|[March 11, 2013]
Fitch Downgrades Tulare Local Health Care District (CA) Revenue Bonds to 'B+'; Outlook to Negative
NEW YORK --(Business Wire)--
Fitch Ratings has downgraded the following bonds issued by Tulare Local
Health Care District (Tulare) to 'B+' from 'BB+':
--$15.7 million refunding revenue bonds, series 2007.
The Rating Outlook is revised to Negative from Stable.
Debt payments are secured by a pledge of the gross revenues of Tulare
Local Health Care District. A fully funded debt service reserve fund
provides additional security.
KEY RATING DRIVERS
CONTINUED FINANCIAL WEAKENING: The multi-notch downgrade is driven by a
rapid decline in Tulare's overall financial profile in fiscal year ended
June 30, 2012 (unaudited interim financials), with continued
deterioration through the six-month interim period ended Dec. 31, 2012.
Performance has resulted in negative debt service coverage for both
periods and Tulare is likely in violation of its debt service coverage
covenant for fiscal 2012. The fiscal 2012 audit and debt service
coverage covenant calculation are still unavailable.
LARGE OPERATING LOSSES: Impacted by challenged patient utilization and
increased bad debt, profitability took a sharp turn as the district
posted large operating losses of $7.3 million in fiscal 2012 and $3.8
million through the interim period, respectively.
WEAK BALANCE SHEET: Unrestricted cash and investments declined sharply
to $10.5 million at Dec. 31, 2012 from $24.5 million at fiscal year-end
(FYE) 2010 due to increased capital investments and negative operating
cash flow. Additionally, debt load increased in December 2011 due to a
$6 million loan to finance certain equipment. Expected further demand on
liquidity for the construction project presents significant concerns.
CONSTRUCTION PROJECT DELAYED: The completion of the new bed tower that
was initially scheduled for October 2012 has been delayed due to
structural problems related to the concrete used on certain floors.
Tulare is currently developing a recovery schedule and evaluating the
amount of additional funding necessary to complete the project.
RECENT MANAGEMENT TURNOVER: Tulare experienced considerable management
turnover in the last two years. Following the November 2012 election of
three new board members, the current CEO rejoined the organization in
December 2012 after having resigned in April 2012 due to differences
with the previous board. The current CFO joined the organization in
August 2012, replacing an interim CFO that had been in place since
COMMUNITY SUPPORT: As a California health care district, Tulare benefits
from a pro rata allocation of property taxes collected in Tulare County
in support of operations and capital outlays.
FURTHER WEAKENING OF FINANCIAL PROFILE: Further balance sheet
deterioration or inability to curb ongoing operating losses and improve
cash flow would lead to negative rating action.
The rating downgrade to 'B+' from 'BB+' reflects dramatic decline in
unrestricted liquidity beginning fiscal 2011 followed by material
deterioration in profitability and debt metrics in fiscal 2012. The
apparent, yet unanticipated need for additional funding related to the
delayed construction project adds further pressure on the already week
Operating profitability took a sharp turn in fiscal 2012, posting an
operating margin of negative 9.3% after solid margins of 7% in 2011 and
5.8% in 2010 (including District tax revenues not related to the general
obligation bond debt service). Operating income was primarily impacted
by lower than budgeted volumes, lower supplemental funding receipts,
increase in bad debt, and elevated expenses related to IT and capital
projects. Bad debt increased 33% from 2011 to 2012 and doubled from 2008
to 2012, reflecting the service area's poor economic characteristics.
Through the six-mnth interim period ended Dec. 31, 2012, level of bad
debt moderated somewhat to $6.6 million versus $9.5 million the prior
year period. However, due to continued challenges in utilization,
operating margin weakened further to negative 10% in the interim period.
Similarly, operating EBITDA margins were low at negative 4.3% in fiscal
2012 and negative 4.5% through the interim period.
