|[December 09, 2013]
Fitch Affirms Northeast Georgia Health System's Revs at 'A'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'A' rating on approximately $320 million
of Hospital Authority of Hall County and the City of Gainesville (GA)
series 2010A revenue bonds issued on behalf of Northeast Georgia Health
The Rating Outlook is Stable.
Bond payments are secured by a pledge of the gross revenues of the
obligated group, a leasehold mortgage on the medical center and a debt
service reserve fund.
KEY RATING DRIVERS:
CONSISTENTLY STRONG OPERATING CASH FLOW: Operating EBITDA margin
averaged 18.6% since fiscal 2008 and equaled 17.1% in fiscal 2013 easily
exceeding Fitch's 'A' category median of 10.7%.
LARGE CAPITAL PLAN: NGHS issued $200 million of series 2012A direct
placement 'draw down' bonds to fund construction of a new 100-bed
hospital currently under construction in Braselton, GA. The hospital is
expected to meet the growth in the service area and is the first new
hospital approved in the state in over 20 years.
HIGH DEBT BURDEN: Excluding the impact of the series 2012A bonds, NGHS'
debt burden is very high with MADS equal to 6.1% of operating revenue in
fiscal 2013 compared to Fitch's 'A' category median of 3.1%. Despite the
strong profitability, MADS coverage by EBITDA of 4.0x in fiscal 2013 is
only adequate for the rating category. The series 2012A bonds are
expected to be refinanced on a long term basis before the maturity date
in 2016 at which time the new hospital will be completed and generating
revenues to help mitigate the increased debt burden.
SOLID FINANCIAL CUSHION: Unrestricted liquidity increased 44.6% since
fiscal 2011 to $610.1 million at Sept. 30, 2013, reflecting strong cash
flow and controlled capital spending, equating to a strong 375.4 days
cash on hand and a solid 14.8x cushion ratio. However, cash to debt is
somewhat light at 97.2%
MAINTAIN COVERAGE METRICS: NGHS will need to maintain its strong cash
flow generation to preserve coverage metrics that are consistent with
the 'A' category rating, particularly as NGHS draws down its series
2012A bonds to the full $200 million. Fitch expects that NGHS will
refinance the series 2012A bonds with long term bonds in 2016 or before
depending upon market conditions. Deterioration of coverage metrics to
levels inconsistent with the 'A' category could lead to negative rating
NGHS is located in Gainesville, GA, approximately 53 miles northeast of
Atlanta, and includes two campuses with a total of 557 licensed beds,
two skilled nursing facilities, and a physician network operating in the
nine surrounding counties. Total operating revenues for fiscal 2013
equaled $678.4 million. NGHS covenants to provide annual and quarterly
disclosure. Disclosure is provided through the Municipal Securities
Rulemaking Board's EMMA system.
Fiscal 2013 results are based upon unaudited interim financial
statements. Audited financial statements were not available at the time
CONSISTENTLY STRONG OPERATING CASH FLOW
Operating profitability has been extremely strong for the rating
category with operating and operating EBITDA margins averaging 6% and
18.1% between fiscal 2010 and fiscal 2013 (Sept. 30 year end). Operating
and operating EBITDA margins equaled 5.6% and 17.1% in fiscal 2013,
easily exceeding Fitch's 'A' category medians of 3.3% and 10.7%. The
strong operating profitability reflects effective cost management
practices, stable volumes and NGHS' leading market share in its service
LARGE CAPITAL PLAN
NGHS began construction in 2012 on a new 100-bed hospital located in
Braselton, GA, approximately 20 miles south of the main campus. The
Braselton hospital is expected to be completed and to begin operations
in May 2015 and will be located in one of the fastest growing areas in
Georgia with favorable demographic characteristics. Indicative of the
need for the new facility, the Braselton hospital is the first new
hospital to receive CON approval in Georgia in over 20 years.
The total cost of the project is estimated at $200 million and will be
financed by the system's series 2012A bonds with a par amount not to
exceed $200 million. The bonds are directly placed with Bank of America
and feature a 'draw down' format under which NGHS will draw funds as
needed to construct the new hospital. At Sept. 30, 2013, $27.7 million
had been drawn. The full $200 million is expected to be drawn
incrementally through fiscal 2015. The bonds mature in December 2016.
NGHS expects to refinance the bonds with long term bonds at or before
the maturity date depending upon market conditions.
While concerned about the additional associated debt burden, Fitch views
the strategic benefits of the new hospital project favorably.
Construction risk is mitigated by a guaranteed maximum price contract,
but execution risk exists with any new facility project. Given the high
debt burden, NGHS must meet projected operating targets to maintain the
current rating and has limited flexibility for adverse events associated
with stabilization of the new facility.
Reflecting the Braselton project, capital spending increased to $111.1
million (163% of depreciation expense) in fiscal 2013 and is expected to
remain at elevated levels through fiscal 2015, averaging $124 million
per year. Capital spending is projected to decrease after the completion
of the Braselton hospital to $60 million in fiscal 2016 and is expected
to remain at lower levels through 2022.
HIGH DEBT BURDEN
Fitch's primary credit concern remains NGHS' high debt burden. Excluding
the series 2012 indebtedness, MADS equaled a high 6.1% of operating
revenue in fiscal 2013. The high debt burden requires strong cash flow
to maintain adequate coverage. Despite NGHS' strong operations, MADS
coverage by operating EBITDA of 2.8x is light relative to Fitch's 'A'
category median of 3.4x while MADS coverage by EBITDA is adequate at
4.0x relative to Fitch's 'A' category median of 3.8x. However, MADS does
not occur until 2016 and coverage of actual debt service by EBITDA was a
solid 5.0x in 2013.
Fitch is concerned that the increased debt load associated with the
refinancing of the series 2012A bonds could materially impact coverage
metrics in fiscal 2016 if the improvement in cash flow associated with
the new hospital does not materialize. Given the already high debt
burden, NGHS likely has limited debt capacity at the current rating in
the near to mid-term after absorbing the $200 million series 2012A bonds.
Both the series 2012A bonds and the series 2010B bonds ($250 million,
rated 'AA-' by Fitch) have additional security provided by Hall County's
legal commitment to pay debt service if hospital revenues are
insufficient. Pursuant to an intergovernmental agreement, the county is
required to levy up to 7 mills to pay debt service on the certificates
if gross revenues of the hospital system are insufficient. Fitch views
the additional security provided by the county's commitment as a
significant credit strength.
SOLID FINANCIAL CUSHION
Unrestricted cash and investments increased 44.6% since fiscal year end
2011 to $610.2 million at Sept. 30, 2013. The increase reflects strong
cash flow generation and moderate capital spending between fiscal years
2010 and 2012. Liquidity metrics are strong relative to operating
expenses with 375.4 days cash on hand relative to Fitch's 'A' category
median of 196.3. However, liquidity is light relative to NGHS's heavy
debt burden with 14.9x cushion ratio and 97.2% cash to debt relative to
Fitch's 'A' category medians of 15.6x and 129.2%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.
Applicable Criteria and Related Research:
Not-for-Profit Hospitals and Health Systems Rating Criteria Outside the
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