|[April 01, 2013]
Fitch Affirms Dimensions Health Corporation's (MD) Rev Bonds at 'CC'
NEW YORK --(Business Wire)--
Fitch Ratings affirms the 'CC' rating on the approximately $56.6 million
Prince George's County, MD project and refunding revenue bonds series
1994 issued on behalf of Dimensions Health Corporation (DHC). DHC is the
operator of three county-owned facilities known as Dimensions Health
Debt payments are secured by a pledge of the gross revenues of the
obligated group and a fully funded debt service fund.
KEY RATING DRIVERS
HEIGHTENED RISK UNTIL LONG-TERM PLAN IMPLEMENTED: DHS' financial
performance continues to be dependent on annual appropriations from the
county and state. The need to secure a long-term solution, which
requires finding sufficient sources of funding for its significant
capital needs, is essential for DHS' long-term viability.
TRANSFORMATION OF DHS: The implementation of the memorandum of
understanding (MOU) between DHS, the state of Maryland (the state),
Prince George's County (the county), the University of Maryland Medical
System (UMMS; rated 'A', Stable Outlook) and the University System of
Maryland (USM; rated 'AA+', Stable Outlook), with the goal of
reorganizing DHS, continues to be on track. A certificate of need (CON)
for a new facility is expected to be submitted in the fall of 2013. So
far, two thirds of the necessary funding has been committed to by the
state and the county, subject to appropriations. The remaining funding
will come in the form of reimbursement rate relief from the Maryland
Health Services Cost Review Commission (HSCRC).
NO FINANCIAL FLEXIBILITY: DHS' financial profile continues to be
precarious, as reflected in the going concern language in its audits
since 2005. DHS is reliant on county and state funds to support its
operations. The county and state have pledged to continue to provide $30
million of annual financial assistance in the form of grants, subject to
appropriations, until 2015, by which time it is expected that a
permanent plan for the transformation of DHS will be in place.
IMPLEMENTATION OF OPERATIONAL IMPROVEMENTS: Management is focused toward
streamlining system operations in order to reduce operating losses and
increase revenues and has targeted $7 million of additional revenues and
$5 million of expense reductions to be accomplished over the next 18
UNLIKELY RATING MOVEMENT UNTIL LONG TERM PLAN FINALIZED: Although the
partnership to transform DHS is viewed favorably, it is unlikely that a
rating change will occur until a definitive plan to address DHS'
financial and capital needs has been finalized and the sources of
payment for implementation have been secured.
The affirmation of the 'CC' rating reflects DHS' stressed financial
situation which requires the ongoing financial support of the state and
the county (both rated 'AAA' with a Stable Outlook by Fitch) in order to
meet its financial and bond payment obligations.
Reflecting the essentiality of DHS' role as the safety net provider,
both the state and the county have provided grant support to DHS of $15
million each for fiscal 2013 and it is expected that this level of
support will be maintained until 2015, subject to appropriation
approval, in order to enable DHS to continue to meet its operating
needs, albeit at minimal levels, and debt service payments. The state
has also appropriated an additional $24 million for DHS' capital needs
over the 2013-2015 period, the bulk of which will be spent on
renovations to the Laurel and Bowie campuses.
Fitch views as positive the July 21, 2011 announcement of a partnership
between DHS, the state and the county and UMMS for developing a
comprehensive plan to provide for health care needs of county residents,
which is intended to address the long-standing financial and capital
needs of DHS. One of the articulated gals of the partnership is the
plan to build a new regional medical center and health sciences campus
to be located in central Prince George's County, which would augment
and/or replace some of DHS' existing facilities. However, this solution
will require the sharing of the cost by the state, county and assistance
in the form of rate relief from the HSCRC.
UMMS has already completed an initial study of the health care needs of
the county's population, which indicated the need for a new facility and
for an additional 61 primary care physicians. The cost of the new
facility, now downsized to 259 inpatient beds and 19 observations beds,
is estimated at approximately $645 million, which includes construction
costs, cost of land acquisition and working capital. Several potential
sites have been identified, one of which is already county owned and a
final decision will be made in May. The ultimate plan will also need to
address approximately $100 million of DHS' unfunded pension, outstanding
debt and unfunded retiree benefits before 2017, and will also require a
transfer of the ownership of DHS' assets from the county to the new
entity. The next phase of the plan, presently underway, is firming up
the funding sources for the new regional facility. The state and the
county have already committed to each contribute approximately $200
million to the project, with the State contribution expected to be
appropriated in stages over the next five years. The remaining funding
will come in the form of reimbursement rate relief from the HSCRC. The
current timetable envisions a CON to be submitted by the fall of 2013.
DHS' Prince George's Hospital Center serves as one of two safety net
hospitals in the county, which together with other system inpatient and
outpatient facilities provide for the essential health care needs of the
underinsured and indigent population of the service area. The system has
a history of extremely weak financial performance with liquidity and
operating metrics consistently at or below Fitch's investment grade
medians, when excluding the impact of the grant support. DHS' audited
financial statements have been receiving 'going concern' opinions since
DHS continues to implement a financial improvement plan and management
targeted $7 million of additional revenues and $5 million of expense
reductions to be accomplished over the next 18 months. As planned, 61
beds of the Gladys Spellman Specialty Hospital and Nursing Center
(Gladys Spellman) long term care facility were sold in October 2012 for
$467,500 to a for-profit operator (Genesis Healthcare). The remaining 46
chronic care beds were transferred to Laurel Hospital and management
reports positive results from the improved reimbursement base. The
proceeds of the sale will be used to repurpose the Gladys Spellman
facility for family services, physician offices and various other
DHS ended fiscal year 2012 (year end June 30) with a positive operating
income of $11.9 million, equal to an operating margin of 3.3% and
operating EBITDA margin of 6.9%. Fitch includes grant funds, which were
$31.3 million in 2012, in operating income. Excluding the grant
revenues, DHS would have reported an operating loss of $19.4 million.
For the six-month interim period ended Dec. 31, 2012, DHS reported
operating income of $1.5 million (includes pro rata share of 2013 grant
revenues of $15 million), for operating margin of 0.8% and operating
EBITDA margin of 4.3%. Excluding the grant revenues, the interim period
ended with operating loss of $12.6 million, ahead of the budgeted loss
of $15.5 million.
Coverage of maximum annual debt service (MADS) by EBITDA was solid at
3.6 times (x) in fiscal 2012 and was 2.3x through the interim period.
DHS' debt burden is manageable with MADS representing a moderate 2.1% of
revenues. Liquidity, despite improving slightly over time, continues to
be extremely weak; days cash on hand (DCOH) were at 39 days at fiscal
2012 year-end and were reported at 40.1 days for the interim period.
Unrestricted cash to debt was 66.9% at Dec. 31, 2012.
Dimensions Health System had $357 million in total revenues for fiscal
2012. The system posts annual and interim financial statements on the 'www.dimensionshealth.com'
website, which does not provide management analysis and commentary, but
management analysis and commentary is provided to bondholders.
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
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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