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Fitch Affirms Orange Regional Medical Center (NY) Revs at 'BB+'; Outlook Stable
[October 17, 2014]

Fitch Affirms Orange Regional Medical Center (NY) Revs at 'BB+'; Outlook Stable


NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'BB+' rating on approximately $248 million of series 2008 bonds issued by the Dormitory Authority of the State of New York on behalf of Orange (News - Alert) Regional Medical Center (ORMC).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross receipts pledge and a mortgage. Further security is provided by a debt service reserve fund.

KEY RATING DRIVERS

IMPROVING OPERATIONS: ORMC's operating EBITDA margin of 11.5% through the nine-month interim period (ended Sept. 30, 2014) was improved from 8.7% in fiscal 2013, and was above Fitch's 'below investment grade' (BIG) median of 7.3%. ORMC's operating improvement is attributed to cost cutting initiatives, which included sizable reductions in force, as well as the addition of key specialty service lines. ORMC is budgeting to have an 11.1% operating EBITDA margin in fiscal 2014, which Fitch views as feasible given ORMC's strong interim performance.

WEAK LIQUIDITY: ORMC's liquidity in relation to debt remained weak with 30.7% cash to debt and 3.6x cushion ratio at Sept. 30, 2014, both of which are below Fitch's medians of 55.7% and 5.3x, respectively. Days cash on hand (DCOH) of 79.9 at Sept. 30 was in line with the median.

ELEVATED DEBT BURDEN: ORMC's debt burden remains high as evidenced by maximum annual debt service (MADS) at 5.7% of revenues in the interim period, comparing unfavorably to Fitch's 'BIG' median of 4%. MADS coverage by EBITDA was 2.2x, slightly above Fitch's median of 1.8x.

SIGNIFICANT CAPITAL PLANS: ORMC is expecting to file a Certificate of Need (CON) application for the construction of a medical office building (MOB) adjacent to the main hospital facility. If approved, the project would be funded in part by the issuance of debt estimated in the range of $65 million-$70 million. Fitch will evaluate the full impact of the project at the time of the debt issuance, which is expected no earlier than the second quarter of 2015.

RATING SENSITIVITIES

MAINTENANCE OF CURRENT OPERATIONS: Fitch expects ORMC to meet their fiscal 2014 operating budget and to continue producing solid operating cash flow going forward. However, ORMC has little room for any profitability compression at the current rating level given its weak liquidity and heavy debt burden.

ADDITIONAL DEBT: Given ORMC's current high leverage position and weak liquidity metrics, issuance of additional debt may lead to negative rating pressure as it would further stress ORMC's balance sheet.

CREDIT PROFILE

ORMC operates a new 383 licensed bed facility, located in Middletown, NY, approximately 65 miles northwest of New York City. The new hospital replaced two previous facilities in Goshen and Middletown, which have since been closed. ORMC's parent is the Greater Hudson Valley Health System (GHVHS), also the parent of two-campus Catskill Regional Medical Center, which ORMC manages. Total revenue in fiscal 2013 (Dec. 31 year end) was $354.2 million. There is no audit of GHVHS and Fitch's analysis is based solely on ORMC.

IMPROVING OPERATIONS

ORMC is beginning to realize efficiencies from the consolidation of its two previous facilities into the new hospital campus, its cost cutting and supply chain initiatives and the addition of new specialty service lines to their continuum of care, as evidenced by improved operations through the 2014 interim period. ORMC's $1 million in income from perations through the interim period equated to an 11.5% operating EBITDA margin, improved from fiscal 2013 year-end result, and above Fitch's 'BIG' median of 7.3%. ORMC is budgeting to end fiscal 2014 with an 11.1% operating EBITDA margin and to achieve an 11.4% operating EBITDA margin in fiscal 2015, which Fitch thinks is achievable.



As part of its physician alignment strategy, ORMC has developed strong relationships with the three major physician groups in its service area and is expecting to increase its employed physician network, currently consisting of 38 clinicians, by 60 physicians, to a total of 98, over the next five years. In addition, ORMC has invested in a number of specialty service lines, including a hand injury program, a pediatric emergency department and cardiac catheterization services in an effort to stem outmigration. Fitch believes that ORMC physician alignment and growth strategies will be accretive to the organization in the medium to long term.

WEAK LIQUIDITY


ORMC's $76.5 million in unrestricted cash and investments at Sept. 30, 2014, coupled with an elevated debt position resulted in a weak 30.7% cash to debt and 3.6x cushion ratio, both of which were below Fitch's 'BIG' medians, but were slightly improved from 27.6% and 3.2x at fiscal 2013 year-end. DCOH of 78.2 at Sept. 30, 2014 was slightly above Fitch's median of 74.8 days and 74.4 days at 2013 year-end. ORMC is still in the formal budgeting process for fiscal 2015, however they have forecasted an improved 83.5 DCOH, 34.3% cash to debt and a 3.8x cushion ratio for the year. Fitch notes that the forecast does not include any impact from the proposed additional debt issuance.

ELEVATED DEBT BURDEN AND ADDITIONAL CAPITAL PLANS

ORMC's current MADS of $21.5 million equated to 6.1% of total annualized revenues in fiscal 2013 and to 5.7% through the interim period, both of which compared unfavorably to Fitch's median of 4%. Stronger operating performance through the interim period resulted in MADS coverage of 2.2x through the period, in line with Fitch's median. ORMC is budgeting to end fiscal 2014 with a 2.1x MADS coverage.

ORMC currently leases an off-campus MOB space which houses its outpatient services, physician practice and cancer center. Lease payments are expected to increase significantly after 2018, and would result in an estimated $27 million MADS figure for ORMC by 2030. In order to reduce its exposure to future operating lease increases ORMC is expecting to file a CON application in October 2014 for the construction of an on-campus MOB. The proposed construction project will include a five-story MOB with four operating rooms, three procedure rooms, three physician office floors and outpatient facilities, as well as the renovation and expansion of current hospital facilities to accommodate a cancer center. The majority of the funding for this project is anticipated to come from the issuance of debt in the range of $65 million-$70 million with preliminary estimate of pro forma MADS at approximately $25 million after 2018, resulting in cost savings from the elimination of lease expense increases. The new MOB would allow for improved physician alignment efficiencies, clinical integration and operational synergies. Fitch notes that while it views ORMC's physician alignment and overall outpatient strategies positively, the proposed issuance would have a negative impact on ORMC's already highly leveraged balance sheet.

DEBT PROFILE

All of ORMC's outstanding debt is fixed rate.

DISCLOSURE

ORMC covenants to submit audited consolidated financial statements within 150 days after year-end, unaudited financial statements 45 days after the first three quarter-ends, and 60 days after the fourth quarter-end, 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 20, 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=901175

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