News Column

Fitch Rates Wise Regional Health System's (TX) Hospital Revs 'BB+'; Outlook Stable

May 13, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns a long-term rating of 'BB+' to approximately $98.3 million of series 2014 revenue bonds issued by Decatur Hospital Authority (TX) on behalf of Wise Regional Health System (WRHS).

The Rating Outlook is Stable.

The series 2014 bonds are expected to sell as fixed-rate tax-exempt bonds. The proceeds will be used to refund WRHS's series 2004 bonds, fund the debt service reserve fund at $9.5 million, as well as provide $10 million in new money. The refunding will decrease maximum annual debt service (MADS) from $12.5 million to approximately $11 million (pro forma MADS was provided by the underwriter). The bonds are expected to price the week of June 2, 2014 and mature in 2044.

SECURITY:

Bond payments are secured by a pledge of gross revenues of the authority's hospital facilities, a fully funded debt service reserve fund, and a first lien on certain mortgaged property and land on which hospital facilities are located.

KEY RATING DRIVERS

RECENTLY IMPROVED PROFITABILITY: WRHS recorded a 12.8% operating margin in fiscal year (FY) 2013 (December 31), up significantly from 0.9% in FY 2011. The recent increase in profitability is attributed to historically steady population growth and increasing volumes, as well as significant governmental funding from the 1115 Medicaid Waiver program. Management is budgeting for an average operating margin of 8% from FY 2014 to FY 2017, which Fitch believes to be consistent with the rating.

HIGH LEVERAGE: Pro forma total long-term debt of $142 million results in extremely stressed leverage metrics. WRHS's pro forma unrestricted cash and investments-to-total debt of 32.3% and cushion ratio of 4.2x based on FY 2013 results both compare unfavorably to Fitch's 'below investment grade' medians of 53% and 5.4x, respectively.

EXTENSIVE CAPITAL PLANS: The system has additional expansion plans in the near- to medium-term, which could potentially include the addition of a new bed tower to the current East Campus. Management states that financing and construction for the project could begin in as early as three years, with total project costs of approximately $62 million, which would potentially stress capital metrics.

LOW, BUT IMPROVING LIQUIDITY: WRHS had $45.9 million in unrestricted cash and investments at Dec. 31, 2013, which equated to 112.4 days cash on hand (DCOH). While the system's unrestricted cash and investments doubled from 2011 to 2013, Fitch believes there is a need for significant additional liquidity growth to support current and future debt.

LEADING MARKET SHARE: WRHS's market share in its primary service area (PSA) increased from 56% in 2011 to a leading 65% in 2012. No other single hospital comprises a market share greater than 10% in the PSA. Fitch views the systems strong market presence as a credit positive.

RATING SENSITIVITIES

LITTLE ROOM FOR ADDITIONAL DEBT: Fitch believes WRHS does not have capacity for additional debt at the current rating level. Any additional debt would be expected to be complemented with a commensurate increase in liquidity.

CREDIT PROFILE

WRHS is a healthcare system located in Decatur, TX and owned and operated by the Decatur Hospital Authority. The authority is not a taxing district and therefore the system is not supported by tax collections. Currently, WRHS operates a 134-bed general acute care hospital which is split into two campuses, the West Campus and the East Campus. In addition, WRHS operates a campus in Bridgeport, TX with 36 licensed beds, currently used as an outpatient facility. Furthermore, WRHS opened its new 12-bed Parkway Surgical and Cardiovascular Hospital in May 2014 in Fort Worth, TX. WRHS has a number of affiliated physicians in the Fort Worth area and expects surgical volumes at the new facility to reach 2,000 by 2016. WRHS reported $180.1 million in total net revenues in FY 2013.

RECENTLY IMPROVED PROFITABILITY

WRHS's profitability has experienced robust year-over-year growth over the past three years, due to increased volumes as well as significant contributions from the Texas Medicaid 1115 Waiver program, which is set to expire in 2016. Operating income grew from $1.2 million in FY 2011 to $23 million in FY 2013, while operating margin increased from 0.9% to 12.8%, which is significantly above the category medians. Management is budgeting for an 8.5% operating margin in FY 2014.

Fitch notes that a significant portion of budgeted operational improvements is expected to materialize through revenue growth, as opposed to cost reductions. Driven by the growth in profitability, debt service coverage by earnings before EBITDA has also improved over the same time period and was 3.1x in FY 2013. Profitability in the interim period was compressed, with a 1.8% operating margin and an 11.5% operating EBITDA margin (both adjusted to include accruals of certain 1115 Waiver funds), largely due to start-up costs at the Parkway facility.

HIGH LEVERAGE

Post the 2014 issuance, WRHS's total debt would be approximately $142 million. The increased leverage will result in a very stressed 32.3% cash-to-debt and 4.2x cushion ratio based on FY 2013 results, both comparing unfavorably to category medians. In addition, the system's modest revenue base results in 6.1% Pro forma MADS as a percent of revenues, compared to the 'below investment grade' median of 3.1%. Pro forma MADS coverage is improved due to savings via refinancing and is 3.5x based on FY 2013 results.

EXTENSIVE CAPITAL PLANS

WRHS has exhibited a fairly aggressive growth strategy in recent years, and has substantial capital plans in the medium term to accommodate the steady population growth. Management discussed plans for a possible second tower to be built on their East Campus in as soon as three years. The approximate cost of the project could be as high as $62 million, $22 million of which is expected to be generated from cash flow, which would be further dilutive to the system's leverage metrics. Additionally, the $10 million of new money from the 2014 issuance may be used for future capital projects, which may include a physical therapy and wellness center which would open up space in the East Campus structure for expansion of hospital services in the future. Fitch acknowledges the necessity of such expansion projects, but notes that WRHS's current financial profile does not have any room for additional debt at the current rating level.

LOW, BUT IMPROVING LIQUIDITY

WRHS's cash position has materially improved over the last few years, with unrestricted cash and investments increasing 105%, from $22.4 million in FY11 to $45.9 million in FY 2013. At 2013 year-end the system's reported unrestricted cash and investments equated to 112.4 DCOH, above the 'below investment grade' median of 73.2 days. At March 31, 2014 DCOH was slightly down at 107.4 days. Management is forecasting an increase in liquidity over the near- to medium-term and expects DCOH to equal 193.1 by 2017 year-end. Financial projections do not incorporate the potential tower expansion project.

LEADING MARKET SHARE

WRHS's market share in its PSA increased from 56% in 2011 to a leading 65% in 2012, with no other single hospital comprising a market share greater than 10% in the area. Fitch views the system's strong market presence as a credit positive, but notes that the system's aggressive expansion plans into territories closer to the high growth area of the Dallas-Forth Worth Metroplex will likely face much higher levels of competition than it has in its current market.

CONTINUING DISCLOSURE

WRHS covenants to provide annual disclosure of audited financials within four months of the fiscal year end and quarterly disclosure of interim financials within 45 days of the quarter end. Annual and quarterly disclosure reports are filed on the Municipal Securities Rulemaking Board's EMMA Web site.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=829975

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Fitch Ratings

Primary Analyst

Eva Thein

Senior Director

+1 212-908-0674

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Dmitry Feofilaktov

Analyst

+1 212-908-0345

or

Committee Chairperson

James LeBuhn

Senior Director

+1 312-368-2059

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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