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Fitch Rates Hunterdon Medical Center, NJ's Rev Bonds 'A'; Outlook StableNEW YORK --(Business Wire)-- Fitch Ratings assigns an 'A' rating to the following New Jersey Health Care Facilities Financing Authority revenue bonds (Hunterdon Medical Center (Hunterdon)): --$42,705,000, series 2014A. Additionally, Fitch affirms at 'A' Hunterdon's outstanding 2006A and 2006B bonds, which are expected to be refunded. The Rating Outlook is Stable. The series 2014A bonds in conjunction with the series 2014B-D bank loans (not rated) will refund all of Hunterdon's outstanding debt. The bonds are expected to sell the week of Dec. 1. SECURITY The series 2006A and B bonds are currently secured by a pledge of gross receipts of the obligated group, debt service reserve funds, and mortgage security in the principal facility in Flemington and a wellness center in Clinton. Hunterdon expects to eliminate the mortgage pledge and the debt service reserve fund requirement with the 2014A issuance. KEY RATING DRIVERS MODERATE DEBT BURDEN: Hunterdon's debt load profile is a credit positive. Coverage of pro forma maximum annual debt service (MADS) equaled 5.2x through the nine months ended Sept. 30, 2014, and MADS constitutes a very light 1.7% of revenues, both favorable to the category medians. The series 2014 financing will result effectively in a 100% fixed rate debt profile. INCONSISTENT PROFITABILITY: Hunterdon's profitability has been volatile with weaker performance in 2013, which has somewhat rebounded through the nine months ended Sept. 30, 2014 (the interim period) due to improved volumes and expenditure controls. Hunterdon reported an operating gain of $4.4 million, equal to a 2.2% operating margin, as compared to the prior year period gain of $1.5 million (0.8% operating margin). Hunterdon reported a weak 0.1% operating margin for 2013. DOMINANT MARKET SHARE: Hunterdon commands a dominant market share of 63.8% in 2012 as the sole acute care provider in Hunterdon County, which has a favorable demographic profile. The system formalized an alliance with Atlantic Health System in 2013, which should help expand services, generate costs savings and efficiencies, and aid in physician recruitment. MIXED LIQUIDITY: Hunterdon's liquidity is mixed. Cash to debt of 185% and cushion ratio of 24.6x are better than the respective 'A' medians, but days cash on hand (DCOH) at 163.5 days at Sept. 30, 2014 is lower than Fitch's 'A' median of 199 DCOH. The $109.6 million of unrestricted cash and investments at Sept. 30, 2014 does not include the approximately $17 million of cash and investments held primarily at the Hunterdon Medical Center Foundation, Inc., which is not in the obligated group, but which are typically donor restricted for programs and projects. RATING SENSITIVITIES MAINTAINED STRONG DEBT METRICS: Fitch expects that Hunterdon will continue to produce solid debt service coverage metrics despite recent weaker profitability due to its moderate debt burden. CREDIT PROFILE Hunterdon Medical Center (Hunterdon) is a 178-bed hospital located in Flemington, New Jersey. Hunterdon reported revenues of $264 million in fiscal 2013 (Dec. 31 year end). The obligated group consists of Hunterdon Medical Center and constituted 92% of the consolidated system assets and system revenues in 2013. The numbers cited in this report are for Medical Center only, however, the consolidated system results are relatively similar. Future reviews will restate the financials on a consolidated basis. SERIES 2014 PLAN OF FINANCE The series 2014 financing will result in a debt structure that is effectively 100% fixed rate from 35% variable. The series 2014A bonds will refund the series 2006A bonds and refund and fix out a bank financing done earlier in 2014, which provided new money for capital projects. The 2014B bonds will refund the 2006B bonds. Synthetic fixed rate exposure will remain approximately 16.1% of pro forma debt ($11.4 million). TD Bank is the counterparty on both swaps, and synthetic fixed rate exposure will represent 16.1% of pro forma debt ($11.4 million). Series 2014C will refund the series 2009 floating rate issue, which will be variable rate and synthetically swapped to fixed rate and will not include a put option. The mark-to-market value of the swap was a negative $0.2 million at Sept. 30, 2014. Series 2014D will refinance a variable rate taxable term loan from North Hnterdon Medical Associates (NHMA), which is currently outside of the obligated group. Series D will amortize through 2034 and the associated swap will be novated from the NHMA to the OG. Hunterdon is currently paying lease payments for the term loan and the series D refinancing will be cash flow positive. Total outstanding debt after the financing is approximately $71.1 million with MADS of $4,455. The series 2014 plan of finance will be issued under a new master trust indenture and extend amortization through 2045. DOMINANT MARKET SHARE The hospital is the only provider of acute care services in Hunterdon County, which constitutes its primary service area (PSA). Hunterdon's market share of the PSA was reported at 63.8% in 2012, above its average market share the over prior four years (62.4%). Hunterdon became part of an alliance with Atlantic, named MidJersey Health Alliance (MidJersey), in 2013, which is expected to bring further expansion of the services provided at Hunterdon, bringing certain difficult to recruit subspecialists to practice part time on site, as well as generally aid in physician recruitment. Other potential benefits of the alliance may include population health initiatives, connectivity, and increased clinical cooperation. The two organizations continue to be independent, but Mid Jersey will have joint management and physician advisory committees to guide their common initiatives. In addition, Fitch expects that Hunterdon will enjoy the benefits of joint purchasing power from this affiliation with Atlantic, which is one of the members of the multi-system alliance Allspire Partners. INCONSISTENT PROFITABILITY Hunterdon finished fiscal 2013 (year-end Dec. 31) with a slim operating gain of $154,000, equal to operating and operating EBITDA margins of 0.1% and 5.9%, respectively compared to much stronger operating profitability in fiscal 2012 (3.8% operating margin), fiscal 2011 (9.1% operating margin) and fiscal 2010 (4.3% operating margin). Financial performance through the interim period has rebounded as utilization has improved: admissions are up 3.8% over prior year to date. Revenues were down by 2.7% in 2013 from 2012, but and have stabilized through the interim period, with year-on-year revenues up marginally (0.9%). Operating income for the nine-month interim period was $4.4 million, equal to an operating margin of 2.2% and operating EBITDA margin of 8.3%, marginally below the 'A' category medians of 2.5% and 9.5%, respectively. Salary and benefits reductions are a notable driver for improved performance for 2014, down 6.5% from the same period year prior due to productivity and process improvement initiatives. Additionally, management took the step to hard-freeze the institution's defined benefit plan. Had the pension been frozen for 2013, management estimates that it would have reduced pension expense by $6 million from $13 million. Management reports that the Hunterdon 2015 operating budget, which is still in draft form, will target a 2.5% to 3% operating margin for the medical center and stronger performance system-wide. Fitch believes these results are attainable. MANAGEABLE DEBT LOAD AND CONTINUED CAPITAL INVESTMENT Hunterdon's debt load remains very manageable despite the bank financing for capital projects earlier in 2014. Coverage of pro forma MADS through the interim period was 5.2x and MADS is a low 1.7% of revenues, better than Fitch's 'A' category medians of 3.8x and 3.1% of revenues. Hunterdon broke ground in the fall of 2013 on a cardiovascular and vertical expansion project, which includes the core shell fit-out and the addition of two new floors on top of the hospital's west wing. The expansion will house a new cardiology unit and 20 new private patient rooms. The project will also enable the transformation of semi-private rooms at the hospital in space made vacant by the new transformation to private status, eventually increasing private rooms to 90% from the current 20%. Management reports that construction is on time and under budget and is expecting completion in mid-2015. The $30 million project cost is being partially funded with proceeds of a $23.7 million private placement bank financing with TD Bank (which will be refunded by series 2014A bonds), internal funds, and philanthropy under a capital fundraising campaign. MIXED LIQUIDITY METRICS Hunterdon's liquidity metrics are mixed. Liquidity is light relative to operating expenses but strong relative to Hunterdon's debt burden. DCOH at Sept 30 equaled 163.5 days which is light relative to the 'A' category median of 196 DCOH. Pro forma cash-to-debt of 154.3% and cushion ratio of 24.6x both exceed the 'A' category medians. Build-up of liquidity is a board stated goal and management's goal is to reach 175 DCOH over the next three to five years. DISCLOSURE Hunterdon discloses quarterly and annual audited financial statements. Quarterly disclosure includes a balance sheet, income statement, cash flow statement, and utilization statistics. 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: Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 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=924395 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. |
