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Fitch Upgrades Meridian Health System's (NJ) Revs to 'A+'; Outlook StableFitch Ratings upgrades the following New Jersey Health Care Facilities Financing Authority (NJHCFFA) bonds issued on behalf of Meridian Health System (Meridian) to 'A+' from 'A': --$26,200,000 refunding bonds Meridian Health System Obligated Group issue, series 2013A; --$164,685,000, Meridian Health System obligated group, series 2011 --$139,375,000 Meridian Health System obligated group issue, series 2007 revenue bonds; --$16,090,000 Southern Ocean County Hospital issue, series 2006; --$11,560,000 variable rate composite revenue bonds, series 2004 A-3; --$60,000,000 Meridian Health System obligated group issue, series 2003A. The Rating Outlook is Stable. SECURITY Security is a pledge of gross revenues. There is no mortgage. KEY RATING DRIVERS STRENGTHENED FINANCIAL PROFILE: The upgrade reflects Meridian's strong financial performance over the three-year historical period. Over this time most of Meridian's financial ratios have exceeded Fitch 'A' category medians, and unrestricted cash and investment grew by over 20% to above $1 billion, with days cash on hand at a solid 274 at Dec. 31. 2014. Debt service coverage was excellent in fiscal 2014 at 6.1x. LARGE INTEGRATED HEALTH SYSTEM: Fitch believes Meridian's solid operating performance is supported by its integrated operating platform and large clinical footprint in its primary service areas (PSA) of Monmouth and Ocean Counties. Meridian has approximately $1.7 billion in operating revenue, six hospitals spread across both counties, including a flagship academic medical health center, a home health division, five nursing homes, a 50% share of a health plan, and numerous other outpatient and primary care sites. GOOD SERVICE AREA CHARACTERISTICS: Monmouth and Ocean Counties are rated 'AAA' by Fitch, with Stable Outlooks. Monmouth County maintains above-average wealth indicators and Ocean County benefits from an increase in summer populations. COMPETITIVE SERVICE AREA: The PSA is competitive, especially for physicians. The largest competitor is Barnabas Health System (revenue bonds rated 'A-'), which has three hospitals and a 34% inpatient market share in the PSA. RATING SENSITIVITIES SUSTAINING PERFORMANCE: Fitch expects Meridian's financial performance to remain in line with category medians. A sustained decline in performance could pressure the rating; continued performance at fiscal 2014 levels, which is not expected, along with additional liquidity growth could move the rating up. POTENTIAL MERGERS: A merger with Raritan (News - Alert) Bay Medical Center (RBMC) is waiting on regulatory approval and Meridian has a memorandum of understanding (MOU) with Hackensack University Health Network (revenue bonds rated 'A-') to explore a merger. The strength of Meridian's current operating profile, coupled with its history of growing by acquisition, offsets credit concerns regarding the RBMC merger. Should a merger with Hackensack University Health Network move forward, it would take a minimum of two to three years after approvals to integrate the two systems into a single system. Fitch will continue to monitor the progress of the potential merger and take rating action at the appropriate time. FUTURE CAPITAL PLANS: Meridian is considering a number of projects that could include additional debt. While Fitch believes Meridian has debt capacity at the higher rating level, Fitch will evaluate the impact of any additional debt when plans clarify. CREDIT PROFILE Meridian is a health care system with locations throughout Monmouth and Ocean Counties and corporate offices in Neptune, NJ. Meridian has license to operate 1,735 licensed beds and 774 skilled nursing beds. The six hospitals that comprise the system are Jersey Shore University Medical Center (610 licensed beds with a major trauma center and The K. Hovnanian Children's Hospital; academic affiliation with Rutgeres University - Robert Wood Johnson Medical School); Ocean Medical Center (275 licensed beds); Riverview Medical Center (463 licensed beds); Southern Ocean Medical Center (176 licensed beds); and Bayshore Community Hospital (211 licensed beds). Fitch's analysis is on the consolidated system, but the obligated group, which includes all six hospitals, makes up the majority of the assets and revenues of te system. Total operating revenue in fiscal 2014 was $1.5 billion. STRONG FISCAL 2014 In 2014, Meridian posted a 7.2% operating margin, 13.5% operating EBITDA margin, and 6.1x debt service coverage, all much stronger than their respective 'A' medians of 2.5%, 9.5%, and 3.8x. The performance in 2014 was helped by growth in Meridian's physicians, Medicaid expansion in New Jersey, the reclassifying of the Medicare Wage Index for the region, and