|[June 09, 2014]
Fitch Upgrades Rex Healthcare's (NC) Revs to 'AA-'; Outlook Stable
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has upgraded the rating on the following North Carolina
Medical Care Commission health care facilities revenue and revenue
refunding bonds issued on behalf of Rex Healthcare (Rex) to 'AA-' from
--$110.3 million series 2010A.
The Rating Outlook is Stable.
The bonds are secured by a pledge of and a lien on the accounts
receivable and the proceeds thereof derived from the ownership and
operation of the obligated group (Rex Healthcare, Inc. and the Hospital).
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: In fiscal 2013 (June 30, 2013; audited), Rex
had another year of solid financial performance that supports the
organization's strong overall financial profile. Specifically, Fitch
views favorably Rex's improving balance sheet, consistently solid
operational profitability, and robust maximum annual debt service (MADS)
coverage, as nearly all of Rex's financial metrics are in line with
Fitch's 'AA' category medians. The rating upgrade to 'AA-' is primarily
driven by the organization's strong financial profile.
MEMBER OF UNC HEALTH SYSTEM: University of North Carolina Health Care
System (UNCHCS; not rated by Fitch) is Rex's sole corporate member and
Rex is operated as part of UNCHCS including systemwide strategic and
capital planning. Further solidifying the two organizations was the
implementation of a common IT platform (Epic), which will go live in
June 2014. The only area that is not consolidated is the debt, and Rex
and UNCHCS remain separately obligated on their own respective debt.
Management is evaluating whether or not to consolidate the obligated
COMPETITIVE SERVICE AREA WITH GOOD DEMOGRAPHICS: Fitch views Rex's
growing and affluent service area positively. However, it remains highly
competitive with primary competitors being Duke University Health System
(revenue bonds rated 'AA' by Fitch) and WakeMed (revenue bonds rated
LIGHT DEBT BURDEN: MADS of $12.4 million represented a low 1.7% of total
revenues in fiscal 2013, which compared favorably against Fitch's 'AA'
category median of 2.6%. MADS coverage by EBITDA and operating EBITDA
averaged a high 6.9x and 6.3x, respectively, over the past four years.
The combination of consistently solid profitability and light debt
burden provides robust debt service coverage metrics, which Fitch views
IMPROVED LIQUIDITY POSITION: Rex's strong EBITDA generation with
measured capital investment has caused unrestricted cash and investments
to increase by approximately 73% since 2010. At March 31, 2014, Rex had
$321.6 million in unrestricted funds, which translated into 172.3 days
cash on hand (DCOH), 25.9x cushion ratio, and 235.6% cash-to-debt.
LARGE CAPITAL SPENDING PLAN: Rex's long-term capital plan is large; the
organization plans to spend approximately $440 million in fiscal
2014-2018 on various items such as the development of its North Carolina
Heart & Vascular Hospital. However, the financing of the capital plan is
being discussed at the UNCHCS and Rex Healthcare level, and Fitch will
evaluate any finncing plan at the appropriate time. In addition, Fitch
does not expect any material weakening of Rex's liquidity metrics as
there is the potential for financing a portion of the capital plan
through internal UNCHCS funding sources.
Rex operates a 433-licensed bed acute care tertiary hospital and two
nursing care facilities with 227 beds. Rex is a controlled affiliate of
UNCHCS, which operates a 799-bed academic medical center located in
Chapel Hill, NC. In fiscal 2013 (audited), Rex had total revenues of
approximately $731.3 million.
RATING UPGRADE TO 'AA-'
The rating upgrade to 'AA-' from 'A+' is primarily supported by Rex's
strong financial profile, which is highlighted by an improving balance
sheet, consistently solid operating profitability, and robust MADS
coverage. Nearly all of Rex's financial metrics are in line with Fitch's
'AA' category medians.
Over the past four fiscal years Rex has averaged a 6.9% operating margin
and 11.9% operating EBITDA margin, which compares favorably against
Fitch's 'AA' category medians of 5.6% and 10.5%, respectively.
Additionally, strong profit generation has led to robust debt service
coverage over the same time period.
Through the nine-month interim period 2014 (March 31; unaudited) Rex's
profitability metrics were slightly lower than historical as the
organization recorded income from operations of $19.8 million (3.6%
operating margin). Management states the lower profitability in 2014 is
primarily related to the large EPIC EHR expense and associated
implementation. Management expects to return to a 4% operating margin in
Debt service coverage ratio calculations exclude transfers to UNCHCS
which totaled approximately $37 million for 2013 and are expected to be
at the same level for fiscal 2014.
MEMBER OF UNCHCS
UNCHCS has a majority of seats on Rex's board and Rex benefits from
being part of UNCHCS. In addition to benefits from a strategic and
resource allocation perspective, UNCHCS assists in negotiation of
managed care contracts and approves operating and capital plans. Fitch
believes that Rex's position as part of the UNCHCS system has resulted
in strong financial performance and is a primary credit strength.
LARGE CAPITAL SPENDING PLAN
Rex's long-term capital plan is large as the organization plans to spend
approximately $440 million in fiscal 2014 to 2018 on various items such
as the development of its North Carolina Heart & Vascular Hospital, a
new hospital (Holly Springs Hospital) located in Wake County, and
However, the financing of the capital plan is being discussed at the
UNCHCS and Rex Healthcare level and may include some funding from
internal UNCHCS funding sources, which should preserve liquidity.
CONSERVATIVE DEBT PROFILE
Rex's outstanding debt is all fixed-rate with no outstanding
interest-rate swaps. Overall, Fitch views the organization's debt
profile as conservative.
Rex covenants to submit annual and quarterly financial and utilization
information to the MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30,
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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