News Column

Fitch Affirms Nanticoke Health Services, DE's Bonds at 'BBB-'; Outlook Stable

May 1, 2014

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.

SECURITY

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 2012.

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.

RATING SENSITIVITIES

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 rating pressure.

CREDIT PROFILE

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%, respectively.

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.

IMPROVED LIQUIDITY

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, 2013);

--'Revenue-Supported Rating Criteria' (June 3, 2013).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Eva Thein

Senior Director

+1-212-908-0674

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Jennifer Kim

Associate Director

+1-212-908-0740

or

Committee Chairperson

James LeBuhn

Senior Director

+1-312-368-2059

or

Media Relations

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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