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Fitch Affirms Nanticoke Health Services, DE's Bonds at 'BBB-'; Outlook to PositiveFitch Ratings has affirmed the 'BBB-' rating on the approximately $45.8 million Delaware Health Facilities Authority (Nanticoke Memorial Hospital Project) series 2013 bonds. The Rating Outlook is revised to Positive from Stable. SECURITY Debt payments are secured by a pledge of gross revenues of the Nanticoke Memorial Hospital (which is the sole member of the obligated group [OG]), a mortgage on the obligated group's facilities, and a debt service reserve account. For rating purposes, Fitch's analysis is based on the performance of the consolidated system, which includes the physician group and certain other entities not part of the OG. The OG constituted 94% of system assets and 92% of system revenues in 2014. KEY RATING DRIVERS MAINTAINING SOLID OPERATING PERFORMANCE: The revision of the Outlook to Positive is based on a consistent trend of solid operating results and growing liquidity over the last three years. The combined benefit of steady volumes, the extension of the Medicare Dependent Hospital (MDH) program through calendar 2014 and continued efforts at expense control produced solid fiscal 2014 (June 30 year-end) system results with operating profit of $11.1 million equal to 8.1% operating and 14.3% operating EBITDA margins. For the nine-month interim period ended March 31, 2015, Nanticoke has maintained the improved performance, with operating margin of 8.5%. LOSS OF MDH STATUS: Effective Dec. 31, 2014, Nanticoke lost the MDH status due to the reclassification by CMS of Sussex County to urban from rural. The MDH designation brought an additional $4.5 million of revenues in fiscal 2014. While the impact is material, Nanticoke Memorial Hospital's operations have been profitable in the last quarter absent the MDH funding and the nine-month interim period included only $1.9 million of MDH funds. Management projects it will end the 2015 fiscal year with consolidated operating income of $12 million. STABLE VOLUME TREND: Owing to continued investment in physician recruitment and various clinical services such as orthopedics, cardiology and oncology, volumes over the last two years and through the third quarter of fiscal 2015 have remained essentially level. Outpatient utilization has benefited from the expansion of Nanticoke's ambulatory footprint, which now includes six locations offering primary care and three urgent care sites. MANAGEABLE DEBT BURDEN: Nanticoke covered its $5.4 million of maximum annual debt service (MADS) 4x in fiscal 2014 and through the nine-month interim period, better than Fitch's 'BBB' rating category median of 2.6x. MADS as percent of revenues, which historically had been elevated, is now at 3.8%, only slightly higher than the 3.6% median. IMPROVED LIQUIDITY: Nanticoke's liquidity has gradually improved and cash and unrestricted investments were reported at $69.3 million at March 31, 2015, equal to 195.9 days cash on hand (DCOH), cushion ratio of 12.5x and cash equal to 133% of long-term indebtedness, all exceeding the 'BBB' medians. RATING SENSITIVITIES NEED TO SUSTAIN IMPROVED PROFILE WITHOUT MDH FUNDS: Fitch expects Nanticoke to maintain its improved operating performance even without the benefit of the MDH program. Continued solid operating results and coverage consistent with the 'BBB' rating category over the next 12 months would likely lead to positive rating movement. CREDIT PROFILE Located in Seaford, DE, Nanticoke Health Services operates 99 acute care beds at Nanticoke Memorial Hospital. The system posted $133.1 million in operating revenue in fiscal 2014. Fitch notes as positive the recent improvement in profitability and sable volumes. Credit concerns include the limited size of the hospital's medical staff and the exposure to changes in reimbursement given the institution's dependence on governmental sources of revenue (69% of gross revenues for Medicare and Medicaid combined). A mitigating factor is the sole-provider status of the hospital in its primary service area. MAINTAINING SOLID OPERATING PERFORMANCE Operating income in fiscal 2014 was $11.1 million, up from $5.4 million in the prior year, producing a strong operating margin of 8.1% and operating EBITDA margin of 14.3%, both significantly exceeding the 'BBB' medians of 1.1% and 7.9%, respectively. Year-to-date performance through the nine- month interim period continued to be solid with a $9.5 million gain from operations, equal to operating margin of 8.5% and operating EBITDA margin of 14%. Despite the fact that Nanticoke had zero benefit of the MDH funds for the last quarter, operating performance continued to be positive in each of the last three months for the hospital, and management projects it will end this year with consolidated operating income of $12 million, equal to a 7% operating margin. Nanticoke is still making substantial investments in its physician network and ambulatory strategy. The third walk-in clinic opened in January 2015 in Laurel. The subsidy to the physician network - $5.1 million last year - continues to be large, but the benefit of the recruitment is reflected in the solid volumes; admissions remained essentially level since 2012 and recruitment is paying off in surgical volumes - inpatient surgeries increased by 6.5% through the interim period. Volumes have also been supported by several affiliations, such as the joint cancer program Nanticoke runs with Beebe Medical Center and a recent partnership with Nemours Alfred I. DuPont Hospital for Children which provides pediatric hospitalists at Nanticoke, greatly reducing the outmigration of pediatric patients to Wilmington. LOSS OF MDH STATUS The long-term prospects for the MDH program were always uncertain and based on CMS's reclassification of Sussex County, Nanticoke lost its designation effective Dec. 31, 2014. Management is pursuing both administrative and legislative efforts to have the status reinstated, or at the least to obtain a transition period. However, at this time, there is no certainty as to the outcome and management is not budgeting for the inclusion of any MDH funds (which totaled $4.5 million in 2014). IMPROVED LIQUIDITY The system's liquidity has been growing consistently and the most recently reported cash and unrestricted investments of $69.3 million at March 31, 2015 were a 32% increase over 2013 fiscal year-end. Nanticoke's liquidity metrics, with 195.9 DCOH, 12.5x cushion ratio and cash equal to 133% of debt are all favorable to Fitch's 'BBB' medians of 145 DCOH, 10.5x cushion ratio and 93.6% cash to debt. DEBT PROFILE The system's debt load, historically cited as a weakness, is now consistent with 'BBB' medians. Coverage of MADS by EBITDA is a solid 4x, as compared to the 'BBB' category median of 2.6x and MADS at 3.8% of revenues is higher than the 'BBB' category median of 3.6%. The system's long-term debt is fixed rate, there are no swaps, and Nanticoke has limited capital needs in the near term. DISCLOSURE Nanticoke covenants to disclose annual audited financial statements and quarterly disclosure to bondholders. Disclosure has been timely and includes a balance sheet, income statement, statement of cash flows and utilization data. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'U.S. Nonprofit Hospitals and Health Systems Rating Criteria'(May 30, 2014); --'Revenue-Supported Rating Criteria' (June 16, 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=983768 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. |
