TMCnet News

Fitch Affirms Martin County Hospital District, TX LT Bonds at 'BBB'; Outlook Stable
[November 26, 2014]

Fitch Affirms Martin County Hospital District, TX LT Bonds at 'BBB'; Outlook Stable


NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the following Martin County Hospital District, Texas (MCHD) ratings:

--$21 million combination limited tax and revenue bonds, series 2011A and 2011B (taxable) at 'BBB'.

The Rating Outlook is Stable.

SECURITY

Direct obligations of the district secured payable from a limited ad valorem tax and pledge of net revenues of the hospital.

KEY RATING DRIVERS

CONCENTRATED NATURAL RESOURCE ECONOMY: The principal industry of this small, rural service area is oil and gas extraction, which is currently experiencing a boom but remains vulnerable to macro-economic events.

HOSPITAL OPERATING RISK: The scope of business operations is very limited and susceptible to wide variances in utilization, especially in the rapidly changing healthcare environment.

TAXES SUPPORT OPERATIONS: Operations are dependent on revenue provided by a dedicated property tax that is distinct from the tax revenues pledged to the bonds. MCHD maintains significant taxing capacity for operations beneath its statutory ceiling.

HIGH PER CAPITA DEBT: While low as a percentage of assessed value (AV), the tax-supported debt level is very high on a per capita basis with slow amortization.

IMPROVING COMPETITIVE POSITION: The hospital is the only one in Martin County and is designated as a Critical Access Hospital (CAH). Patient volume improved in fiscal 2014 with the recruitment of an additional full-time physician, though total staff physicians remain low at three.

TAX RAISING CAPACITY: The district's wide margin under the tax limitation is a key credit strength mitigating the highly cyclical economy.

RATING SENSITIVITIES

FINANCIAL PERFORMANCE OF THE HOSPITAL: Fitch expects MCHD's financial performance to remain stable with tax revenue providing significant support for operations. Deterioration in financial performance would likely put downward pressure on the rating, whereas the small service area and economically sensitive revenue base limit the rating to its current level.

CREDIT PROFILE

MCHD is coterminous with Martin County, located approximately 20 miles east of Midland in central west Texas. The district was established in 1967 to serve the county's population (5,312 in 2013), which has grown modestly over the last decade. The Permian Basin shale play underlies the county, holding a significant portion of the nation's proven, accessible oil and natural gas reserves. The comparatively broad employment market of the Midland-Odessa metropolitan statistical area (MSA) is easily accessible from the county.

HIGHLY CYCLICAL NATURAL RESOURCE BASED ECONOMY

The extremely narrow economic resource base and exposure to elevated levels of cyclicality is captured in the low rating. Activity in oil and gas extraction drives much of the local economy. Drilling activity has increased significantly due to the discovery of layered Permian Basin shale plays made accessible with horizontal drilling technology. Sufficiently high oil prices make production highly economical. Though the potential impact of persistently lower oil prices remains a concern, the relatively affordable unit cost of extraction in the Permian Basin partly offsets this risk.

Job gains in the oil and gas sector have had the dual effect of lowering the county's unemployment rate and elevating income levels, as this sector also tends to pay higher wages. County unemployment levels have historically trended below state and national norms and demonstrated good resiliency to the recession, peaking at only 5.7% in 2010. The unemployment rate declined o a very low at 3.2% in September 2014, down from 4.1% a year prior and well below state and national averages of 5.0% and 5.7%, respectively.



The district's AV totals rose dramatically since 2008, reaching $5.9 billion in fiscal 2014, equivalent to an exceptional $1.1 million per capita. The gains reflect an average annual growth rate of 34% from fiscal years 2008 to 2014, with further strong tax base growth projected for fiscal 2015.

Oil and gas assets make up more than 85% of the tax base and taxpayer concentration in this sector is extremely high. The top 10 payers are exclusively oil/gas firms representing 45% of taxable assessed value (TAV). The largest taxpayers are Endeavor Energy Resources and Pioneer Resources ('BBB-'/Outlook Stable) at 11.7% of and 8.1% of fiscal 2014 TAV, respectively.


LOW TAX RATE RELATIVE TO STATUTORY CAP

The significant taxing margin currently available to the district under statutory limits is a mitigant to concerns about potential strong tax base volatility. The district's combined operating and debt service tax rate equals $0.16 per $100 of TAV in fiscal 2014 relative to the $0.75 limit. The operating component of the tax rate is $0.13 relative to a $0.30 limit. Substantial and unanticipated deterioration in the taxing margin would cause negative pressure on the rating.

The district is governed by a six member board appointed by the county commissioners. Members serve staggered two-year terms, meet monthly for policy oversight and to approve the annual operating and debt service levies as proposed by the county assessor and by district management.

PROPERTY TAXES SUPPORT OPERATIONS

MCHD's small rural service area and limited physician staff challenge operations, which are materially supported by property taxes. Operating performance, excluding tax revenues, exhibited very high losses of $5.2 million or 53% of operating revenues in fiscal 2014. Net patient revenue increased substantially (27%) in fiscal 2014 to its highest level in at least the last six years. The increase is due to the addition of a third full time physician, the expansion of outpatient procedures, and increased emergency room visits.

The hospital benefits from its CAH status as it is reimbursed by Medicare at cost plus 1%. Also, CAHs are reimbursed for capital costs (depreciation and interest) of construction based on their Medicare payor mix. Medicare patients comprised 26% of the payor mix in fiscal 2014, an increase from 21% in fiscal 2013. Liquidity is ample with over 200 days cash on hand.

MIXED LIABILITY PROFILE

Overall debt levels are very high on a per capita basis at $7,752, but low (0.8%) relative to market value, due to the county's unusually high property value per capita. Principal amortization is very slow with approximately 33% retired in 10 years. The district's debt service tax rate was projected to increase by as much as $0.13 to service this debt, but rapid TAV growth in recent years has kept the rate at under $.05.

Near-term capital needs are manageable at approximately $4 million in capital spending through a direct bank loan to be repaid from tax revenues. The funds are intended to construct additional office and support space as well as facilities for physical therapy. MCHD administers a defined contribution plan for its employees, significantly limiting retiree benefit costs.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=936276

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.


[ Back To TMCnet.com's Homepage ]