|[April 08, 2014]
Fitch Affirms Beatrice Community Hospital's (NE) Revs at 'BB+'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'BB+' rating on the following Hospital
Authority No. 1 Gage County, Nebraska bonds, issued on behalf of
Beatrice Community Hospital (BCH):
--$30 million health care facilities revenue bonds, series 2010B.
BCH also has $13 million in series 2010A bank qualified bonds, which are
not rated by Fitch.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues, a mortgage lien,
and a debt service reserve.
KEY RATING DRIVERS
SOLID CASH FLOW: Good volume trends in fiscal 2013 (Sept. 30 year end)
and interim 2014 (through the three months ended Dec. 31) have supported
healthier cash flow; BCH produced a 4.2% operating and 19.1% operating
EBITDA margin in fiscal 2013 which was sufficient to provide 2.9 times
(x) coverage of maximum annual debt service (MADS). This trend continued
through the interim period with a 15.8% operating EBITDA margin and 2.8x
MODEST BALANCE SHEET GROWTH: At Sept. 30, 2013, BCH's unrestricted cash
and investments equaled $12.3 million (93.7 days of cash on hand [DCOH])
ahead of $7.8 million (69.1 DCOH) at Sept. 30, 2012. Sustained cash flow
should provide further incremental balance sheet growth going forward
despite an expansion project that is expected to cost $6.6 million and
funded from cash flow in fiscal 2015-2016.
CRITICAL ACCESS DESIGNATION: BCH's operating performance continues to be
bolstered by the associated supplemental revenues afforded by its
critical access hospital (CAH) designation. Further, BCH's rural
location affords it with stable and leading market position, and a very
limited competitive landscape. While the supplemental revenue provided
to BCH helps to mitigate the risks inherent to small, rural facilities,
Fitch notes that the CAH program has been a target for reductions at the
federal level and changes to this program would likely have a material
impact on BCH's rating.
HIGH DEBT BURDEN: BCH maintains a significant debt burden, as evidenced
by debt to capitalization of 53.6% and MADS equal to 6.6% of revenue in
fiscal 2013. Fitch expects this will moderate over time given good
revenue growth and no additional debt plans.
SUSTAINED OPERATING IMPROVEMENT: Fitch expects BCH to maintain healthy
operating cash flow levels which support balance sheet growth, and
moderating leverage levels over the longer term. Given the risks
inherent from BCH's small revenue base, Fitch expects BCH to demonstrate
a consistent financial cushion in excess of Fitch's 'BBB' category
median ratios before movement back to an investment grade rating level
BCH is located in Beatrice, Nebraska approximately 40 miles south of
Lincoln, Nebraska. BCH is a CAH operating 25 acute-care beds. Other
entities include two HUD housing projects and a congregate living
facility. Total revenues were $56.2 million in audited fiscal 2013.
STEADY CASH FLOW
Fiscal 2013 was the first full year in the replacement facility (opened
February 2012) and BCH benefited from good physcian recruitment and
clinical growth. Leadership remained committed to growing the medical
staff, which increased to 25 active members up from 20 in 2011. BCH's
total revenue increased significantly by 20% in fiscal 2013, and
management was successful in limiting total expense growth to 18% thus
preserving solid profitability. For fiscal 2014, management is budgeting
for a steady operating EBITDA margin near 19%, which is reasonable
against interim results and prior year performance. The fiscal 2014
budget also includes $1.9 million of meaningful use funds.
Solid cash flow in fiscal 2013 and into 2014 has resulted in some
balance sheet growth, to 11.9 million at Dec. 31, 2013 from a low $7.8
million at fiscal year-end 2012. Fitch excludes board designated funds
for self-insurance from unrestricted liquidity, which differs from the
liquidity covenant calculation. BCH had $13.3 million and 100.9 DCOH per
its covenant calculation at fiscal 2013, which includes approximately
$952 thousand in board designated funds for health insurance claims.
Further incremental growth is expected in fiscal 2014 and beyond as BCH
expects to produce steady operating cash flow and maintain a manageable
level of capital spending. Consistent and meaningful balance sheet
improvement to levels in excess of Fitch's 'BBB' category medians is a
necessary precursor to any consideration of upward rating movement.
HIGH DEBT LEVEL
BCH remains heavily leveraged, and its balance sheet remains light
against its debt burden. BCH has $43 million of long-term debt
outstanding, which is 100% fixed rate. As of Dec. 31, 2013, BCH had
27.9% cash to debt and a 3.2x cushion ratio, versus Fitch's 'BBB'
medians of 91.7% and 10.2x, respectively. Operating in a new facility
which opened in early 2012 will limit BCH's capital needs going forward.
BCH is planning for up to $1.5 million in capital expenditures for
fiscal 2014, well below its annual depreciation expense. While capital
plans include a $6.6 million medical office and ambulatory expansion
over the next several years, these capital needs should be supported by
cash flow with no additional debt expected.
BCH's market position and its CAH designation should provide for some
revenue stability over the near-to-medium term, and help to offset the
risks associated with its small revenue base. However, Fitch notes that
the long term viability of the CAH program is uncertain, and that any
changes to that program could have a material impact on BCH's credit
profile and rating. Management recognizes the risk associated with the
reduction in this supplemental funding and has long term plans to
operate on a breakeven basis absent the supplemental funds, which Fitch
BCH only covenants to provide audited annual financial statements 150
days after the year-end close to bondholders via the Municipal
Securities Rulemaking Board's Electronic Municipal Market Access system
(EMMA), which Fitch views negatively. However, BCH provides voluntary
quarterly disclosure via EMMA. Disclosure to Fitch has been timely and
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20,
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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