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TMCNet:  Fitch Affirms Parrish Medical Center (FL) Revs at 'A-'; Outlook to Negative

[December 11, 2013]

Fitch Affirms Parrish Medical Center (FL) Revs at 'A-'; Outlook to Negative

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'A-' rating on the following North Brevard County Hospital District bonds issued on behalf of Parrish Medical Center, Florida (PMC):

--$95.8 million North Brevard County Hospital District (Parrish Medical Center) refunding revenue bonds, series 2008.

The Rating Outlook has been revised to Negative from Stable.

SECURITY:

Bonds are secured by a pledge of net revenues and a fully funded debt service reserve fund.

KEY RATING DRIVERS

POOR PROFITABILITY: In fiscal 2013, PMC recorded a $3.9 million operating loss, which equated to a negative 2.7% operating margin and 7.7% operating EBITDA margin, including an $8.2 million operating loss on PMC's employed physician group (PMG (News - Alert)). The operating losses are primarily attributed to a declining volumes trend at the hospital, as well as on-going physician subsidies. The Outlook revision to Negative is driven by the PMC's poor profitability that suppresses debt service coverage to levels not commensurate with the 'A-' rating level. Failure to improve profitability and coverage metrics will likely lead to negative rating pressure over the next 12-24 months.

LOW DEBT SERVICE COVERAGE: Pressured profitability combined with a high debt burden resulted in low maximum annual debt service (MADS) coverage by EBITDA of 1.5x and MADS coverage by operating EBITDA of 1.7x in fiscal 2013, which compare unfavorably against Fitch's 'A-' category medians of 3.8x and 3.4x respectively. Fitch views PMC's weak debt service coverage for the 'A-' rating level as a primary credit concern.

SOLID BALANCE SHEET: At Sept. 30, 2013 (year-end; unaudited), PMC had a total of $111.4 million in unrestricted cash and investments (a 3% growth since fiscal year [FY] 2011), translating into 299.1 days cash on hand, 17.1x cushion ratio, and cash to debt of 117%, which nearly met and/or exceeded Fitch's 'A' category medians of 196 days, 15.6x and 129% respectively. Fitch views PMC's solid unrestricted liquidity cushion as a primary credit strength.

LEADING MARKET SHARE: PMC maintains a leading market share of 66% in its primary service area (PSA). The closest competitor is Wuesthoff Hospital (a part of HMA; rated 'BB-', Rating Watch Negative by Fitch) with a 9% market share. Market share has remained relatively stable despite a decline in volumes.

EFFECTIVE MANAGEMENT PRACTICES: Fitch believes management's effort to effectively control costs and maintain high quality will continue to position PMC favorably as healthcare reform implementation advances. Specifically, CMS ranked PMC in the top 6% of hospitals in the nation based upon cost and quality metrics. Additionally, management has led cost containment strategies to address the recent trend in volume decline, through which total expenses have decreased and stabilized over the past two years.

TAXING AUTHORITY ABILITY: PMC is a district hospital and as such has the authority to levy up to five mills on district property to support hospital operations. Based on the district's taxable property values, management estimates the maximum levy would generate approximately $15 million per year in additional revenue. The ad-valorem tax has not been levied since 1994. Fitch views PMC's taxing ability as a credit positive.

RATING SENSITIVITY

OPERATIONAL IMPROVEMENTS NEEDED: Fitch will continue to monitor PMC's operating performance and expects management's initiatives to gain traction within 12-24 months. Fitch believes a reversal of the three year volume decline, narrowing of the total subsidy incurred by PMC and improvement in profitability is critical to be consistent with 'A-' rating levels. Failure to demonstrate improvement in profitability will likely result in a rating downgrade.

CREDIT PROFILE

ORGANIZATIONAL OVERVIEW

Parrish Medical Center is a district hospital with 210 licensed beds (60 staffed beds) located in Titusville, Florida (45 miles east of Orlando, FL). In fiscal 2013 (unaudited), PMC had total revenues of $158.1 million. PMC covenants to provide annual and quarterly disclosure through the Municipal Rule Making Board's EMMA system.

