Additionally, Fitch Ratings has downgraded the rating to 'A-' from 'A' on the following bonds issued on behalf of KDMC:
The series 2014A bonds are expected to be issued as floating rate notes in a SIFMA based index mode. Proceeds will be used to refund the series 2008A and 2008B bonds; to defease and/or advance refund a portion of the series 2010A, series 2010B and/or series 2008C bonds; to fund a debt service reserve fund (if necessary); and to pay the costs of issuance. In conjunction with the series 2014 issuance, KDMC will amend its indenture. The series 2014 bonds are expected to price the week of
The Rating Outlook is Negative.
Bond payments are secured by a pledge of the gross receipts of the obligated group and a mortgage interest in certain property including the acute care hospital. Additionally, a debt service reserve fund will be funded if necessary
KEY RATING DRIVERS
RESOLUTION OF DOJ INVESTIGATION: KDMC and the
WEAKENED LIQUIDITY METRICS: The rating downgrade reflects the material decrease in KDMC's liquidity which, in combination with the weakened profitability, has weakened KDMC's credit profile. With the payment of DOJ settlement and related expenses, KDMC's unrestricted cash and investments fell to
MATERIALLY WEAKENED PROFITABILITY: The Negative Outlook reflects Fitch's ongoing concern related to the significant deterioration in operating performance. Operating EBITDA margin decreased to 3.1% in fiscal 2013 (
DETERIORATION IN COVERAGE: KDMC's weakened profitability and cash flow has caused a deterioration in coverage metrics, with MADS coverage by EBITDA decreasing to a weak 1.5x in fiscal 2013 and 0.7x in the interim period.
DECLINING UTILIZATION: Inpatient and outpatient utilization decreased in fiscal 2013 and in the interim period due to the combined negative impact of an ongoing investigation by DOJ, national utilization trends and the impact of high deductible health plans.
LEADING MARKET SHARE: KDMC's primary service area (PSA) market share decreased to 36.6% in fiscal 2012 from 39.5% in fiscal 2010, however, KDMC continues to maintain a leading market share. The service area characteristics remain challenging.
IMPROVED OPERATING PERFORMANCE: While Fitch expects KDMC to stabilize and improve operating performance, an inability to realize its financial improvement plans over the next two years would likely lead to further negative rating pressure.
RESOLUTION OF DOJ INVESTIGATION
The DOJ and KDMC reached a settlement agreement in
WEAKENED LIQUIDITY METRICS
Liquidity metrics have been materially impacted by settlement of the DOJ investigation. Subsequent to the
Capital spending is expected to remain at low levels over the next three years, allowing for recovery of KDMC's liquidity. Unrestricted liquidity is projected to increase 23.9% to
MATERIALLY WEAKENED PROFITABILITY
Operating EBITDA margins averaged 10.2% between fiscal years 2010 and 2012, but declined to a weak 3.1% in fiscal 2013 and further deteriorated to 1% in the seven-month interim period ending
Management implemented a financial improvement plan in late fiscal 2013. Initiatives include revenue cycle, staffing productivity, supply chain, hospital service line and physician practice improvements. KDMC eliminated 150 FTEs in
DETERIORATION IN COVERAGE
Coverage metrics compressed in lock-step with the decrease in profitability and cash flows. Pro forma MADS is expected to equal
Inpatient and outpatient utilization declined materially across the board in fiscal 2013 with decreases in inpatient admissions by 6.5%, total surgeries by 12.4% and cardiac catheterizations by 48.3%. Utilization continued to decline in the interim period but is showing signs of recovery with admissions and surgeries exceeding budget. Fitch believes the compressed utilization is due to the negative impact of an ongoing DOJ investigation, national utilization trends and the effects of high deductible health plans.
LEADING MARKET SHARE
After consistently increasing between fiscal years 2006 and 2010, KDMC's leading market share in the primary service area decreased to 36.6% in fiscal 2012 from 39.5% in fiscal 2010. The service area remains challenging and is characterized by flat to declining population levels and low median household income levels relative to both state and national averages. These demographic characteristics are reflected in KDMC's high exposure to
KDMC covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 45 days of the end of each quarter. Disclosure is provided through the
Additional information is available at 'www.fitchratings.com'.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated
Nonprofit Hospitals and Health Systems Rating Criteria - Effective
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Source: Fitch Ratings
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