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| [February 27, 2013] |
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Fitch Downgrades Marshall Medical Center (CA) Revs to 'BB+'; Outlook Stable
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has downgraded the underlying rating to 'BB+' from 'BBB-'
on the following revenue bonds issued on behalf of Marshall Medical
Center (MMC), California, as follows:
--$29,650,000 California Health Facilities Financing Authority insured
hospital revenue bonds (Marshall Medical) 2004 series A, (insured by Cal
Mortgage, whose Insurer Financial Strength [IFS] is rated 'A-' by
Fitch); and
--$20,000,000 California Health Facilities Financing Authority insured
hospital revenue bonds (Marshall Medical) 2004 series B, (insured by
Ambac, which is not rated by Fitch);
The Rating Outlook is Stable.
SECURITY
Gross revenue pledge of the obligated group and a deed of trust.
KEY RATING DRIVERS
PRECIPITOUS DROP IN LIQUIDITY: The rating downgrade is driven by MMC's
eroded balance sheet, which exhibits liquidity metrics that are
incongruent with an investment grade rating. As of January 31, 2013, MMC
had $25 million in unrestricted cash and investments, or 48.3 days cash
on hand and 33.9% cash to debt, compared to Fitch's respective 'BBB'
category medians of 138.9 days and 82.7%. The sharp erosion resulted
from large and unexpected cash spending to complete MMC's much delayed
patient expansion wing. Fitch expects MMC to begin replenishing the
balance sheet in fiscal 2013 though a material improvement is not
expected.
PRESSURED OPERATING ENVIRONMENT: Fiscal 2012 operations were hampered by
declining inpatient volumes, along with increased operating expenses
related to the opening of the new expansion project. Management is
implementing a $2.5 million labor and supply expense reduction
initiative, including a reduction in force.
PROVIDER FEE BUTTRESSES PROFITABILITY: MMC reported an operating income
of $4.2 million for FY 2012 (draft audit; Oct. 31 year end), or an
adequate 2% operating margin down from 4.6% in the prior year, but is
still in line with Fitch's 1.9% median for the 'BBB' category. Fitch
notes that excluding the $12.8 million in net California provider fee
benefit, MMC would have recorded a sizable operating loss of $8.6
million or a negative 4.7% operating margin. Management has budgeted for
a $6.6 million in operating income for FY 2013, or a 3.1% operating
margin for FY 2013, which includes expected receipt of $8.6 million in
net provider fee benefit but excludes the aforementioned $2.5 million in
ongoing cost control initiatives. On balance, this equates to a
break-even FY 2013 absent any provider fee funds, which Fitch views
favorably.
SIZEABLE PROJECT FINALLY COMPLETE: In January 2013, and two years behind
schedule, MMC opened its new three-story expansion wing which houses its
new emergency department, a 16-bed obstetrics center, and shelled space
for future ICU and laboratory expansion. MMC's five-year capital budget
(2013-2017) is still fairly robust and totals $65.6 million, however
$51.7 million is categorized as discretionary projects and management
stated that the capital spending will be dependent on available funding
sources.
RATING SENSITIVITIES
IMPROVING CORE PROFITABILITY AND CASH FLOW GENERATION: Fitch expects MMC
to realize the full benefits of its cost control initiatives and achieve
break-even profitability, excluding provider fee benefits. Additionally,
Fitch expects MMC to resume stronger cash flow generation to support its
capital plan and rebuild its balance sheet. The failure to accomplish
either of these objectives could result in negative rating pressure.
FURTHER EROSION IN LIQUIDITY: MMC was almost in violation of its
liquidity covenant in the first quarter of fiscal 2013 (tested
quarterly). Potential other demands on liquidity include pension funding
contributions, which are expected to total $10 million in fiscal 2013. A
further drop in liquidity will result in downward rating pressure.
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CREDIT PROFILE
Marshall Medical Center is located in Placerville, California, and
operates a 105 licensed-bed general acute-care community hospital and
several clinics. In fiscal 2012 (Oct. 31 year-end), MMC reported $208.1
million in total operating revenue.
