News Column

Fitch Affirms Mercy Medical Center (OH) Revs at 'BB+'; Outlook Stable

August 11, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BB+' rating on $70,840,000Cuyahoga County (OH) hospital facilities revenue bonds, series 2000 (UHHS/CSAHS - Cuyahoga, Inc. and CSAHS/UHHS - Canton, Inc. Projects).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of the gross revenues of the Mercy Medical Center (MMC; formerly known as UHHS/CSAHS - Cuyahoga, Inc.) obligated group, a first lien mortgage of hospital property and a debt service reserve fund.

KEY RATING DRIVERS

SIGNS OF TURNAROUND: Core operations improved markedly in fiscal 2013 and through the six months ended June 30, 2014, with recovering patient volume and realization of cost control initiatives. Fitch expects the positive trend to continue as performance improvement plans ramp up.

SPONSOR SUPPORT: Sisters of Charity of Health System (SCHS) is the sole corporate member of MMC. Although SCHS does not guarantee and is not obligated to pay debt service on MMC's obligations, Fitch views the close relationship with and financial strength of SCHS as a key credit factor in support of the rating. At Dec. 31, 2013, SCHS had $437.4 million of unrestricted cash and investments which equates to 207 days of cash on hand and 170% cash to long-term debt (including MMC's series 2000 bonds).

ADEQUATE DEBT SERVICE COVERAGE: Improved cash flow resulted in stronger maximum annual debt service (MADS) coverage at 1.9x in 2013 compared to 0.7x the prior year as calculated by Fitch (includes all long-term debt). As per the master trust indenture, debt service coverage on the series 2000 bonds was a strong 4.1x in 2013 versus 1.4x 2012.

LIQUIDITY REMAINS WEAK: At June 30, 2014, MMC's $53.8 million in unrestricted cash and investments equated to 70 days cash on hand, 4.8x cushion ratio, and 58.7% cash to debt.

RATING SENSITIVITIES

LIQUIDITY GROWTH NEEDED: Fitch expects financial improvements to hold and begin generating sufficient cash flows to fund capital expenditures while gradually rebuilding the balance sheet. Inability to sustain current performance could pressure the rating.

CREDIT PROFILE

Mercy Medical Center, located in Canton, Ohio, is a teaching hospital with 475 licensed beds, of which 341 are staffed. Total operating revenues were $283.2 million in the fiscal year ended (FYE) Dec. 31, 2013.

Improving Core Operations

Following three years of large losses (negative 6%-7% operating margins), MMC posted a modest loss in fiscal 2013 and a negative 0.7% operating margin. Fitch notes that fiscal 2013 results were supported by a $12.7 million legal settlement ($5.4 million is included in operating income). Excluding this one-time benefit, operating margin would have been negative 3.4%, still improved from prior years. The positive trend continued through the six-month interim period ended June 30, 2014, with a net income of $1.2 million (0.8% operating margin). Management attributed the recovering profitability to better patient volume and realization of performance improvement initiatives focusing on revenue growth and expense control. Additionally, MMC has begun seeing the impact of Medicaid expansion in Ohio, mainly in a shift from self-pay to Medicaid. Management believes the net impact will be to the benefit of MMC. Budgeted net income for fiscal 2014 is $2.8 million, which Fitch believes is achievable.

Support of Sponsor

Sisters of Charity Health System (SCHS) is the sole corporate member of MMC and MMC is included in SCHS's consolidated financial statements. Although SCHS is not legally obligated on MMC's bonds, Fitch views the close relationship to SCHS and the financial strength of SCHS as a key credit strength in support of the rating. SCHS has been deeply involved in hospital operations and recently expanded the support services which now includes information technology, billing, executive compensation, contracting, treasury services and supply chain management. At Dec. 31, 2013, SCHS had $437.4 million of unrestricted cash and investments which equates to 207 days of cash on hand and 170% cash to long-term debt (including MMC's series 2000 bonds).

Adequate Debt Service Coverage

Supported by improved profitability and cash flow, MADS coverage improved to 1.9x in 2013 from 0.7x in the prior year. Fitch uses a MADS of $11.3 million, which includes all bonds, notes, and capitalized leases. As calculated under the master trust indenture, MMC covered the $7.8 million MADS on the series 2000 bonds by 4.1x in 2013, up from 1.4x in 2012. Debt burden is relatively high with 4% of MADS as a percentage of revenues. MMC does not expect to issue any additional debt in the near term.

Weak Liquidity

At June 30, 2014, MMC reported $53.8 million in unrestricted cash and investments, which equated to 70 days cash on hand, 4.8x cushion ratio (based on MADS of $11.3 million) and 58.7% cash to debt. Fitch notes that MMC's position of unrestricted cash and investments declined from 2009 to 2012, but grew slightly in 2013 due to a $12.7 million settlement received from Aultman Hospital. The erosion in liquidity reflects, in part, the impact of funding various capital projects including a $14.5 million emergency room expansion from the balance sheet due to MMC's weak profitability.

DISCLOSURE

MMC covenants to provide annual disclosure within 120 days of each fiscal year end, and quarterly disclosure within 45 days of quarter end through the Municipal Securities Rulemaking Board's EMMA system.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 16, 2014;

--'U.S. 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=750012

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=848754

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

Jennifer Kim

Associate Director

+1-212-908-0740

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Gary Sokolow

Director

+1-212-908-9186

or

Committee Chairperson

Eva Thein

Senior Director

+1-212-908-0674

or

Media Relations:

Elizabeth Fogerty, +1-212-908-0526 (New York)

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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