Management is in the process of planning and executing various
strategies to improve profitability such as enhancing revenue cycle
management, strengthening contracts, and reducing overall expenses. The
initiatives are being implemented throughout the 2013 calendar year, and
benefits are expected to be realized somewhat in fiscal 2013 and in full
over fiscal 2014. Management expects break-even performance for fiscal
2013. Fitch believes this will be challenging based on current
performance, but recognizes the strong operating results posted from
2009 to 2011 under the current CEO's leadership.
Driven by a combination of capital spending and negative cash flow,
unrestricted cash and investments declined further from $24.5 million at
FYE 2010 to $10.5 million at Dec. 31, 2012. Over $6 million of the $14
million decline is attributable to IT related investments. Days cash on
hand of 48.5, cushion ratio of 4.1x, and cash to debt of 51.2% are weak
compared to Fitch's median for below investment grade ratings. Given
future capital needs related to the construction project and other
infrastructure investments, Fitch expects ongoing negative pressure on
Tulare has a major construction project in progress, which plans to
feature a 24-bed emergency department, a new diagnostic department, a
16-bed obstetric unit, four surgery suites, and 27 new private patient
rooms meeting seismic requirements. This new expansion tower was
initially slated to open October 2012. However, due to problems related
to the concrete structure on the third and fourth floors discovered in
April 2012, construction has been at a standstill. Tulare is working
with the Office of Statewide Health Planning and Development in
rectifying the issue to move forward on an accelerated recovery
schedule. Remaining funds available include approximately $15 million
from the general obligation (GO) bond financing, $2.2 million from the
2011 Bank of America loan, and $1.4 million from philanthropy. Tulare
will likely need to procure resources in addition to existing funds to
complete the project, but the amount remains under evaluation. As Tulare
has purchased nearly all of the equipment and materials for the new
tower, remaining costs are primarily labor related.
Management indicated that the area's population growth and projected
demand for healthcare services beyond 2030 dictate the need for a second
hospital tower. Tulare is currently in the planning and design stage for
the five-story tower, which Fitch does not believe is feasible given its
current performance and utilization trends. A schedule or financing plan
is not yet in place, however, there is no additional debt capacity at
the current rating level. Aside from the first tower construction,
Tulare continues to invest in its IT platform and is in the process of
opening two rural clinics. Annual capital spending is budgeted at $1.5
million, addressing routine operations and maintenance needs.
At Dec. 31, 2012, Tulare's revenue supported debt burden totaled $20.5
million, consisting of $15.7 million in series 2007 bonds and $4.8
million in capital leases. The bonds are all fixed rate and produces a
maximum annual debt service (MADS) of $2.5 million, which declines to
$1.3 million in fiscal 2017 following the final payment of the capital
lease. Debt burden is relatively low, with debt to capitalization of
27%. However, MADS coverage declined to negative 1.1x in fiscal 2012 and
negative 1.2x through the interim period compared to 4.4x in fiscal
2011. The alarming drop in debt service coverage is one of Fitch's main
concerns, and a key driver in the rating action. Fitch does not expect
Tulare to meet its debt service coverage covenant for fiscal 2012, which
is not an event of default but will require a consultant call-in.
Not included in Fitch's calculation of Tulare's long-term debt are $85
million in GO bonds, which are not rated by Fitch. Since Tulare's GO
debt is secured by a special assessment on property taxes in the
district, Fitch's calculation of financial ratios excludes Tulare's GO
debt and related receipts.
The Negative Outlook reflects the apparent need for additional capital
expenditure in order to complete Tulare's current construction project,
putting further strain on balance sheet and profitability metrics.
Failure to improve its overall financial condition will lead to further
negative rating action.
Tulare Local Health Care District owns and operates a 112-bed hospital
in the City of Tulare, California. Total revenues in fiscal 2012 were
$78.5 million (exclusive of tax revenues related to GO bonds debt
service). The district 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', June 12, 2012;
--'Non-Profit Hospital and Health System Rating Criteria', July 23, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
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