News Column

Fitch Affirms Jennie Stuart Medical Center (KY) Revs at 'BBB'; Outlook Revised to Negative

June 16, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB' rating on the following Christian County hospital revenue and refunding bonds issued on behalf of Jennie Stuart Medical Center (JSMC):

--$60.1 million series 2006

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are secured by the gross revenues of JSMC, and are further secured by a mortgage on hospital property and a debt service reserve fund.

KEY RATING DRIVERS

VOLATILE OPERATING PERFORMANCE: The Outlook revision to Negative reflects JSMC's continued challenges as a small hospital in a rural area, which has been reflected in its inconsistent operating performance. Most recently, operating performance declined from 3.4% in 2012 to a negative 1.5% in 2013 (Dec. 31 year end), which was below budgeted expectations and is significantly below Fitch's 'BBB' category median of 1.8%. Management is expecting to finish 2014 at breakeven and return to a positive operating margin in 2015, which should be feasible given a number of cost cutting and physician recruitment initiatives implemented in early 2014.

CLINICAL VOLUME DECLINES: Most patient volumes, including inpatient admissions and emergency department visits, fell in 2013 and in the three-month interim period of 2014 (March 31, 2014). Volume declines are attributed, in part, to a number of unexpected physician retirements. JSMC has begun filling key physician vacancies, which should help improve volumes over the next 12-18 months.

ELEVATED DEBT BURDEN: JSMC's debt burden remains elevated with maximum annual debt service (MADS) as a percent of revenue of 5.2% in 2013, compared to category median of 3.5%. Additionally, weaker operating performance reduced debt service coverage to 1.6x by EBITDA through the March interim period, from 2.9x in 2012. JSMC has no debt plans in the near to medium term and its 2014 capital budget remains below depreciation expense and will be funded via cash flow.

SOLID LIQUIDITY: JSMC's liquidity metrics, including days cash on hand (DCOH) of 182.5 and 77% cash to debt at Dec. 31, 2013, are in line with median rating category levels and have been stable for the past four years. However, JSMC's high average age of plant of 13 years in 2013 is indicative of deferred capital spending which could hamper meaningful liquidity growth going forward.

STABLE MARKET POSITION: JSMC's market share in its primary service area (PSA) has remained consistent at approximately 55% and is a primary credit strength. However, the service area remains economically challenged, as JSMC's payor mix was 13% Medicaid and 12.2% self-pay in 2013.

RATING SENSITIVITIES

OPERATING PERFORMANCE IMPROVEMENT: Although Fitch believes JSMC should be able to improve operating performance via successful physician recruitment and better clinical volumes over the near to medium term, the Negative Outlook reflects concerns about the industry pressures on JSMC as well as the ability to retain key physician recruitments. Failure to stabilize operating performance in 2014, or preserve liquidity and demonstrate improvement in cash flow by 2015 would likely prompt negative rating action.

CREDIT PROFILE

JSMC is a 194 licensed bed inpatient acute care hospital located in Hopkinsville, Kentucky approximately 70 miles north of Nashville, Tennessee. Total revenues are estimated at $105.6 million in 2013.

DECLINED OPERATING PERFORMANCE

Following a year of strong results in 2012, JSMC ended 2013 with a negative 1.5% operating margin, which was below budgeted expectations nearer 1.7%. Its operating margin fell further to a negative 3.7% through the three-month interim period. The operating loss is attributed mainly to a drop in clinical volumes which was caused, in large part, by the unexpected retirement of a number of physicians in the latter half of 2013.

Downward rating movement is precluded due to management's successful recruitment of several key surgeons, the ongoing recruitment of additional physicians, and Fitch's expectation that clinical volumes will rebound to historical levels once these new physicians ramp up by 2014 year-end. In the meantime, JSMC is implementing a number of cost cutting initiatives, including eliminating a number of key management positions and closely monitoring staffing levels and vacant positions. As a result, management expects to end 2014 at a breakeven operating margin and improve to a positive margin in 2015, which should be feasible.

ELEVATED DEBT BURDEN

JSMC's modest revenue base results in MADS as a percent of revenue of 5.2%, which is indicative of an elevated debt burden when compared to category median of 3.5%. In addition, debt service coverage by EBITDA was a soft 2.2x in 2013, and fell further to 1.6x in the March interim period, due to weakened operations. JSMC's capital structure is conservative as all of its debt is fixed rate and there are no additional debt plans in the near to medium term.

SOLID LIQUIDITY

JSMC's $49.6 million in unrestricted cash and investments at Dec. 31, 2013 equated to a solid 182.5 DCOH, above the 'BBB' category median of 144.7 days. JSMC's cash position in respect to its debt burden remains below category medians, but has improved over the past five years. Cash to debt improved from 48.9% in 2009 to 77% in 2013, while cushion ratio improved from 6.7x to 9.1x over the same time period. Fitch views JSMC's liquidity position as essential at the 'BBB' rating level, providing needed financial flexibility against a somewhat volatile and small operating platform. However, JSMC's somewhat high average age of plant of 13 years in 2013 is indicative of deferred capital spending, which could impact JSMC's competitive positioning over the longer term if not addressed.

MEDICAID SETTLEMENT PENDING

JSMC's has a pending settlement of $2.7 million related to overpayment from the state's Medicaid Managed Care providers. JSMC has booked the settlement in fiscal 2012 but the payment is expected to be made in fiscal 2014 and management expects that the final cash payment will only be approximately 40% of the original amount.

CONTINUING DISCLOSURE

JSMC covenants to disclose audited annual information within 150 days of fiscal year end to the Municipal Securities Rulemaking Board's EMMA system. JSMC also discloses quarterly statements to EMMA, and Fitch notes that disclosure has been timely and thorough.

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

Applicable Criteria and Related Research:

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

--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

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

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834836

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

Emily E. Wadhwani, +1 312-368-3347

Director

70 W. Madison Street

Chicago IL 60602

or

Secondary Analyst

Dmitry Feofilaktov, +1 212-908-0345

Analyst

or

Committee Chairperson

Emily Wong, +1 415-732-5620

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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