|[June 10, 2014]
Fitch Affirms Summit Health's (PA) Bonds at 'A+'; Outlook Stable
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has affirmed the 'A+' rating on Summit Health, PA's
(Summit) outstanding debt listed below:
--$120.1 million Franklin County Industrial Development Authority
revenue bonds, series 2010.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues and debt service
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Summit's financial profile is highlighted by
its strong balance sheet metrics, consistently solid profitability, and
satisfactory maximum annual debt service (MADS) coverage indicators for
the 'A' rating category. Financial metrics as of March 31, 2014 (nine
months; unaudited) compare favorably to the preceding year.
DOMINANT MARKET POSITION: Fitch views Summit's dominant market position
in its primary service area (PSA) as a primary credit strength, as it
helps to support the organization's underlying financial condition. In
calendar year 2012, Chambersburg Hospital and Waynesboro Hospital held a
market share of 73.9% and 66.3% in each of their respective PSAs.
SUCCESSFUL PHYSICIAN ENGAGEMENT: Summit's approach to engaging
physicians, which includes employment, joint-venturing, and use of
independent contracts, has been successful in sustaining the
organization's market presence and profitability.
SOFTENING INPATIENT ADMISSIONS: Similar to other providers nationwide,
Summit observed softened inpatient admissions in fiscal 2013 and
year-to-date fiscal 2014. However, Fitch notes positively that the
financial impact has been minimal to-date and senior leadership
continues to actively explore ways to bolster top-line revenue growth,
while effectively controlling expense growth.
HIGH EXPOSURE TO GOVERNMENTAL PAYORS: Summit's mix of governmental
payors (Medicare and Medicaid) has grown in each of the past four fiscal
years. Specifically, Summit's exposure to Medicare and Medicaid was
59.7% in fiscal 2013, up from 56.2% in fiscal 2010. Fitch recognizes
that the risk of having an enhanced level of governmental payors can
expose the organization to reimbursement pressure at the state and
MANAGEABLE CAPITAL PLANS: Management entered into a $15 million private
placement loan in fiscal 2014 to finance the construction of a new
administrative building, which did not materially impact the
organization's overall leverage position. Beyond the aforementioned
project, Summit's capital needs over the next five years appear
manageable (approximately $123 million in investment) and are expected
to be entirely funded from operating cash flows.
MAINTAIN STRONG FINANCIAL PROFILE: The Stable Outlook is based on
Fitch's expectation that Summit will continue to effectively maintain
its strong financial position consistent with historical trends.
Located in south-central Pennsylvania, Summit is anchored by two acute
care facilities, Chambersburg Hospital and Waynesboro Hospital
(Waynesboro), which have a combined total of 326 licensed beds. In
fiscal 2013, Summit had total operating revenues of $408.8 million.
AFFIRMATION OF 'A+' RATING
The 'A+' rating is supported by Summit's strong financial profile,
dominant market position with limited competition, good physician
engagement strategy, and manageable capital plans.
In fiscal 2013 (June 30, 2013; audited), Summit generated $22.1 million
in income, which translated into a 5.4% operating margin and 10.8%
operating EBITDA margin. These metrics compare favorably against Fitch's
'A' category medians of 3.3% and 10.7%, respectively. Through the
nine-month interimperiod (March 31, 2014; unaudited), the system earned
$12.5 million in operating income (4% operating margin), which is
already ahead of management's budgeted year-end target income of
approximately $7.3 million.
Solid operations and favorable investment returns have helped support
good cash growth and satisfactory debt service coverage. Through March
2014, Summit had $371.5 million of unrestricted cash and investments,
which is significantly above 2010's $234.4 million absolute cash
balance. Further, MADS coverage was 4.4x by EBITDA and 3.5 by operating
EBITDA through the interim period, which compare favorably with the
respective 'A' category medians of 3.8x and 3.4x.
In fiscal 2015, management is budgeting for $7.3 million in income from
operations, which reflects the volume shift that is currently affecting
Summit. Fitch notes that Summit has historically budgeted conservatively
and outperformed its financial forecast.
Summit's overall debt burden, measured by MADS as a percentage of
revenue of 3.1% in fiscal 2013 was identical to Fitch's 'A' category
median of 3.1%. Further, MADS coverage is viewed as satisfactory and as
a buoying credit factor for Summit at the 'A+' rating level. Over the
medium-to-long term, Fitch expects the organization to moderate its debt
burden given the lack of large capital investment plans.
The system operates two hospitals that serve patients in Franklin,
Fulton, Adams, and Cumberland Counties in PA and Washington County in
MD; Summit's nearest competitors are Fulton County Medical Center (FCMC;
a critical access hospital) and Meritus Health (rated 'BBB'; Stable
Outlook by Fitch). Overall, Fitch views Summit's competitive position as
favorable, as illustrated by the system's dominant market share in the
Like other healthcare providers nationwide, Summit has observed softened
inpatient admissions in fiscal 2013 and year-to-date fiscal 2014.
Specifically, inpatient admissions decreased to 14,844 in fiscal 2013
(from 15,466 in fiscal 2012) and year-to-date inpatient admissions (as
of March 31, 2014) are lagging 3.3% behind the same time last year.
Management reported that inpatient utilization is being affected by
various factors, including the reclassification of inpatients as
observations patients (observation cases increased by 16% in fiscal 2013
over the preceding year) and changing consumer behavior as a result of
lingering economic pressures and high deductible health plans.
Fitch remains concerned about Summit's increasing mix of governmental
payors (Medicare and Medicaid), which has grown over the past four
fiscal years. Specifically, Summit's exposure to Medicare and Medicaid
was relatively high as 59.7% in fiscal 2013, up from 56.2% in fiscal
2010. Fitch recognizes that the risk of having an enhanced level of
governmental payors can expose the organization to reimbursement
pressure at the state and federal level.
Management refinanced its fixed-rate series 2009 bonds on April 30, 2014
with a fixed-rate private placement from Susquehanna Bank (not rated by
Fitch). At the same time, management also secured an additional $15
million from Susquehanna Bank in a separate private placement loan to
finance the construction of a medical office building adjacent to
Waynesboro. Approximately 60% of the second private placement is
fixed-rate, which the remaining portion is variable rate. Fitch does not
view the additional new money debt as having a material adverse impact
on debt manageability given Summit's healthy profitability and improving
balance sheet strength.
Summit has an outstanding swap with Royal Bank of Canada (RBC; rated
'AA/F1+'; Stable Outlook) that required a collateral posting of $5.8
million at fiscal year-end 2013 (swap expires on March 1, 2038).
However, a temporary amendment was negotiated to the original interest
rate swap agreement in fiscal 2014 that changed certain stipulations,
including reduced collateral thresholds and minimum posting
requirements. Currently, Summit has no collateral posted on the swap.
Summit covenants to submit annual and quarterly financial and
utilization information to the MSRB's EMMA system. Management was candid
and timely in its responses to Fitch during the credit review process.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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