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Fitch Affirms Butler Health System (PA) Revs at 'A-'; Outlook Stable
[September 17, 2014]

Fitch Affirms Butler Health System (PA) Revs at 'A-'; Outlook Stable


NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'A-' rating on $75,900,000 series 2009B hospital revenue bonds issued by Butler County Hospital Authority on behalf of Butler Health System (BHS).

In addition, BHS has outstanding $62,165,000 in series 2009A and 2010A private placements with BB&T, which Fitch does not rate.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues, a lien of a mortgage granted by the credit group, and a debt service reserve fund.

KEY RATING DRIVERS

LEADING MARKET POSITION: BHS continues to enjoy a dominant market position, despite operating in a very competitive service area. Inpatient market share in the primary service area was 63.7% in 2013. However, the Pittsburgh region is expected to experience some commercial insurance shifts in the 2015 benefit year, creating a level of uncertainty in future volume trends and payor mix.

STRONG FISCAL 2014: BHS posted solid profitability metrics in 2014 with operating and operating EBITDA margins of 5% and 12.8%, respectively, which were supported by better mix and higher acuity of services.

STEADY LIQUIDITY GROWTH: Unrestricted cash and investments grew 36% in the last three years, reflecting sound cash flows and lower capital spending. As capital expenditures rise back to depreciation levels, liquidity growth is expected to slow, but maintained at a level consistent with the 'A-' rating.

HIGH DEBT BURDEN: Maximum annual debt service (MADS) of approximately $10 million represented 3.7% of total operating revenues in fiscal 2014, which compared negatively against Fitch's 'A' category median of 3.1%, but improved from 4.2% in 2012. Due to better cash flow in 2014, MADS coverage improved to 3.6x compared to 2.6x in 2013.

RATING SENSITIVITIES

CONTINUED STABILITY EXPECTED: Fitch expects BHS to weather potential regional pressures and continue producing sound cash flows to produce adequate debt service coverage metrics at the 'A-' rating.

CREDIT PROFILE

Located in Butler County, PA, Butler Health System is a 339 licensed-bed (296 hospital, 25 skilled nursing, and 18 nursery) large community hospital system that offers select higher-end services in Western Pennsylvania. In total, BHS has 28 outpatient care sites in its network, including four urgent care clinics. In fiscal year ended June 30, 2014 (unaudited interim results), BHS had approximately $274.5 million in total operating revenue.

Dominant Provider in a Competitive Service Area

BHS continues to maintain steady growth and financial strength despite operating in a fairly competitive area. Management has been successfully executing BHS' strategic plans involving regional outpatient expansion, select physician partnerships, and continued focus on delivering value. Inpatient market share in the primary service area was a strong 63.7% in 2013, albeit slightly down from prior years.

Competition in the greater Pittsburgh area continues to be a oncern, and has intensified between two major competitors operating in the region; University of Pittsburgh Medical Center (UPMC, rated 'AA-'; Negative Outlook by Fitch) and Allegheny Health Network (AHS). Increase in competitive pressure and dispute between UPMC and AHS has created significant friction in the Pittsburgh market, and is expected to cause shifts in the commercial insurance market beginning the 2015 benefit year. While the outcome of the change in insurance market is uncertain, BHS expects to continue collaborating with and remain in both networks, which Fitch views positively.



Strong Fiscal 2014 Results

BHS posted unusually strong results in fiscal 2014 due to growth in case-mix index as well as a favorable mix of services. Operating and operating EBITDA margins were 5% and 12.8% in fiscal 2014, respectively, compared to 1.6% and 10% in 2013 and the respective medians of 2.5% and 9.5%. Management expects profitability to remain strong, and is aiming to exceed the budgeted 3.5% operating margin in 2015.


Adequate Liquidity

At June 30, 2014, unrestricted cash and investments totaled $132.7 million, equating to 197 days cash on hand, 13x cushion ratio, and 100.9% cash to debt, which reflect a steady improvement over the last five years. Liquidity expected to remain stable as capital plans rise closer to depreciation levels.

High but Moderating Debt Burden

BHS had outstanding $131.5 million in long-term debt at June 30, 2014, consisting of series 2009B fixed rate bonds and series 2009A and 2010 private placements with BB&T Bank (rated 'A+/F1'; Stable Outlook). Debt service is relatively level at around $9-10 million annually through 2039. BHS does not have any swaps outstanding.

Debt burden has moderated over the last several years, but remains somewhat high with MADS as a percentage of 3.7% and debt to capitalization of 43.5% compared to the respective medians of 3.1% and 36.3%. As a result, MADS coverage was 3.6x in 2014 and 2.6x in 2013, weaker than the median of 3.8x despite sound cash flows. Fitch expects debt metrics to continue improving as BHS does not have any new debt plans.

DISCLOSURE

BHS has covenanted to provide financial information to DAC. Quarterly information consists of financial statements and select utilization data.

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

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria'(June 16, 2014);

--'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

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=874794

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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