News Column

Fitch Revises Outlook to Positive on Methodist Hospital's (IN) Series 2014 Revs; Revs Rated 'BBB'

July 31, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB' rating to the following Indiana Finance Authority bonds, issued on behalf of The Methodist Hospitals (TMH):

--$48.7 million revenue refunding bonds, series 2014.

The bonds will be issued as fixed rate, be used to refund the outstanding 2001 bonds, fund a debt service reserve, and pay costs of issuance, and are expected to price the week of August 11 via negotiation.

In addition, Fitch affirms the following Indiana Health Facility Financing Authority bonds issued on behalf of TMH:

--$6.8 million revenue bonds, series 1996 at 'BBB';

--$51.9 million revenue bonds, series 2001 at 'BBB'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by a pledge of gross revenues and a debt service reserve fund.

KEY RATING DRIVERS

STRONG LIQUIDITY: TMH continues to maintain robust liquidity metrics for the rating category, demonstrated by 208.1 days of cash on hand (DCOH) and 208.7% cash to debt at the interim period ended June 30, 2014. TMH's balance sheet metrics have consistently exceeded Fitch's 'BBB' category medians of 144.7 DCOH and 91.7% cash-to-debt since fiscal 2007, and its debt burden will continue to moderate with the series 2014 refunding.

MANAGEABLE DEBT PLANS: Post issuance, TMH will have a total $71.4 million in debt and capital lease obligations, equal to a low 2.1x EBITDA and 22.1% capitalization. While future capital plans may include an increase in long-term debt, Fitch believes they will be manageable against TMH's balance sheet strength.

ADEQUATE PROFITABILITY: TMH continues to produce sufficient operating cash flow, generating a 9% operating EBITDA and 10.4% EBITDA margin in fiscal 2013. A decline to 7.7% operating EBITDA through the six-month interim period ended June 30, 2014 resulted from below-budget performance in the first quarter due in large part to very poor weather. Still, cash flow was healthy enough to produce 3.5x coverage of pro forma maximum annual debt service (MADS), which exceeds Fitch's 'BBB' category median of 2.7x. Fitch anticipates TMH will rebound to prior year levels.

SUPPLEMENTAL REVENUE RISK LESSENED: While TMH's exposure to supplemental and government reimbursement remains a fundamental concern, extension of the Indiana provider tax program through June 30, 2017 lessens that risk over the near term. TMH's exposure to governmental payors will continue to present credit risk going forward as overall state and government funding levels are reduced. Fitch views as positive that TMH leadership remains committed to managing its net profitability absent supplemental payments.

RATING SENSITIVITIES

FUTURE CAPITAL PLANS: Pending further development of TMH's master facility plans, future borrowing for capital expenditures may approach $65 million; however, Fitch believes that TMH's financial profile could absorb it at a higher rating level. Upward movement in the rating is likely should TMH's sustain its healthy liquidity and return to positive operating performance, and its future capital plans remain in line with Fitch's expectations.

CREDIT PROFILE

Serving northwest Indiana, TMH operates a 302-bed acute care facility in Gary (Northlake campus), IN and a 313-bed acute care facility in Merrillville, IN (Southlake campus), and other various clinical entities. The system is also supported by a foundation. Total reported revenues for 2013 (Dec. 31 fiscal year-end) were $346.7 million, which Fitch adjusts to exclude investment income.

BALANCE SHEET STRENGTH

The Outlook revision to Positive is driven in significant part by the consistent strength of TMH's liquidity position, against what Fitch believes will be manageable capital and debt levels over the near- to medium-term. TMH's balance sheet strength remains a key credit factor, as demonstrated by a healthy 24.6x pro forma cushion ratio as of June 30, 2014, more than double Fitch's 'BBB' category median of 10.2x.

The series 2014 bonds are expected provide present value savings, and reduce MADS to approximately $6.9 million from a level currently above $9 million. In conjunction with this financing, TMH also plans to defease its series 1996 bonds using equity. Post-issuance the series 2014 bonds will be the only bond debt outstanding. TMH also has an additional $20 million in capital leases, with approximately $2.7 million in annual payments included in MADS.

FUTURE CAPITAL PLANS

TMH continues to formulate its master facility plan, which is likely to result in a debt financing for increased capital expenditures within the next two years. Over the near term, key projects will include $5 million-$8 million for an emergency department expansion and intensive care renovation at Northlake, and other expansion and renovation projects are being developed over the medium term. While Fitch believes it is likely that TMH can accommodate increased spending and debt at a higher rating level, upward rating movement will depend in part upon review of finalized capital and financing plans over the next 12-24 months.

SUPPLEMENTAL REVENUES

TMH remains reliant upon supplemental revenues via the state and federal DSH program, which is subject to pressure under health reform. Fitch notes that the provider tax program in Indiana was recently extended through June 2017, which should preserve Medicaid DSH funding though the medium term. Following the expected decrease of Medicare DSH by $3.2 million in 2014, TMH expects to receive a total $42 million in Medicaid and $10 million in Medicare DSH in 2014. Fitch believes TMH's continued reliance on these supplemental funds will remain a credit concern for the foreseeable future.

CONTINUING DISCLOSURE

TMH covenants to disclose audited financial statements within 150 days of fiscal year end. Annual disclosure is posted to the Municipal Securities Rulemaking Board's EMMA system. While TMH does not covenant to disclose quarterly statements, it does so voluntarily to bondholders via EMMA. Quarterly disclosure includes balance sheet, income statement, statement of cash flows, utilization, and management discussion and analysis. Fitch notes that management has been very accessible, timely and thorough in its disclosure.

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

Applicable Criteria and Related Research:

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

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=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843396

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

Fitch Ratings, Inc.

70 W. Madison Street, Chicago IL 60602

or

Secondary Analyst

Kathleen Proux, +1-312-368-3348

Analyst

or

Committee Chairperson

James LeBuhn, +1-312-368-2059

Senior Director

or

Media Relations, New York

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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