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Fitch Affirms Calvert Health System's (MD) Revs at 'A'; Outlook to PositiveFitch Ratings has affirmed the 'A' rating on the following bonds issued by the Maryland Health and Higher Educational Facilities Authority on behalf of Calvert Health System (CHS): --$31,095,000 revenue bonds series 2013. The Rating Outlook is revised to Positive from Stable. SECURITY The bonds are secured by a pledge of the receipts of the obligated group. KEY RATING DRIVERS: STRENGTHENED FINANCIAL PROFILE: The Positive Outlook reflects CHS's strong credit profile, including liquidity, profitability and coverage metrics that exceed Fitch's 'A' category medians. STRONG MARKET POSITION: CHS holds a dominant market position in a favorable primary service area (PSA). Additionally, CHS bolsters its market position through partnerships with several tertiary providers in certain service lines. ROBUST LIQUIDITY METRICS: Liquidity metrics were strengthened in fiscal 2014 by the sale of six medical office buildings. Liquidity metrics easily exceed Fitch's 'A' category medians with 363.1 days cash on hand, 39.4x cushion ratio and 283.1% cash to debt at Dec. 31, 2014. SOLID OPERATING PROFITABILITY: Operating profitability has improved over the past five years and is now solid with operating EBITDA margins equal to 11.7% and 11.3% in fiscal years 2013 and 2014, exceeding Fitch's 'A' category median of 9.5%. LIGHT DEBT BURDEN: With maximum annual debt service (MADS) equal to a light 2.4% of fiscal 2014 operating revenue and solid operating cash flow, MADS coverage by EBITDA was strong at 6.3x in fiscal 2014. RATING SENSITIVITIES FINALIZATION OF DEBT AND CAPITAL PLANS: A rating upgrade is precluded at this time due to a planned bond issuance in summer 2015 and contemplated capital plans that may include the construction of a new patient tower to convert to private rooms in 2018 or 2019. While a preliminary analysis indicates that CHS has the capacity to absorb the additional debt at the higher rating level, Fitch would like further certainty on the pro forma impact of the new bonds and will assess the credit impact, if any, of the new tower project as more details become certain. CREDIT SUMMARY: Located in Prince Frederick, MD (approximately 41 miles southeast of Washington, DC) CHS operates a general acute care hospital with 122 acute care beds (85 currently licensed), 18 skilled nursing beds, 12 nursery beds and various outpatient facilities. Operating revenue equaled $142.8 million in Fiscal 2014. CHS is one of 10 Maryland hospitals participating in the Total Patient Revenue (TPR) program. TPR was developed for Maryland's sole community hospitals and provides a fixed, fully-capitated, revenue stream which is adjusted annually based upon historical volume and demographic trends. Fitch views CHS' participation in the TPR program positively as it should position CHS well for the implementation of health care reform and operating in a value based reimbursement environment. CHS executed a three-year extension of the TPR contract through 2016 which should provide a measure of operating stability as over 90% of operating revenues will be known in advance and expenses can be managed appropriately. The revenue stability afforded by the TPR system mitigates Fitch's concerns related to Calvert's small revenue base. STRONG MARKET POSITION CHS holds a leading market share of 62% in Calvert County which accounts for over 75% of discharges and is characterized by low unemployment and above average wealth levels relative to both Maryland and national levels. CHS benefits from limited competition with its closest competitor being 26 miles away. However, given CHS' proximity to Baltimore and Washington, D.C., outmigration s a credit concern. Market share has decreased in recent years primarily due to the system's successful TPR related initiatives to decrease inpatient utilization. ROBUST LIQUIDITY METRICS Unrestricted cash and investments increased markedly since Fitch's last review, increasing 53% to $135.2 million at Dec. 31, 2014 from $88 million at June 30, 2013. The increase was primarily due to the sale of six medical office buildings in fiscal 2014 plus solid cash flows and moderate capital spending. CHS sold six medical office buildings for $32.5 million and used $6.7 million to pay down a related bank loan, bolstering liquidity by $25.8 million. With 363.1 days cash on hand, 39.4x cushion ratio and 283.1% cash to debt, liquidity metrics easily exceed Fitch's 'A' category medians of 199.2 days, 17.0x and 131.2%. Capital spending is expected to increase in fiscal years 2015 through 2019. Capital spending in fiscal years 2015 through 2017 is expected to be funded through proceeds from an expected bond issuance in summer 2015, cash and cash flow without materially impacting liquidity metrics. Near-term capital projects include the implementation of a new IT system and radiology renovations. Additionally, management is contemplating construction of a new patient tower in 2018 or 2019. The new tower would convert the hospital to 100% private rooms and is estimated to cost approximately $50 million. The project is subject to CON approval and is expected to be funded through cash and cash flow. As plans are preliminary, Fitch will assess any related credit impact as plans become more certain. SOLID OPERATING PROFITABILITY Operating profitability has been solid over the past two fiscal years with operating EBITDA margin improving from 10.1% in fiscal 2012 to 11.7% and 11.3% in fiscal years 2013 and 2014, respectively, exceeding Fitch's 'A' category median of 9.5%. Profitability slightly compressed in the interim period due to approximately $2.7 million in non-recurring, non-cash reserves, with operating EBITDA margin decreasing to 9.1%. Excluding the reserves, operating EBITDA margin would have improved to 12.3%. The continued improvement reflects the system's adjustment to operating within the TPR system and effective cost management initiatives with emphasis on labor productivity, supply chain management and reductions in clinical variability. LIGHT DEBT BURDEN The system's debt burden is light with MADS equal to 2.4% of fiscal 2014 operating revenue, comparing favorably to Fitch's 'A' category median of 3.1%. The light debt burden combined with solid operating profitability has provided for strong debt service coverage metrics, with MADS coverage by EBITDA equal to 6.3x in fiscal 2014, easily exceeding Fitch's 'A' category median of 3.8x. CHS is considering issuing up to $20 million of new bonds in summer 2015 via a direct placement to provide funding for the new IT system and radiology renovations. Based upon a preliminary analysis, Fitch believes that CHS has capacity to absorb the additional debt. However, plans are currently preliminary and Fitch will assess the impact of the new debt as details become certain. DEBT PROFILE CHS had approximately $48 million of total debt outstanding at Dec. 31, 2014, 100% of which is fixed rate. In addition to the rated series 2013 bonds, CHS has $16.7 million of series 2012 bonds outstanding which are directly placed with Sun Trust Bank through 2022. The system is not counterparty to any swap agreements. Fitch views the conservative debt profile favorably. DISCLOSURE CHS covenants to provide quarterly and annual disclosure. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria', June 16, 2014; --'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=981411 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. |
