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TMCNet:  Fitch Affirms Bryan Health (NE) Revs at 'A+'; Outlook Stable

[December 10, 2013]

Fitch Affirms Bryan Health (NE) Revs at 'A+'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'A+' rating on the following revenue bonds issued by the Hospital Authority No.1 of Lancaster County, NE on behalf of Bryan Health (BH; formerly known as BryanLGH):

--$45,575,000 series 2006 fixed rate bonds;

--$17,515,000 series 2008A fixed rate bonds;

--$37,675,000 series 2008B-1 variable rate demand bonds;

--$37,645,000 series 2008B-2 variable rate demand bonds;

--$12,385,000 series 2008C variable rate demand bonds.

For the series 2008B-1, 2008B-2, and 2008C bonds, the 'A+' rating is an underlying rating. These bonds are secured by letters of credit (LOCs) issued by U.S. Bank, NA., which Fitch rates 'AA-/F1+'.

The Rating Outlook is Stable.

SECURITY

Bond payments are secured by a security interest in the Pledged Revenues of the obligated group.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: Fiscal 2012 and 2013 produced very strong results, with excellent profitability and modest capital needs leading to considerable balance sheet strengthening. However, management expects profitability to normalize in following years at around 4-5%, which is below 2012-2013 levels but favorable against Fitch's 'A' median of 3.3%.

STABLE VOLUMES: Overall utilization remained steady over the last three years, despite the declining trend observed nationally and in BH's service area. This was supported by a growing market share, which management attributed to strong relationships with physicians and strategic marketing and service expansion initiatives.

MANAGEABLE CAPITAL NEEDS: Following completion of its recently built patient tower, BH capital needs over the medium term are modest and will be funded from cash flow without impacting liquidity.

LOW DEBT BURDEN: BH has five series of bonds outstanding, of which 42% is fixed rate and 58% is variable rate with fixed payor swaps. Good debt metrics are expected to be sustained given projected cash flow and no new debt plans.

RATING SENSITIVITIES

CONTINUED BALANCE SHEET STRENGTHENING EXPECTED: Fitch believes liquidity and capital metrics will continue to improve aided by sound cash flows and amortization of debt, which would likely to lead to an upgrade.

CREDIT PROFILE

Located in Lincoln, Nebraska, Bryan Health is a two-campus hospital with 714 licensed beds and other related entities, including a critical access hospital. In fiscal year ended (FYE) May 31, 2013, Bryan Health generated $505.5 million in total operating revenue.

Excellent Financial Profile

BH's financial metrics improved markedly in fiscal 2012 and 2013, due to concerted efforts to hone cost structure, employee engagement, and constant quality improvements. Operating margin was robust at 6.9% in 2013 and 7.6% in 2012, compared to 3.5% in 2011 and Fitch's 'A' median of 3.3%. Similarly, operating EBITDA margin was a high 15.6% in 2013 and 15.8% in 2012 compared to 11.9% in 2011 and the median of 10.7%. Expense reduction efforts focusing on labor, benefits, and supplies yielded significant savings, with total expenses growing only 0.2% between 2011 and 2013.

At FYE 2013, BH had $347.9 million in unrestricted cash and investments, up from $291.3 million at FYE 2011. This translated into 295.3 days cash on hand, 21.1x cushion ratio, and 214.5% cash to debt, which comfortably exceeded Fitch's 'A' medians of 196.3 days, 15.6x, and 129.2%. While profitability is expected to normalize in following yearsat around 4-5% operating margins, Fitch believes sustained profitability and modest capital needs will continue to strengthen liquidity.

Volumes Supported by Market Position

Overall utilization stayed relatively stable over the last three years, despite declining volume trends nationally and in BH's service area. Steady volumes were supported by growing inpatient market share at 55.9% in the primary service area (PSA) in 2012, compared to 47.1% in 2007. Management attributes this improvement to strong relationships with the mostly independent physicians in the Lincoln market, new branding efforts, and strategic service line expansions. St. Elizabeth Regional Medical Center (part of Catholic Health Initiatives, revenue bonds rated 'A+' stable) remains the main competitor in the PSA with 33.9% market share in 2012, down from 41.7% in 2007.

BH is also a part of Heartland Health Alliance (HHA), a network of primarily rural hospitals in Nebraska. BH has had a long standing relationship with the member hospitals and acts as a tertiary referral center. Bryan Health Connect, a Physician Hospital Organization (PHO), is under development with BH, independent physicians in Lincoln, and HHA. Fitch believes the PHO provides a solid platform to face the impending changes related to healthcare reform.

Modest Capital Plans

Capital expenditures are budgeted at manageable levels, with no major spending needs in the near to medium term. Both hospital campuses were updated as part of the major facility plan completed in 2009. Capital spending for fiscal 2014 budgeted at $41.9 million focuses on investment in patient care, clinical, and support services, IT, and construction projects, and is expected to be funded from cash flow with no plans to issue additional debt.

Manageable Debt Portfolio

As of Sept. 30, 2013, BH had five series of bonds outstanding totaling $152 million. The debt portfolio consisted of $63.8 million (42%) of fixed rate bonds and $87.7 million (58%) of VRDBs with LOCs from US Bank with expiration dates in May 2016. The VRDBs are swapped to fixed with LIBOR-based interest rate swaps with Piper Jaffray and Morgan Stanley as counterparties. Mark to market as of Sept. 30, 2013 was negative $13.7 million, and no collateral was posted. Debt service is relatively level through 2019 at around $16 million, then drops to $12 million in 2020 and below $7 million in 2024. MADS is relatively high for BH's debt burden, due to short average life of bonds and declining debt service schedule.

Debt metrics have improved significantly since the issuance of 2008 bonds. Debt burden is low with 1.8x debt to EBITDA and 23.1% debt to capitalization in fiscal 2013 compared to 4.6x and 33.2% in 2009 and respective medians of 3.3x and 40.7%. Similarly, coverage is sound at 5.4x in 2012 and 2013 compared to 2.6x in 2009 and the median of 3.8x.

DISCLOSURE

BH covenants to provide annual audited financials and utilization data within 120 days of year end, and unaudited quarterly information within 60 days of quarter end through the Municipal Rule Making Board's EMMA website. BH's disclosure filings have been timely and thorough. BH is in the process of changing its reporting period from May 31 year-end to Dec. 31 year-end. An audited report will be issued Dec. 31, 2013 for 7 months.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria', June 3, 2013;

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811207

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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE 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 WEBSITE.


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