DECLINING VOLUME TREND

Despite having a 66% market share position in its primary service area, Parrish Medical Center has experienced a three year deterioration in inpatient and surgical volumes which has pressured profitability. Since fiscal 2010, inpatient admissions have declined 11.9% and observation stays have fallen 23.7%. More concerning has been the sharp drop in outpatient surgeries from 6,374 in fiscal 2010 to 4,513 in fiscal 2013, a 29.2% decline. However, management believes with the improving local economy and housing market, volumes should improve over the next several years.

POOR PROFITABILITY

In fiscal 2013, PMC had an operating loss of $3.9 million, which resulted in a negative 2.7% operating margin and 7.7% operating EBITDA margin, and compared unfavorably against Fitch's 'A' category medians of 3.3% and 10.7%, respectively. Management attributes this deterioration from fiscal 2012 primarily to PMG's $8.2 million operating loss and to declining volumes. Management expects PMG's operating losses (which are lower per physician than the industry average) to decrease to $3.8 million by FY2015. Fitch believes it is imperative for PMC to stymie the physician group's losses to improve system profitability.

Excluding PMG's operating losses, PMC achieved a 3% operating margin in fiscal 2013, which is improved from a 0.8% margin in FY2011. The operational improvement is attributed to cost reduction strategies implemented in fiscal 2012, resulting in total savings of $2.2 million. Additionally, PMC contracted with a consultant in June 2013 to help mitigate declines in inpatient admissions, which resulted in a $1.5 million increase in net patient revenue to date. In fiscal 2014, management is budgeting for additional cost savings of approximately $2 million and an approximate $4.3 million operating gain, excluding physician subsidies.

SOLID BALANCE SHEET

At Sept. 30, 2013 (year-end; unaudited), PMC had a total of $111.4 million in unrestricted cash and investments(a 3% growth since FY2011), translating into 299.1 days cash on hand, 17.1x cushion ratio, and cash to debt of 117%, which nearly met and/or exceeded Fitch's 'A' category medians of 196 days, 15.6x and 129% respectively. Fitch views PMC's solid unrestricted liquidity cushion as a primary credit strength.

Additionally, in 2013 PMC revised its investment policy from 100% U.S. government backed fixed income securities to a more balanced portfolio of equities and diversified fixed income investments. Management believes this change will result in improvements in the long-term investment performance.

LOW DEBT SERVICE COVERAGE

PMC's poor profitability combined with a high leverage position resulted in low MADS coverage by EBITDA of 1.5x and MADS coverage by operating EBITDA of 1.7x in fiscal 2013, which compared unfavorably against Fitch's 'A-' category medians of 3.8x and 3.4x respectively. Fitch views PMC's weak debt service coverage for the 'A-' rating level as a primary credit concern. Failure to improve debt service coverage metrics to levels more consistent with the 'A-' rating will likely lead to negative rating movement.

EFFECTIVE MANAGEMENT PRACTICES

Effective management practices including vigilant expense controls and high priority placed on quality metrics is viewed as a credit positive. Specifically, CMS ranked PMC number one amongst central Florida hospitals and in the top 6% of hospitals nationally based upon cost and quality metrics. Overall, Fitch believes management's effort to effectively control costs and maintain high quality metrics will position PMC favorably as healthcare reform implementation advances.

In FY2012 and FY2013, management implemented cost-cutting and revenue improvement initiatives to improve operations. Total operating expenses (excluding PMG) decreased by 5.7% in FY2012 and by 1.1% in FY2013, while net patient revenues increased by 2% and 2.4%, respectively. Management's ability to effectively control expenses, while growing top-line revenue is viewed as a credit positive and should result in improved operating profitability in the near to mid-term.

OUTSTANDING DEBT PROFILE

PMC's outstanding debt is all fixed-rate. As of Nov. 29, 2013, PMC had two outstanding basis swaps with Raymond James, which had a positive mark-to-market valuation of $1.7 million. Overall, Fitch views PMC's outstanding debt profile as conservative.

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

Applicable Criteria and Related Research:

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

Applicable Criteria and Related Research:

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=811470

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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