|[March 12, 2013]
Fitch Affirms Nanticoke Health Services, DE's Bonds at 'BBB-'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the rating on approximately $38.3 million
Delaware Health Facilities Authority (Nanticoke Health Services Project)
series 2002 bonds at 'BBB-'.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of gross revenues, a mortgage on
the Obligated Group's facilities in Seaford, and a debt service reserve
For rating purposes, Fitch's analysis is based on the performance of the
consolidated system, which includes the physician group that is not part
of the obligated group.
KEY RATING DRIVERS
POSITIVE FISCAL 2012 PERFORMANCE: Due to the added benefit of the
designation as a Medicare Dependent Hospital (MDH) ($4 million) as well
as funds from meaningful use ($2.6 million), Nanticoke reported
operating gain of $2.6 million, the first after several years of
operating losses, equal to operating margin of 2.1% and operating EBITDA
margin of 9.4%. Nanticoke also had strong volume trends, however, net
patient revenue was flat at $119 million fiscal 2012 (June 30 year-end)
compared to $118 million in fiscal 2011.
SUPPLEMENTAL FUNDING TO BE TERMINATED: Nanticoke only qualified for the
MDH program in 2012, which was then terminated effective October 2012.
However, the federal government has extended the program through
September 2013, which will result in $4-6 million of funds for the
current fiscal year. Due to the lag in the receipt of the MDH funds for
the current year, Nanticoke reported an operating loss of $0.3 million
through the six-month interim period ended Dec. 31, 2012. Despite the
loss of the supplemental funding, the sustained improved profitability
is expected as Nanticoke is committed to reducing overall expenses by $4
ELEVATED DEBT BURDEN: Nanticoke's coverage of maximum annual debt
service (MADS) is somewhat elevated, partially due to new capitalized
leases entered into in fiscal 2012. MADS coverage by EBITDA was 2.2x in
fiscal 2012 and is reported at 1.7x through the interim period. MADS
represents an elevated 4.6% of consolidated system revenues.
IMPROVED LIQUIDITY: Nanticoke's liquidity improved due to higher
cash-flow generation in 2012 and the $8.5 million of proceeds from the
sale of the Lifecare at Lofland Park. Days cash on hand (DCOH) rose to
133.1 days at Dec. 31, 2012 and cash to debt was 77.5%, both close to
the 'BBB' category rating medians.
NEED TO SUSTAIN IMPROVEMENT: Failure to sustain the improved operating
performance for the remainder of the 2013 fiscal year or a significant
departure from the budgeted $3.5 million operating profit for the
consolidated system may lead to downward rating pressure.
The affirmation of the 'BBB-' rating and Stable Outlook is based on
improved profitability and liquidity metrics in fiscal 2012 and the
expectation that Nanticoke will be able to sustain its improved
operations in the current fiscal year. Profitability will be aided by
the delayed funds pursuant to the Medicare Dependent Hospital (MDH)
program as well as its cost reduction initiative. In 2012 (year-end June
30), the consolidated system generated operating income of $2.6 million,
translating to an operating and operating EBITDA margins of 2.5% and
9.4%, respectively, exceeding Fitch's 'BBB' category medians of 1.9% and
8.3%. The positive gain from operations was the first since 2005 and the
hospital nly performance exceeded the budgeted operating income of $4
million. For the interim period ended Dec. 31, 2012, the system reported
operating loss of $0.3 million for a negative 0.5% operating margin.
Nanticoke's designation as MDH resulted in a $4 million benefit in the
2012 fiscal year. Effective Oct. 1, 2012, CMS terminated the program.
The program was subsequently reinstated for one more year, to run to
Sept. 30, 2013. However, no monies have been received under the program
to date and while management fully expects to receive the funds this
fiscal year, estimated between $4-6 million, none have been accrued
through Dec. 31, 2012. Management is budgeting $3.5 million operating
income for the system for fiscal 2013.
Management is implementing a number of expense reductions with a
potential goal of reducing expenses by $4 million this year. These
include a redesign of the employee benefits, which brings benefit
expenses more in line with industry standards, elimination of
unprofitable service lines, such as occupational therapy, and
renegotiation of certain vendor contracts. Nanticoke continues to focus
on physician recruitment and was able to add several specialists, and is
also adding primary care physicians at its five outpatient clinics. The
recruitment efforts have resulted in a strong growth in utilization in
fiscal 2012, with admissions exceeding the prior year by a robust 10.7%.
Inpatient volumes have slowed in the current fiscal year and admissions
are reported at 1.1% below the prior year through Jan.31, 2013. The
system continues to subsidize the Nanticoke Physician Group which
currently employs 27 physicians. The physician network lost $4.6 million
in 2012 and the loss of $2.1 million through Dec. 31, 2012 was slightly
lower than for a comparable period in the prior year due to improved
physician productivity. Management expects to reduce the subsidy of the
physician group to approximately $3.5 million in fiscal 2013.
The system's liquidity position improved due to positive operating cash
flow in 2012 and was also boosted by the $8.5 million of proceeds from
the sale of the Lifecare at Lofland facility to Genesis Healthcare
effective June 29, 2012. The system reported cash and unrestricted
investments of $42.5 million at Dec. 31, 2012, an increase from $30.5
million at the end of fiscal 2011. Nanticoke's liquidity metrics with
133.1 DCOH, 7.5x cushion ratio and 77.5% cash to debt are only slightly
below Fitch's 'BBB' medians of 138.9 days, 9.4x and 82.7%, respectively.
The system debt load is somewhat elevated compared to the 'BBB' medians.
Coverage of MADS by EBITDA was 2.2x in fiscal 2012, including debt
service on $4 million of capitalized leases, as compared to the 'BBB'
category median of 2.8x, and only 1.7x through the interim period. MADS
as 4.6% of revenues is higher than the 'BBB' category median of 3.3%.
Somewhat offsetting the higher debt load is the system's all fixed rate
debt composition and limited capital needs in the near term.
The chief credit concerns remain the limited size of the hospital's
staff and the exposure to changes in reimbursement given the
institution's dependence on governmental sources of revenue (67% of
gross revenues for Medicare and Medicaid combined). A mitigating factor
is the sole provider status of the hospital in its primary service area
generating a solid 45% market share.
Located in Seaford, DE, Nanticoke Health Services operates 99 acute care
beds at Nanticoke Memorial Hospital. The system posted $124.7 million in
operating revenue in fiscal 2012. Nanticoke covenants to disclose annual
audited financial statements and quarterly disclosure to bondholders.
Disclosure has been timely and includes a balance sheet, income
statement, statement of cash flows and utilization data.
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:
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23,
--'Revenue-Supported Rating Criteria', June 112, 2012.
Applicable Criteria and Related Research
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
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.
AVAILABLE ON (News - Alert) 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
[ InfoTech Spotlight's Homepage ]