NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has affirmed the 'BBB-' rating on the approximately $45.6
millionDelaware Health Facilities Authority (Nanticoke Memorial
Hospital Project) series 2013 bonds.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of gross revenues of the Nanticoke
Memorial Hospital (which is the sole member of the obligated group), and
a mortgage on the obligated group's facilities, and a debt service
reserve account. For rating purposes, Fitch's analysis is based on the
performance of the consolidated system, which includes the physician
group and certain other entities not part of the obligated group. The
obligated group constituted 93% of system assets and 93% of system
revenues in 2013.
KEY RATING DRIVERS
MAINTAINING SOLID OPERATING PERFORMANCE: The combined benefit of steady
volumes, the extension of the Medicare Dependent Hospital (MDH) program
and management's efforts at expense control has produced solid fiscal
2013 (June 30 year-end) results with operating profit of $5.4 million
equal to 4.2% operating margin. For the nine months interim period ended
March 31, 2014, Nanticoke has maintained the improved performance, with
operating margin of 4.6%, before the inclusion of the MDH funds.
STABLE VOLUME TREND: Continued investment in support of certain
services, such as orthopedics, cardiology and oncology and investment in
the physician network has contributed to steady volumes. After
increasing by 10.7% in 2012, admissions remained level in fiscal 2013
and through the nine month interim period ended March 31, 2014.
DEBT BURDEN MODERATING: Nanticoke's coverage of MADS was 2.6x in fiscal
2013 and was reported at 3.1x though the 2014 interim period, consistent
with Fitch's 'BBB' median. MADS as percent of revenues is still slightly
elevated even after the reduction in debt service payments from the 2013
refunding, partially due to capitalized leases entered into in fiscal
IMPROVED LIQUIDITY: Nanticoke's liquidity has improved over the last two
years as profitability improved and partially as result of the $8.5
million of proceeds from the sale of the Lifecare at Lofland Park in
June 2012. Days cash on hand (DCOH) increased to 171.5 days at March 31,
2014 and cash to debt has improved to 108.5%, both slightly better than
Fitch's 'BBB' category medians.
NEED TO SUSTAIN IMPROVEMENT: Fitch expects Nanticoke to maintain its
improved operating performance even without the benefit of the MDH
program. Continued solid operating results over the next 12-24 months
leading to further moderation of leverage could result in positive
Located in Seaford, DE, Nanticoke Health Services operates 99 acute care
beds at Nanticoke Memorial Hospital. The system posted $127.4 million in
operating revenue in fiscal 2013. Fitch notes as positive the recent
improvement in profitability and stable volumes. Credit concerns include
the limited size of the hospital's medical staff and the exposure to
changes in reimbursement given the institution's dependence on
governmental sources of revenue (68% of gross revenues for Medicare and
Medicaid combined). A mitigating factor is the sole-provider status of
the hospital in its primary service area. Nanticoke covenants to
disclose annual audited financial statements and quarterly disclosure to
bondholders. Disclosure has been timely and includes a balance sheet,
income statement, statement of cash flows and utilization data.
MAINTAINING SOLID OPERATING PERFORMANCE
While the long-term prospect for the Medicare Dependent Hospital (MDH)
program is uncertain, CMS extended the program through fiscal 2013 and
for the current fiscal year. Participation in the MDH program brought a
$2.7 million benefit in fiscal 2013 and Nanticoke expect to receive
approximately $3 million for the current fiscal, which has not been
accrued for. Partially from the boost of the MDH funds, but also as a
result of continued focus on expense control and solid volume trends,
fiscal 2013 was a stronger year than 2012 with net patient revenues of
the consolidated system increasing by 2.8%, while expenses were held
level with the prior year.
Operating income in fiscal 2013 was $5.4 million, up from $2.6 million
in the prior year, producing operating margin of 4.2% and operating
EBITDA margin of 11.2%, exceeding the 'BBB' medians of 1.8% and 9%,
Year to date performance through the nine months interim period
continues to be solid with a $4.7 million gain from operations, equal to
operating margin of 4.6% and operating EBITDA margin of 11%, before any
benefit from the MDH monies, which are expected to be received by end of
June or beginning of July 2014. The Hospital alone had an operating gain
of over $8 million, through the third quarter, significantly exceeding
the $2 million budget. Nanticoke is still making substantial investments
in its physician network and ambulatory strategy. Two walk-in clinics
were opened this year a third will open in July 2014. The losses of the
physician network, which now includes 35 employed physicians, exceeded
the budget for this year, but Nanticoke continues to recruit physicians
and added nurse practitioners.
STABLE VOLUME TREND
The investment in the physician network and focus on services such as
cardiology and orthopedics, and cancer which is run in a partnership
with Beebe Medical Center, have resulted in stable volumes with
admissions remaining level in 2013 and though the third quarter of 2014,
and inpatient surgeries rose 8.8% through the third quarter of this
year. Management reports that market share increased to 48.6% from 45.5%
a year ago.
The system reported cash and unrestricted investments of $57 million at
March 31, 2014, up from $45.5 million at March 31, 2013. Nanticoke's
liquidity metrics with 171.5 DCOH, 10.3x cushion ratio and 108.5% cash
to debt are now consistent or slightly better than Fitch's 'BBB' medians
of 144.7 DCOH, 10.2x cushion ratio and 91.7% cash to debt.
DEBT BURDEN MODERATING
The system debt load is still somewhat elevated, but now close to 'BBB'
medians. Coverage of MADS by EBITDA was 2.6x in fiscal 2013, including
debt service on $4 million of capitalized leases, as compared to the
'BBB' category median of 3.1x, but is 3.1x through the interim period.
MADS at 4.1% of revenues is higher than the 'BBB' category median of
3.5%. The system's capital lease payments are expected to steadily
decrease through 2017 (the last scheduled lease payment), with MADS at
$3.8 million in 2017 versus the current $5.5 million. Somewhat
offsetting the higher debt load is the system's all fixed-rate debt
composition and limited capital needs in the near term.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria'(May 20,
--'Revenue-Supported Rating Criteria' (June 3, 2013).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
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Source: Fitch Ratings