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Fitch Affirms Olmsted Medical Center (MN) Revs at 'A-'; Outlook StableFitch Ratings affirms its 'A-' rating on the approximately $34.9 million Rochester health care facilities revenue bonds, series 2010 and 2013, issued on behalf of Olmsted Medical Center, MN (OMC). The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of gross receipts of OMC. KEY RATING DRIVERS SOLID BALANCE SHEET: OMC's balance sheet remains strong, with a solid cash position and favorable capitalization. Robust cash flow in excess of capital spending continues to strengthen OMC's balance sheet, resulting in 214.1 days of cash on hand (DCOH) and cash-to-debt of 193.7% as of Dec 31, 2014 (unaudited), above Fitch's respective 'A' category medians of 199.2 days and 131.2%. Debt-to-capitalization remains strong at 24.6%, comparing favorably to the category median of 36.3% despite OMC's recent largely debt-funded capital investment. PROFITABILITY PRESSURED BY SERVICE MIX: Over the last two years, profitability has dipped from prior highs because of a shift toward ambulatory services. Operating margin in 2014 was 5.3%, down from 8.8% in 2012 but still well above the 'A' category median of 2.5%, mitigating concerns about OMC's small revenue base and limited geographic reach. Fitch believes that OMC's continued strategic investments - in women's services (an expansion of which was completed in late 2014), population health management, and telemedicine - will be accretive. ADEQUATE DEBT SERVICE COVERAGE: EBITDA coverage of maximum annual debt service (MADS) in 2014 of 3.2x was somewhat weaker than Fitch's 'A' median of 3.8x; however, debt service is front-loaded and OMC does not expect further leverage in the short term. Fitch believes that coverage is adequate and debt service will moderate, leading to stronger coverage in the longer term. FAVORABLE OPERATING PROFILE: OMC's operations continue to benefit from alignment with its physicians, high percentage of outpatient revenue (over 70%), and collaborative relationship with Mayo Clinic. In Fitch's opinion, this mitigates the risks associated with OMC's small revenue base and limited geographic scope. Although OMC and Mayo currently have a collaborative relationship, Fitch still considers Mayo as a fairly formidable competitor for certain inpatient services. ADEQUATE REVENUE MIX: OMC's revenue base is supported primarily by outpatient services (75% of 2014 revenues), which limits its exposure to government payors (49.1% of gross revenues in 2014). Still, Fitch notes that an expected constrained reimbursement environment across both government and commercial payors going forward could pressure OMC's profitability. RATING SENSITIVITIES DECLINE IN PROFITABILITY: An unexpected drop in profitability or increased volatility in operations could result in downward rating pressure. IMPROVED DEBT SERVICE COVERAGE: Solid improvement in debt service coverage by EBITDA, which Fitch expects in the long term, could result in positive rating momentum, so long as Olmsted maintains robust liquidity metrics. CREDIT PROFILE OMC is located in Rochester, MN, and the operation includes a 61-licensed-bed hospital, 107 employed physicians, and various other ambulatory sites. Total revenues for the fiscal year ended Dec 31, 2014, were $178 million. OPERATING PERFORMANCE SOFTENED BY SHIFT TO AMBULATORY CARE Operations softened in 2013 and 2014 but remained in excess of the 'A' category, offsetting concerns about OMC's small, geographically concentrated revenue base. In 2013 and 2014, operating margin dropped to 7.2% and 5.3%, respectively, below 2012's strong 8.8% margin but well in excess of Fitch's 2.5% 'A' category median. Between 2012 and 2014, OMC experienced further shift in clinical utilizaion from inpatient to outpatient, consistent with broader industry trends, which somewhat compressed OMC's profitability. Acute adult patient days dropped 9% to 4,317 in 2014 from 4,766 in 2012. Outpatient and clinical visits increased 6.7% over the same time, to 296,028 in 2014. Management reports that the first two months of fiscal 2015 have resulted in approximately $1.5 million of profit, which Fitch views positively given OMC's utilization and that cash flow levels are historically much stronger in the latter half of the fiscal year. OMC is budgeting a 5.1% operating margin for fiscal 2015, slightly below prior-year performance. Fitch believes this target is reasonable given the increase in utilization from the opening of the pavilion, which will be open its first full year in 2015, and given OMC's long track record of outperforming budget. Fitch notes that OMC's unique history as a physician group-owned hospital has allowed it to maintain very strong physician alignment and clinic-driven strategy. As a result, OMC's revenue base is largely outpatient, which allows it to collaborate effectively with Mayo Clinic in Rochester. Fitch believes that recent strategic actions into population health initiatives, with a 16% increase in unique patients over the past two years, and telemedicine initiatives will continue to bear fruit for the hospital. MAJOR ACCRETIVE CAPITAL INVESTMENT; CONTINUED LIQUIDITY GROWTH OMC recently completed a $25 million, 80,000 square-foot Women's Pavilion (the pavilion) adjacent to its existing facility, which houses a new OB wing, a C-section space, and other women's services. The pavilion opened in November 2014 on time and under budget. Management reports some positive effect on utilization with the opening of 16 beds in the pavilion. OMC continues to produce robust cash flow, offsetting its $8 million equity contrition for the pavilion and ongoing cash-funded capital expenditures. On Dec 31, 2014, OMC reported $94.3 million in cash and investment, corresponding to 214.1 DCOH, above Fitch's 'A' median of 199.2 days. Cash-to-debt was also strong a 195.7%, having grown from 158.9% at the prior year end, and was well above Fitch's median of 131.2%. Routine capital of $6.8 million is budgeted for 2015 from operating cash flow. Fitch views positively OMC's ongoing capital investment and very low age of plant (6.9 years) and expects liquidity metrics to remain robust. ADEQUATE DEBT SERVICE COVERAGE Debt service is front-loaded, with MADS of $6.6 million occurring in 2015 and then leveling off in 2021 at $3.1 million. Management does not anticipate further debt in the near term, which should allow for moderation in OMC's debt profile and improve coverage. However, EBITDA coverage of MADS in 2014 of 3.2x was somewhat weaker than Fitch's 'A' median of 3.8x. Favorably, OMC's debt-to-capitalization was 24.6% in 2014, better than Fitch's median of 36.3%. CONSERVATIVE DEBT PROFILE Fitch believes OMC's debt burden is manageable and conservatively structured. Total debt was $48.7 million as of Dec. 31, 2014, all of which is fixed rate with no swaps. In 2013, OMC refinanced outstanding series 2004 bonds and series 2006 and 2009A notes with a bank loan from US Bank, which does not share a parity claim with bondholders to gross receipts. TIMELY DISCLOSURE PRACTICES OMC covenants to provide annual continuing disclosure by June 1 following fiscal year-end. Both annual and quarterly disclosure is provided via the Municipal Securities Rulemaking Board's EMMA system. Disclosure to bondholders is available upon request no later than 120 days after fiscal year-end. Additional information is available at 'www.fitchratings.com' This action was informed by the sources of information identified in Fitch's 'Revenue-Supported Rating Criteria'. 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=982130 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. |
