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.
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
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.
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.
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,
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
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.
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,
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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Fitch Ratings, Inc.
New York, NY 10004
Elizabeth Fogerty, +1-212-908-0526 (New York)
Source: Fitch Ratings