Fitch Ratings has affirmed its 'A' rating on the following New Jersey Health Care Facilities Financing Authority revenue bonds (Hunterdon Medical Center):
--$21.5 million, series 2006A;
--$16.6 million, series 2006B.
The Rating Outlook is revised to Stable from Positive.
Bonds are secured by a pledge of gross revenues and a mortgage on its principal facility in Flemington and a wellness center in Clinton. The obligated group consists of Hunterdon Medical Center (Hunterdon) and constituted 92 percent of the consolidated system assets and 93 percent of system revenues.
KEY RATING DRIVERS
WEAK 2013 OPERATING RESULTS: The revision of the Outlook to Stable reflects the downturn in profitability through the nine months ended Sept. 30, 2013 (the interim period) which was a result of weaker than anticipated volumes and revenues. Hunterdon reported an operating gain of $1.6 million, equal to a weak 0.8 percent operating margin, as compared to the prior year period gain of $10 million (5.0 percent operating margin). The consolidated system reported a slightly better 1.8 percent operating margin through the third quarter of fiscal 2013 (3Q'13).
DOMINANT MARKET SHARE: Hunterdon commands a dominant market share of 64.5 percent as the sole acute care provider in Hunterdon County, which has a favorable demographic profile. The system has recently formalized its alliance with Atlantic Health System (Fitch rated 'A+'), which should help expand services, generate costs savings and efficiencies and aid in physician recruitment.
MANAGEABLE DEBT LOAD DESPITE 2014 ISSUANCE: Hunterdon's debt load remains manageable even after the compressed profitability in the interim period and the recent issuance of $23.7 million in bank qualified debt to finance expansion projects at the main hospital facility. Coverage of pro forma maximum annual debt service (MADS) equaled 4.3x through 3Q'13 and MADS constitutes a very light 2.1 percent of revenues, both favorable to the category medians.
MIXED LIQUIDITY: Hunterdon's liquidity is mixed, cash-to-pro forma debt of 161 percent and cushion ratio of 20x are better than the respective 'A' medians, but days cash on hand (DCOH) at 159.5 days through the interim period is lower than Fitch's 'A' median of 196 DCOH. The $109 million of unrestricted cash and investments at Sept. 30, 2013 does not include the approximately $17 million of cash and investments held primarily at the Hunterdon Medical Center Foundation,Inc., which is not in the obligated group, but which are typically donor restricted for programs and projects.
NEED TO IMPROVE PROFITABILITY: While some margin compression experienced in fiscal 2013 is likely to continue into fiscal 2014, management is implementing margin enhancement initiatives and Fitch expects Hunterdon to achieve its budgeted 2014 targets which include an operating margin of 2.5 percent. A sustained improvement in profitability over the next two years to close to historical levels would likely lead to a rating upgrade.
DOMINANT MARKET SHARE
Hunterdon Medical Center (Hunterdon) is a 178-bed hospital located in Flemington, New Jersey. Hunterdon reported revenues of $268 million in fiscal 2012. The hospital is the only provider of acute care services in Hunterdon County, which constitutes its primary service area (PSA). Hunterdon's market share of the PSA was reported at 64.5 percent, an increase from 63 percent. A recently formalized alliance with Atlantic Health System, named Mid Jersey Health Alliance (Mid Jersey), is expected to bring further expansion of the services provided at Hunterdon, bringing certain difficult to recruit subspecialists to practice part time on site, as well as generally aid in physician recruitment. Other potential benefits of the alliance may include population health initiatives, connectivity, increased clinical cooperation, and cost-saving opportunities. The two organizations continue to be independent, but Mid Jersey will have joint management and physician advisory committees to guide their common initiatives.
