|[February 05, 2013]
Fitch Rates Hurley Medical Center's (MI) Series 2013A&B Revs 'BB+'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has assigned a 'BB+' rating to the Flint Hospital Building
Authority's expected issuance of approximately $22 million series 2013A
fixed-rate revenue rental bonds and approximately $37 million series
2013B fixed-rate revenue refunding bonds issued on behalf of Hurley
In addition, Fitch Ratings has affirmed the 'BB+' rating on the
following fixed-rate bonds issued on behalf of Hurley Medical Center
(HMC) by Flint Hospital Building Authority (Michigan):
--$8,835,000 revenue refunding bonds, series 1998A;
--$14,665,000 revenue rental bonds, series 1998B;
--$23,360,000 hospital revenue and refunding bonds, series 2003;
--$34,215,000 revenue rental bonds, series 2010.
HMC has approximately $4.7 million outstanding on its series 2011 direct
placement, which Fitch does not rate.
The Rating Outlook is Stable.
Proceeds of the series 2013A bonds will be used to finance capital
projects and installation of equipment at Hurley Medical Center, fund a
debt service reserve fund and pay certain costs of issuance. The
proceeds of the series 2013B bonds will be used to refund all or a
portion of the series 1998A &B bonds and the series 2003 bonds for
savings, fund a debt reserve fund and pay certain costs of issuance.
Maximum annual debt service (MADS) was calculated by the underwriter and
is expected to be about $10.84 million. The bonds are expected to sell
via negotiation the week of Feb. 25, 2013.
Debt payments are secured by cash rentals (net revenues of the Medical
Center) made to the authority, acting through its Board of Hospital
Managers, on behalf of HMC as agreed under the eighth amended and
restated contract of lease dated Feb. 1, 2013. In addition, bondholders
will benefit from a fully funded debt service reserve fund.
SENSITIVITY/ RATING DRIVERS
ADEQUATE LIQUIDITY: Liquidity metrics remain adequate for the rating
category despite a decrease since Fitch's last review. Unrestricted cash
and investments at Dec. 31, 2012 of $64.3 million was down from $70.6
million at fiscal year-end 2012 (year ended June 30) and $85.3 million
at fiscal year-end 2011, mostly due to significant capital spending and
weak operating cash flow. The series 2013 financing will strengthen
Hurley's balance sheet with $7 million of reimbursement for prior
HISTORICALLY MARGINAL OPERATING PERFORMANCE: Operating performance in
fiscal 2012 with operating margin of negative 1.3% and operating EBITDA
of 3.6% was below prior years, reflecting the impact of several one-time
expenses. Fitch expects performance to return to break-even results in
CHALLENGING PAYOR MIX: Located in Flint, Michigan, HMC operates in a
competitive service area with below-average socioeconomic indicators,
subjecting the hospital to elevated levels of government payors, with
Medicaid at a very high 39.4% of gross revenues in fiscal 2012.
MANAGEABLE DEBT BURDEN: Pro forma MADS comprised a manageable 3% of
total fiscal 2012 revenues. Coverage of pro forma MADS by EBITDA of 1.8x
in fiscal 2012 is adequate for the rating category.
The 'BB+' rating reflects HMC's adequate liquidity for the rating
category and relatively stable operating performance despite operating
in a difficult market with a high Medicaid population. Located in Flint,
Michigan, HMC is a safety-net teaching hospital and is the only provider
in the region of Level I Trauma, Level II Pediatric Trauma and Level III
Neontal Intensive care, among other services. HMC has an active
outreach effort with many community organizations and is focusing on
improving community health.
Unrestricted liquidity declined in fiscal 2012 and through the interim
period due to high capital spending and weak operating cash flow. At
Dec. 30, 2012 unrestricted cash and investments was $64.3 million,
equating to a light 66.8 days cash on hand, 5.9x pro forma cushion ratio
and 60.8% pro forma cash to debt (Fitch factored $22 million of new
money into the analysis). With this financing HMC will put $7 million
back on the balance sheet as reimbursement for capital expenditures.
This will result in unrestricted cash and investments of $71.3 million,
equaling 74.1 days cash on hand, 6.6x pro forma cushion ratio and 67.5%
pro forma cash to debt. Fitch expects liquidity to stabilize in the near
term. Further deterioration to liquidity would likely result in downward
HMC has been heavily investing in its plant with capital expenditures
averaging a high 246% of depreciation expense from 2010 - 2012. HMC's
most recent large capital project was the expansion of its emergency
department (ED) to account for high volumes that could not be
accommodated in its former space. This project was successful and the
expansion and redesign has allowed for improved patient flow, operating
efficiencies and improved patient care. In addition, management expects
to be better able to appropriately manage observation patients with the
addition of a 12-bed observation unit in the ED.
HMC's operating performance has been relatively stable over the last
three fiscal years but was impacted in fiscal 2012 by several one-time
expenses, including $2.2 million for EPIC electronic medical record
training, $1.6 million for severance costs associated with upper
management turnover and $300,000 for additional supplies and staffing
associated with the opening of the ED. In fiscal 2012, HMC posted
negative 1.3% operating margin and 3.6% operating EBITDA margin.
Adjusting for about $4.1 million in one-time expenses, operating margin
was near break-even and operating EBITDA was about 4.7%. Management is
actively managing expenses, and initiatives include employee health care
benefit redesign, legacy cost review, Six Sigma, more efficient
purchasing process and observation case management. Fitch expects break
even operating profitability in fiscal 2013.
HMC's debt profile is manageable with all fixed-rate debt and pro forma
MADS equating to 3% of fiscal 2012 total revenue. Pro forma MADS
coverage by EBITDA was a relatively light 1.8x in fiscal 2012 but
consistent with the prior years' results of 1.7x in fiscal 2011 and
2010. Through the six-month interim period ended Dec. 31, 2012 MADS
coverage by EBITDA improved to 2.2x. Since HMC is a governmental entity,
its investment portfolio is very conservative as investments are
restricted to government-issued fixed-income securities.
The primary credit risks include a challenging economic environment and
reliance on state Medicare disproportionate share (DSH) revenues.
Located in Flint, Michigan, HMC operates in an economically distressed
service area with a challenging payor mix. A high 39.7% of gross
revenues were derived from Medicaid and 27% from Medicare at December
31, 2012. Uncertainty over the continuation of current Medicaid funding
levels, given the state's budget distress and national budget pressures,
remains a significant credit risk. Material funding reductions would
have a major impact on HMC's ability to improve profitability.
The Stable Outlook reflects Fitch's expectation that HMC will stabilize
its operations and liquidity position. Continued deterioration to
liquidity or profitability would likely result in negative rating
HMC is a 443-bed acute care teaching hospital with safety-net provider
status located in Flint, Michigan. HMC had approximately $362.5 million
of total revenue in fiscal 2012. HMC covenants to provide annual and
quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA
Additional information is available at 'www.fitchratings.com'
. The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the
Revenue-Supported Rating Criteria, this action was additionally informed
by information from Raymond James, the Underwriter and Kaufman Hall, the
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23,
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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