SAN FRANCISCO--(BUSINESS WIRE)--
Fitch Ratings has affirmed the 'A' rating on Salem Health's (Salem)
outstanding debt, which is listed at the end of the press release.
The Rating Outlook is Stable.
The bonds are secured by a gross revenue pledge of the obligated group
(OG). Salem Hospital is the only member of the OG and accounted for 98%
of total assets and 97% of total revenue of the consolidated entity
(Salem Health) in fiscal 2013 (Sept. 30 fiscal year end). Fitch's
analysis is based on the consolidated entity.
KEY RATING DRIVERS
REBOUND IN PROFITABILITY: After weaker profitability in fiscal 2012,
Salem's operating performance improved to a 4.1% operating margin in
fiscal 2013 from 1.1% in fiscal 2012 and 3.8% in fiscal 2011 due mainly
to a rebound in volume and the implementation of a performance
improvement plan in March 2012. Salem's performance significantly
exceeded budgeted expectations.
LEADING MARKET SHARE: Salem's main credit strength is its leading and
dominant 77% inpatient market share position in the primary service
area, which has been relatively stable since fiscal 2010. Salem is
evaluating affiliation options to best position the organization for a
value-based reimbursement environment.
GOOD LIQUIDITY: Liquidity metrics are good for the rating level; Salem
had 286.9 days cash on hand (DCOH) and 129.4% cash-to-debt at Sept. 30,
2013, compared to Fitch's 'A' category median of 196.3 days and 129.2%
cash-to-debt. Balance sheet growth has been driven partially by lower
capital spending over the last four years.
ADDITIONAL DEBT INCURRED: Salem issued $20 million of additional debt in
fiscal 2013 in conjunction with a refinancing of its series 2008C letter
of credit (LOC) backed variable-rate demand bonds (VRDBs) with a direct
bank loan. This had only a nominal impact on debt levels because of the
improved performance in fiscal 2013. However, Salem has a moderately
high debt burden.
MANAGEABLE FUTURE CAPITAL SPENDING PLANS: After significant capital
spending pre-2010, capital spending has been less than 1x depreciation
expense in fiscal 2010-2013. The projected capital plan for fiscal
2014-2018 has spending increasing to an annual average of 1.2x
depreciation expense and includes $20 million for various expansion and
renovation projects at the hospital.
STABILITY AT CURRENT RATING LEVEL: The improved performance in fiscal
2013 provides financial cushion at the current rating level and Fitch
expects Salem to continue to produce financial results in line with the
'A' category median ratios.
Salem Health includes Salem Hospital, a 390-staffed bed hospital located
in Salem, OR, approximately 45 miles south of Portland, as well as other
healthcare related entities. Salem Health had $573 million in operating
revenue for fiscal 2013.
Salem's operating performance has fluctuated over the past few years
mainly due to shifts in volume. Fiscal 2012 saw the largest decline with
an 11% reduction in inpatient discharges and 4% drop in operating room
cases. Salem implemented a financial improvement plan beginning in March
2012 to combat revenue challenges that has yielded annualized savings of
$15.3 million. The main areas of focus were labor and non-labor cost
savings, supply chain and revenue cycle management, and enhanced
In addition to cost reduction initiatives, inpatient discharges were up
5% in fiscal 2013 compared to the prior year and operating room cases
were up 1%, which drove the improved profitability. In fiscal 2013,
operating income was $23.5 million (4.1% operating margin; 12.9%
operating EBITDA margin) compared to $6.1 million (1.1% operating
margin; 10.9% operating EBITDA margin) in fiscal 2012. The fiscal 2014
budget (for Salem Hospital only) has an operating margin of 3.5% and
operating EBITDA margin of 12%.
Salem's liquidity metrics are good for the rating level and unrestricted
cash and investments have steadily increased year over year since fiscal
2010. Unrestricted cash and investments totaled $402.4 million at Sept.
30, 2013, which equated to 286.9 days cash on hand and 129.4%
cash-to-debt. Modest capital spending should further facilitate
liquidity growth. Management has projected conservatively for ICD-10 and
with a doubling of accounts receivable, days cash on hand would remain
Manageable Capital Plans
Capital spending has been minimal over the last four years as a new
hospital tower was brought online in 2009. Capital spending is projected
to increase slightly from these low levels to $63 million in fiscal
2014, $55 million in fiscal 2015, $55 million in fiscal 2016, $43
million in fiscal 2017, and $49 million in fiscal 2018 or an annual
average of 1.2x depreciation expense. Fitch believes the capital plan is
manageable and flexible. Management indicated that the amount of capital
spending will be subject to meeting financial performance targets (at
least 12% operating EBITDA margin and over 200 days cash on hand).
Moderately High Debt Burden
Salem's debt burden is moderately high as maximum annual debt service
(MADS) accounts for 3.9% of operating revenue compared to Fitch's 'A'
category median of 2.8%. However, MADS coverage has greatly improved due
to better profitability in fiscal 2013 with 3.8x coverage compared to
2.8x in fiscal 2012 and Fitch's A category median of 3.8x. MADS is $22.2
As of Sept. 30, 2013, Salem had $311 million of total debt, with a debt
mix of 76% underlying fixed rate and 24% underlying VRDBs. Salem's VRDB
exposure has been reduced to $75 million (series 2008C) and is supported
by a letter of credit (LOC) from US Bank that expires April 2016. There
is an 18-month term-out period under the reimbursement agreement if
there is a draw on the LOC.
Salem issued two direct bank loans in June 2013 that totaled $70 million
($35 million series 2013A with JP Morgan and $35 million series 2013B
with US Bank) to refinance the $50 million series 2008C VRDBs and
provide $20 million of new money. The direct bank loans are fixed rate
and have an initial term to June 2020.
Including the impact of Salem's fixed payor swap, Salem has 100%
fixed-rate debt. The swap is with UBS and the collateral posting
threshold is $20 million. The mark-to-market valuation was negative
$11.8 million as of Sept. 30, 2013.
Salem Health only covenants to provide annual audited financial
statements to the Municipal Securities Rule Making Board's EMMA system,
which is viewed negatively; however, quarterly disclosure has been
Fitch affirms the following outstanding debt:
$75,000,000Salem Hospital Facility Authority (OR) (Salem Hospital
Project) variable rate revenue bonds series 2008B (LOC: U.S. Bank
$47,323,613Salem Hospital Facility Authority (OR) (Salem Hospital
Project) revenue bonds series 2008A
$117,555,926Salem Hospital Facility Authority (OR) (Salem Hospital
Project) revenue bonds series 2006
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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Source: Fitch Ratings