The Rating Outlook is revised to Negative from Stable.
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 (
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 (
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
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%
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.
JSMC is a 194 licensed bed inpatient acute care hospital located in
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.
MEDICAID SETTLEMENT PENDING
JSMC's has a pending settlement of
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'
--'Revenue-Supported Rating Criteria' (
--'Nonprofit Hospitals and Health Systems Rating Criteria' (
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Dmitry Feofilaktov, +1 212-908-0345
Source: Fitch Ratings
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