Eroded Balance Sheet
The rating downgrade to 'BB+' from 'BBB-' is driven by an eroded balance
sheet and thin liquidity metrics that are inconsistent with an
investment grade rating. Unrestricted cash and investments dropped from
$44.3 million at fiscal year end fiscal 2011 to $30 million at fiscal
year end 2012 and was $25 million at Jan. 31, 2013. The drop in cash has
been due to large and unexpected cash spending to complete MMC's
recently completed new wing project ($15.2 million), and a $10 million
pension contribution in fiscal 2012. MMC has a liquidity covenant of 45
days that is tested quarterly, which was barely met for the first
quarter 2013. Fitch expects liquidity to incrementally improve going
forward as management intends to improve operations and rebuild the
balance sheet.
Pressured Profitability
Operations were challenged by a sharp drop in inpatient volumes over the
last six months of FY 2012 and through the interim period, which
management attributes to an area-wide decline in utilization. Coupled
with increased operating expenses related to the opening of the new
expansion wing, profitability fell in FY 2012 as MMC reported $4.2
million in operating income, down from $9.6 million in the prior.
While the 2% FY 2012 operating margin is in line with Fitch's 'BBB'
median of 1.9%, Fitch is concerned that profitability was entirely aided
by the receipt of $12.8 million in net California provider fee benefit.
Absent these funds, MMC would have recorded an operating loss of $8.6
million or a negative 4.7% operating margin.
In response to the pressured core profitability, MMC is implementing
labor and supply cost control initiatives, including a reduction in
force, that are expected to yield $2.5 million in savings. Management
has budgeted for $6.6 million in operating income for FY 2013, which
includes $8.6 million in net California provider fee benefit, but
excludes the impact of the cost control measures. Fitch expects MMC to
maintain cost control vigilance and achieve near-break-even
profitability, excluding the provider fee funds.
Future Capital Needs
In January, 2013, and after a two year delay, MMC opened its new
hospital expansion wing, which houses a new ED, a 16-bed obstetrics
center, and shelled space for future ICU and laboratory expansion. The
$59 million project was funded primarily by bond proceeds ($25.6
million) and cash spending ($27.6 million). MMC will make the final $2.6
million in cash disbursements on this project through April, 2013. This
project was over budget and MMC's equity contribution was greater than
Fitch's initial expectations. Further erosion in balance sheet metrics
will result in negative rating pressure.
MMC's five-year capital plan is still robust at $65.6 million, which
includes $51.7 million in discretionary capital projects and $13.9
million in routine maintenance needs. The discretionary capital projects
include the build out of the aforementioned shelled space, however,
these plans are dependent on MMC's ability to shore up core
profitability and resume stronger cash flow generation. If MMC
undertakes its projected capital plan without an improvement in cash
flow, negative rating pressure is likely.
Long-Term Debt
In September 2012, MMC issued $19.7 million in 2012 series A insured
hospital revenue refunding bonds (not rated by Fitch) to advance refund
$21.1 million in outstanding 1993 series A and 1998 series A insured
revenue bonds.
As of Oct. 31, 2012, Marshall had $72.5 million in long-term debt,
including $69.3 million in revenue bonds outstanding, and $3.2 million
in capital leases and notes payable. The bonds are in fixed-rate mode,
except for the series 2004B bonds, which are in auction-rate mode.
Maximum annual debt service of $5.6 million accounts for a moderate 2.7%
of total revenue and coverage by FY 2012 EBITDA is good for its rating
level at 2.3 times (x).
Stable Outlook
The Stable Outlook reflects Fitch's expectation that MMC will succeed in
its cost control initiatives and achieve break-even profitability
without reliance on provider fee funds. Additionally, Fitch expects MMC
to resume stronger cash flow generation in support of its capital needs
and steadily rebuild the balance sheet. Further erosion to the balance
sheet or failure to improve core operating profitability would likely
result in negative rating pressure.
Disclosure
Marshall Medical Center covenants to provide annual and quarterly
disclosure through the Municipal Rule Making Board's EMMA system.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July
23, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=681015
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=683418
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