continued expense management. While 2014 was a very strong year, the upgrade is driven by Meridian's consistent performance over the prior years. From 2011 to 2013, Meridian averaged a 4% operating margin, an 11.2% operating EBITDA margin, and 4.6x debt service coverage (based on its current maximum annual debt service (MADS) of $40.3 million). Moving forward, Fitch does not expect Meridian to maintain the 2014 performance. Meridian is budgeting for a 5.5% operating margin, which Fitch views as achievable, especially given the additional funds related to the Medicare Wage Index. Liquidity metrics are also strong relative to Fitch's 'A' medians. At Dec. 31 2014, Meridian had approximately $1.1 billion in unrestricted cash and investments, which equates to 274 days cash on hand (DCOH), a cushion ratio of 27x, and cash to debt of 171.1%. All of these figures are above Fitch's 'A' category medians. Solid Market Position Fitch views Meridian's large clinical footprint and leading market share in an economically strong service area as credit positives. Meridian has a leading 39.7% inpatient market share in its PSA, including leading market shares in cardiology, neurosciences, and orthopedics. Meridian maintains its presence in its PSA through a large physician base, both from employed physicians and physicians in Meridian's physician hospital organization, and with a number of clinical sites and services in the region, including 19 ambulatory care facilities, a large home care business line, 18 primary care physician practice locations, and nine outpatient facilities and two inpatient units for rehabilitation and fitness. Most recently, Meridian opened a health village in Jackson, NJ, which among the services it currently offers includes a walk-in urgent care center, a fitness and wellness center, access to primary care and physician specialists, OB/GYN women's services and cardiac diagnostic and rehabilitation services. Diagnostic imaging and radiology services, a surgery center, and a cancer center are also expected to open on the site soon. Meridian has plans to continue to grow in areas contiguous to its current service area. A merger with RBMC, which has a hospital in Perth Amboy and in Old Bridge, NJ, has been approved by each organization's board and is awaiting regulatory approval. Fitch reviewed RBMC's 2013 audit, and the organization had approximately $220 million in operating revenue, about a 1% negative operating margin, and $39 million in long-term debt. Meridian's experience integrating Southern Ocean and Bayshore hospitals into its system alleviates some of the credit concern regarding the potential merger with an organization not as fiscally strong as Meridian. More significant is a potential merger with Hackensack. The organizations have signed a MOU and are in a period of due diligence. Combined the two organizations would have over $3 billion in revenues and $4 billion in assets based on 2014 figures. However, as the merger is in the due diligence phase, Fitch did not factor it into its rating. Debt Profile Meridian has approximately $622.7 million of long-term debt, 46% of which is variable rate. Approximately $129.4 million of the variable rate debt is supported by letters of credit (LOCs), while the rest is privately placed. All the LOCs expire in October and November of 2017. The lack of staggered expiration dates is a credit concern, but the concern is offset by Meridian's access to the market at its current rating level, the diversity of LOC providers, and Meridian's ample liquidity relative to the puttable debt. Meridian has five fixed-payor swaps. Meridian has good counterparty diversity, with three separate swap counterparties, no collateral posting requirements and Meridian is the only party that can terminate the swaps. The aggregate mark-to-market on the swaps was a negative $73.7 million as of Dec. 31, 2014. The strong operating performance has helped ease Meridian's debt burden, which was slightly elevated at Fitch's last review. MADS as a percentage of revenues of 2.5% and debt-to-EBITDA of 2.6x at year-end 2014 were improved over Fitch's last review and both are now better than the medians. Disclosure As part of its continuing disclosure agreement, Meridian covenants to provide annual audited financial statements within 150 days of each fiscal year-end and unaudited quarterly statements, with utilization data, within 45 days of each fiscal quarter-end to the EMMA and bondholders. Additional information is available at 'www.fitchratings.com' Related Research: Applicable Criteria and Related Research: --U.S. Nonprofit Hospitals and Health Systems Rating Criteria (May 2014); --Revenue Supported Rating Criteria (June 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=983089 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. |
