News Column

Fitch Upgrades Pella Regional Health Center (IA) Revs to 'BBB'; Outlook Revised to Stable

June 6, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has upgraded to 'BBB' from 'BBB-'the rating on the following Iowa Finance Authority bonds issued on behalf of Pella Regional Health Center (PRHC):

--$46.7 million health facilities revenue bonds, series 2006.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are secured by a pledge of gross revenues of the obligated group, and a first-priority mortgage on certain property.

KEY RATING DRIVERS

BALANCE SHEET GROWTH: The rating upgrade to 'BBB' is prompted by PRHC's continued improvement in liquidity metrics, which have grown consistently over the past five years. As of March 31, 2014, unrestricted cash and investments of $56.4 million equate to approximately 311.5 days cash on hand (DCOH), a cushion ratio of 16.6x, and cash-to-debt of 118.6%, all of which well exceed the 'BBB' category medians.

CONSISTENT HEALTHY CASH FLOW: PRHC's critical access hospital (CAH) designation provides beneficial Medicare and Medicaid reimbursement, which has supported robust operating profitability and consistent revenue growth. For fiscal 2013, PRHC produced a 16.4% EBITDA and 14% operating EBITDA, which continued through the three-month interim period ended March 31, 2014 with a 17.4% EBITDA margin and 14.3% operating EBITDA margin.

LEADING MARKET POSITION: By virtue of its CAH designation PRHC remains the market leader in Marion County, supported by successful recruitment and close attention to service needs in the market. Positive service area economic indicators have meant that PRHC's bad debt, self-pay, and Medicaid levels remain low compared to peers.

MODERATING DEBT BURDEN: The rating upgrade is additionally supported by PRHC's declining debt burden and modest ongoing capital needs. While maximum annual debt service (MADS) as a percent of revenue remains somewhat elevated at 4.5%, debt-to-EBITDA was 3.7x in 2013 and improved significantly from 6.4x in 2010. No additional debt is planned, and future capital needs are manageable between $3 million and $5 million annually.

SMALL REVENUE BASE: PRHC's revenue base of $75.4 million in 2013 remains a primary credit concern as it provides only limited ability to absorb adverse events, making it inherently vulnerable to volatility in its medical staff, utilization trends and changes in reimbursement methodology. Mitigating this concern is consistent growth; PRHC's total revenue base has grown an average 6.2% year-over-year since 2010, and is currently the largest in Fitch's CAH rated portfolio.

RATING SENSITIVITIES

SUSTAINED BALANCE SHEET STRENGTH: Fitch expects PRHC to sustain an ample level of liquidity for its rating level, which is required as a cushion against the risks associated with its modest revenue base and debt level. Sustaining liquidity metrics in excess of Fitch's 'BBB' category metrics will require consistent cash flow strength to fund modest capital needs and provide ongoing debt moderation.

CREDIT PROFILE

Located in Pella, IA, in Marion County, approximately 50 miles southeast of Des Moines, PRHC is a critical access hospital with 25 acute care beds. Other entities include seven medical clinics, a 63-bed skilled nursing facility, and the Pella Hospital Foundation. Total revenues were $75.4 million in fiscal 2013.

Balance Sheet Growth

The upgrade to 'BBB' from 'BBB-'is driven primarily by ongoing growth in PRMC's liquidity. Unrestricted liquidity has more than doubled since 2008, from $20.7 million to $53.7 million at fiscal 2013 year-end via robust cash flow and limited capital expenditures.

PRHC's capital needs are modest going forward, between $3 million and $5 million in expected expenditures against $10.6 million in budgeted operating EBITDA for fiscal 2014. Fitch believes balance sheet strength will be essential at the 'BBB' rating level to offset the risks associated with PRHC's relatively small revenue base (for the rating category) and exposure to potential Medicare reimbursement changes.

Consistent Healthy Cash Flow

For 2013, PRHC produced a 4.1% operating and 14% operating EBITDA margins, and is budgeting for stable operating performance in 2014, targeting 3.6% operating and 14% operating EBITDA margins. Fitch anticipates that PRHC will achieve these budget targets. The three-month interim performance is above budget at 3.7% operating and 14.3% operating EBITDA margins, which is noteworthy, as first-quarter performance has been historically light. PRHC continues to investigate opportunities to cut costs and improve efficiencies.

Leading Market Position

The rating incorporates PRHC's CAH designation, which provides enhanced reimbursement for both Medicare and Medicaid services, and supports its leading market position. Fitch also notes that socioeconomic metrics (median income, poverty rate, and unemployment rate) within the service area compare favorably against the state and U.S. averages through April 2014.

Solid economic factors are born out in PRHC's good payor mix with relatively small exposure to Medicaid (10% of gross revenues) and self-pay (3% of gross revenues) through March 2014. While exposure to Medicare is slightly high at 40% of gross revenues, it remains in line with other CAH peers.

Moderating Debt Burden

Fiscal 2015 will be PRHC's first principal payment on the outstanding debt totaling approximately $47 million. All debt is fixed-rate, and PRHC has no additional debt planned. Maximum annual debt service (MADS) is measured at approximately $3.4 million, which PRHC covers sufficiently at 3.9x by EBITDA and 3.1x by operating EBITDA at March 31, 2014.

Small Revenue Base

The primary credit concern is PRHC's modest revenue base for the 'BBB' rating category, which limits its overall financial flexibility in the face of adverse events, and highlights the need for strong balance sheet flexibility. Fitch also notes that the long-term viability of the CAH program is uncertain, and that any changes to that program could have a material impact on PRHC's credit profile and rating. Management recognizes the risk associated with the reduction in this supplemental funding and is currently analyzing how to offset any negative impact on profitability.

Disclosure

PRHC covenants to provide annual and quarterly disclosure to the Municipal Securities Rulemaking Boards EMMA system, consisting of a management discussion and analysis, balance sheet, income statement, statement of cash flows, and utilization statistics.

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

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated June 3, 2013.

'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

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=833464

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

Director

+1 312-368-3347

70 W. Madison Street, Chicago IL 60602

or

Secondary Analyst

Katie Proux

Analyst

+1 312-368-3348

or

Committee Chairperson

Eva Thein

Senior Director

+1 212-988-0674

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters