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TMCNet:  Fitch Affirms Harris County Hospital District (TX) Revs at 'A'; Outlook Stable

[July 23, 2014]

Fitch Affirms Harris County Hospital District (TX) Revs at 'A'; Outlook Stable

CHICAGO --(Business Wire)--

Fitch Ratings has affirmed the 'A' rating on the following Harris County Hospital District (HCHD) revenue bonds:

--$104.4 million series 2010;

--$199.1 million series 2007A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a lien on the pledged revenues of Harris County Hospital District (excluding ad valorem tax revenues) and a debt service reserve fund.

KEY RATING DRIVERS

WANING CAPITAL DEMANDS: HCHD is nearing completion of its multi-year capital plan, which includes a significant expansion of its ambulatory network, and renovation existing facilities to meet increasing patient demand and capacity needs. No additional debt is planned, and capital expenditures are expected to decline materially beyond 2015.

HEALTHY LIQUIDITY: Despite several years of significant expenditures, HCHD's balance sheet has maintained solid liquidity metrics in line with Fitch's 'A' category medians. Despite the expected reduction in liquidity due to capital spending, HCHD's solid liquidity position still provides financial flexibility against HCHD's historically light and somewhat volatile cash flow, and against its manageable debt burden.

MEDICAID WAIVER PROGRAM REVENUE: HCHD currently benefits from Texas' 1115 waiver program, which have had a supportive impact on HCHD's historically light profitability, though lags in payment have meant some volatility in cash flow. Fitch views HCHD's dependence on supplemental reimbursement and government payors to make debt service coverage as a credit concern, due to uncertainty related to ongoing funding.

TAX REVENUE SUPPORT: Support from ad valorem tax revenues has significantly offset operating and management expenses, and HCHD received $515.9 million in fiscal 2014 and $508.4 million in fiscal 2013. Harris County's financial profile has improved since the recession, and Fitch notes favorable tax base trends within its most recent 'AAA'/Outlook Stable general obligation rating review.

SAFETY NET (News - Alert) PROVIDER: HCHD's position as the safety net provider for Harris County, Texas provides for a significant level community and legislative support. This position is further cemented by a long standing relationship with Baylor College of Medicine and the University of Texas Medical School in support of clinical services and personnel.

RATING SENSITIVITIES

SUPPLEMENTAL FUNDING UNCERTAINTY: It remains uncertain whether or not Texas' Medicaid 1115 waiver program will be extended beyond September 2016, or if Medicaid expansion will occur in its place. Without either, HCHD would face a significant reduction in reimbursement and profitability, which could prompt negative rating pressure.

CREDIT PROFILE

Harris County Hospital District (HCHD) is the fifth largest metropolitan health system in the country, and consists of three hospitals: 586-bed Ben Taub General Hospital, 328-bed LBJ Hospital, and 49-bed Quentin Mease Community Hospital, 18 community care centers, six school-based clinics, and other ambulatory sites. Other component units of the HCHD system include a foundation and a Medicaid Health Maintenance Organization known as Community Health Choice (CHC).

Fitch's analysis is based on HCHD and its component units. In fiscal 2014, HCHD generated $1.9 billion of revenues, including $348.6 million in net patient service revenue (includes $104.9 million of bad debt expense classified as deduction from revenue in the audited financials), $515.9 million of ad valorem tax revenue (classified as non-operating revenue in the audited financials), $255.9 million of DSH/UPL funding, $668.4 million of premium revenue, and $120.9 million of other revenue, including $90.1 million in DSRIP evenue.

CAPITAL PROJECTS NEAR COMPLETION

HCHD is nearing completion of its multi-year strategic capital plan, which includes the renovation of its Ben Taub campus bed tower and emergency department, and ambulatory expansion at its Holly Hall campus, an ambulatory expansion at the LBJ campus, and other various strategic items. As of Jan. 31, 2014, approximately $75 million remained to be spent out of $157 million in strategic capital plans for the remainder of 2014 and 2015. Phase I and II of III total phases are complete, with some expansion/renovation at Ben Taub as well as a data center remaining. Other than project spending, routine capital is budgeted near $46 million for fiscal 2015.

At fiscal 2014 (year-end Feb. 28) HCHD had approximately $107 million in board designated assets for capital use. Total unrestricted cash (including board designated) was $685.3 million, equal to 132.2 days of cash on hand (DCOH) and a healthy 35.0 times (x) cushion ratio and 239.1% cash to debt.

HCHD's total debt equaled approximately $286 million, of which $96 million (34%) was variable rate demand bonds (VRDBs), series 2010. The VRDBs are supported by a letter of credit provided by JP Morgan (News - Alert) Chase, valid through Aug. 12, 2016. HCHD is also counterparty to a swap, which HCHD's debt level is modest, as indicated by a debt to capitalization of 32.1% and maximum annual debt service (MADS) equal to a low 1% of revenue. HCHD produced 2.2x coverage of MADS by EBITDA per Fitch's calculation, which includes tax revenues not pledge to debt service. Though light against Fitch's 'A' category median of 3.8x, any concern is offset by HCHD's healthy liquidity against its light debt burden. No additional debt is planned.

WAIVER PROGRAM

HCHD has benefitted from the increased supplemental funding provided via the Texas 1115 Waiver program, which helped support better operating performance in fiscal 2014. HCHD received $255.9 million in Uncompensated Care (UC) Medicaid supplemental revenues and another $90 million in delivery system reform incentive payment (DSRIP) revenues, which is inflated due to settlement for prior years. The 1115 Waiver program has a September 2016 term, and funding beyond that is uncertain. In addition, the state did not expand Medicaid.

Operating profitability was improved in fiscal 2014, due in large part to the receipt of supplemental payments and narrowed losses at CHC, which improved to a $4 million operating loss from over $13 million in losses in fiscal 2013. For fiscal 2015, HCHD has budgeted to near breakeven operating performance, which includes its tax, DSRIP, and tobacco settlement revenues, as well as interest income. Attaining budget will require steadier receipts of supplemental and tax revenues than in prior years, as well as ongoing management of clinical operations during HCHD's capital projects.

AD VALOREM TAX SUPPORT

HCHD continues to rely upon the tax support provided by the district towards operation & management of the health system. For 2014, HCHD received $516 million in ad valorem tax revenues, following $508 million in 2013. For tax year 2013 (HCHD fiscal 2014), the district tax rate declined to $0.170 cents per $100 of assessed value (AV) reduced from $0.182 the prior year and $0.192 the previous seven years. Fitch also notes that Harris County (rated 'AAA', Outlook Stable) has substantial taxing room at $0.398 per $100 of AV, well below its current ceiling of $0.80. Further, Harris County's total AV is expected to increase 5.2% for fiscal 2015, following two years of solid gains of 5% and 9% in fiscal 2013 and 2014, respectively.

Fitch believes HCHD's position as the safety net provider for Houston, Harris County and the region, as well as its position as a teaching system for Baylor College of Medicine and The University of Texas Health Science Center, provide for significant local and state legislative support. As an offset, its position as a safety net results in reliance on tax revenues, supplemental funding, and Medicaid and self-pay present credit risks from possible state or federal legislative changes.

CONTINUING DISCLOSURE

HCHD covenants to provide only annual disclosure to bondholders, via the Municipal Securities Rulemaking Board's EMMA system. Fitch views negatively the lack of a provision for quarterly disclosure.

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

Applicable Criteria and Related Research:

'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014).

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=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=841183

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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