WEAK 2013 OPERATING RESULTS
Hunterdon finished fiscal 2012 (year-end Dec. 31) with solid operating gain of $10.3 million, equal to operating and operating EBITA margins of 3.8 percent and 9.8 percent, respectively. Financial performance through 3Q'13 dipped significantly due to below-budgeted volumes as admission decreased by 3.9 percent, partially due to the shift to observation status. After increasing by 11.7 percent in fiscal 2012, revenues were actually 1.3 percent lower through 3Q'13 compared to the prior year period. Operating income for the nine-month interim period was $1.6 million, equal to a slim operating margin of 0.8 percent and operating EBITDA margin of 6.5 percent, both well below the 'A' category medians of 3.3 percent and 10.7 percent, respectively and significantly below the prior year period operating gain of $10 million. The consolidated system had slightly better results with a gain from operations of $4.3 million (1.8 percent operating and 7.7 percent operating EBITDA margins).
Management is implementing a margin improvement initiative with focus on revenue cycle management Staffing at all levels is being reviewed, a consulting firm has been engaged to look at labor productivity. Management took the step to hard-freeze the institution's defined benefit plan which, had it been taken earlier, would have reduced the pension expense by $6 million from the $13 million in fiscal 2013. The Medical Center 2014 operating budget, based on a further 5.5 percent decrease in admissions due to observation status and the 'two midnight' rule but benefiting from participation in a Blue Cross Insurance Exchange product, is a gain of $6.8 million (2.5 percent operating margin and 8.7 percent operating EBITDA margin), which Fitch believes is attainable. Revenues are budgeted to increase by 4 percent, half of the increase being generated from new programs.
MANAGEABLE DEBT LOAD
Hunterdon broke ground in the fall of 2013 on a cardiovascular and vertical expansion project, which includes the core shell fit- out and the addition of two new floors on top of the hospital's west wing that will house a new cardiology unit and 22 new private patient rooms. The project will also enable the transformation of semi-private rooms at the hospital in space made vacant by the new transformation to private status, eventually increasing private rooms to 90 percent from the current 20 percent. Completion is expected in mid-2015 and the $30 million project cost is being partially funded with proceeds of a $23.7 million private placement bank financing with TD Bank and the remainder from internal funds. At the time of the February 2013 Fitch review, the intention had been to fund the project from internal sources, but a subsequent decision was in favor of debt issuance. The borrowing is structured as a 10-year put bond with a 25-year final maturity in 2039, with interest at 69 percent of one-month LIBOR plus 136 basis points. Fitch uses MADS, which includes the 2014 debt amortizing over the last 20 years starting with 2020.
Despite the 2014 issuance, Hunterdon's debt load remains very manageable. Coverage of pro forma MADS through 3Q'13 was 4.3x and MADS is a low 2.1 percent of revenues, better than Fitch's 'A' category medians of 3.8x and 3.1 percent of revenues. On a consolidated basis the system had coverage of 5.5x, with MADS at a very mild 1.7 percent of revenues. MADS includes the series of privately placed floating-rate debt issued in 2009, not rated by Fitch ($7.6 million outstanding at Sept. 30, 2013; does not include a put feature), but does not include a $4.5 million balloon due in 2017 for a medical office building (not in the obligated group), which is expected to be refinanced. The series 2009 was synthetically swapped to fixed rate and the mark-to-market on the swap was a negative $0.3 million at Sept. 30, 2013.
Hunterdon's liquidity metrics are mixed. Liquidity is light relative to operating expenses but strong relative to Hunterdon's debt burden. DCOH at Sept 30 equaled 159.5 days (153 DCOH on a consolidated system basis) which is light relative to the 'A' category median of 196 DCOH. However, cash-to-pro forma debt of 161 percent and a cushion ratio of 20x both exceed the 'A' category medians. The $109 million of unrestricted cash and investments does not include $16.6 million at the system level. Inclusion of these funds increases cash-to-debt to 168 percent. Build-up of liquidity is a Board stated goal and management's goal is to reach 175 DCOH over the next three to five years.
Hunterdon discloses quarterly and annual audited financial statements. Quarterly disclosure includes a balance sheet, income statement, cash flow statement and utilization statistics.
Additional information is available at 'fitchratings.com'
Applicable Criteria and Related Research:
--U.S. Nonprofit Hospitals and Health Systems Rating Criteria, May 20, 2013;
--Revenue-Supported Rating Criteria, June 3, 2013.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Additional information is available at 'fitchratings.com'.
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