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Fitch Affirms Jackson County Schneck Memorial Hospital's (IN) Revs at 'A+'; Outlook Stable
[October 20, 2016]

Fitch Affirms Jackson County Schneck Memorial Hospital's (IN) Revs at 'A+'; Outlook Stable


Fitch Ratings has affirmed the following Jackson County Schneck Memorial Hospital (JCSMH) Indiana outstanding debt at 'A+':

--$18.6 million Indiana Health and Educational Facility Financing Authority revenue bonds, series 2006B;

--10.9 million Indiana Finance Authority revenue bonds, series 2010.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by gross revenues, a debt service reserve fund, and any other property which is subjected to the lien of the bond indenture or pledged/or assigned to the bond trustee.

KEY RATING DRIVERS

LONG-TERM CARE AFFILIATIONS: JCSMH continues to benefit from additional net income through its long-term care affiliations where it has entered into 15 lease agreements with long-term care providers. The agreements allow the hospital to share intergovernmental transfer (IGT) payments which have translated into an additional $14.2 million in net income for fiscal 2015. Revenues from these affiliations comprised approximately 53% of JCSMH's total revenues in fiscal 2015.

SMALL REVENUE BASE: JCSMH had total revenues (excluding long-term care revenues) of $134 million in fiscal 2015 which exposes the organization to potential performance volatility from any changes in physician staffing, local demographics, or reimbursement methodology. JCSMH's enhanced revenues from its long-term care affiliations and robust liquidity levels help mitigate concerns over their small revenue base.

STRONG OPERATIONAL PERFORMANCE: JCSMH further improved its strong operational performance in fiscal 2015 (includes long-term care revenues) as evidenced by its 11% operating margin, 14.6% operating EBITDA margin, and 14.6% EBITDA margin which all compare favorably to Fitch's 'A' category medians. Additionally, strong operational performance has led to a robust maximum annual debt service (MADS) coverage level of 16.1x in fiscal 2015.

DOMINANT MARKET POSITION: JCSMH remained the market leader in 2015 with a 65% market share in its primary service area. The next closest competitor had a 13% market share.

REDUCED DEBT BURDEN: In September 2016, JCSMH defeased approximately $4.5 million of outstanding debt which further reduced its low debt burden. The reduced MADS number represented 1.9% of fiscal 2015 revenues (hospital only) which is in line with Fitch's 'A' category median of 2.7%. Additionally, JCSMH has no new debt plans and its manageable capital plans are expected to be funded from unrestricted cash or operating cash flow.

GROWING LIQUIDITY POSITION: JCSMH's unrestricted cash and investments increased to approximately $200 million in fiscal 2015 which translates into 298 days cash on hand (DCOH), a 77x cushion ratio, and 583% cash to debt, are all significantly above Fitch's 'A' category medians.

RATING SENSITIVITIES

LONG-TERM CARE AFFILIATIONS: While the loss of this additional income would be viewed negatively, absent these revenues the current rating could withstand a discontinuation of this program given the current operating profile of the hospital. Alternatively, a continuation of additional income from IGT payments could further increase liquidity levels and moderate its debt burden which may result in upward movement of the rating.

CREDIT PROFILE

JCSMH is located in Seymour, IN approximately 60 miles south of Indianapolis. As a county-owned acute care hospital, JCSMH has 93 staffed beds (licensed for 166 beds) in addition to 20 beds utilized primarily for outpatient surgery and observation patients. JCSMH had total revenues of $284 million (includes long-term care revenues) in fiscal 2015.

DOMINANT MARKET POSITION

JCSMH held its dominant market position in 2015 with a 65% market share (includes inpatient and outpatient) in its primary service area. The next closest competitor has approximately a 13% market share. Despite maintenance of its leading market position, JCSMH has seen mixed results in its utilization volumes. In fiscal 2015, admissions decreased 6.9%, births fell by 6.6%, and surgeries fell by 3.2%. Conversely, ED volumes increased by 14.7% and clinic visits increased by 8.6%. Concerns over a decrease in utilization are mitigated by the enhanced revenues from the IGT payments and JCSMH's robust liquidity levels.

STRONG OPERATIONAL PERFORMANCE

JCSMH continued its solid operational performance in fiscal 2015 with approximately $31.3 million in income from operations. In fiscal 2015, JCSMH had a 11.0% operating margin, 13.6% operating EBITDA margin, and a 14.6% EBITDA margin which compares favorably to the 'A' category medians of 3.8%, 10.3%, and 12.6% respectively. Solid operational performance has translated into robust coverage levels. In fiscal 2015, JCSMH had MADS coverage 16.1x by EBITDA and coverage of 15.9x by operating EBITDA which both compare favorably to the 'A' category medians of 4.5x and 3.9x.

JCSMH's strong performance is partially attributed to its long-term care affiliations which have helped enhance its operations. JCSMH has entered into lease agreements with 15 long-term care providers in which JCSMH owns the operating license and is the party to a long-term care facility's Medicaid provider agreement and qualifies for enhanced Medicaid reimbursement, which is split with the long-term care facility. Approximately $14.2 million in income from operations is attributable to the long-term care affiliations. Enhanced revenues from the long-term care agreements are expected to continue for at least fiscal 2016 and fiscal 2017. However, enhanced revenues from the program are uncertain beyond the next few years.

ROBUST LIQUIDITY POSITION

JCSMH's operational performance has helped enhance its liquidity position in recent years. JCSMH increased its unrestricted cash and investments to $200 million in fiscal 2015 which is an increase from the $139 million in unrestricted cash and investments in fiscal 012. JCSMH's $200 million in unrestricted cash and investments translates into 298.1 DCOH, a 77.0x cushion ratio, and 582.7% cash to debt which all compare favorably to Fitch's 'A' category medians of 215.5, 19.4x, and 148.6%, respectively. Fitch considers JCSMH's robust liquidity position as a primary credit strength and a key mitigant to JCSMH's small revenue base.



DEBT PROFILE

JCSMH has approximately $30 million in outstanding debt which is all fixed-rate. JCSMH's outstanding 2006B bonds were placed in May 2013 with Capital One (News - Alert) Public Funding and Jackson County Bank with an initial term of 10 years and faces renewal risk in 2023. In September 2016, JCSMH used cash to defease the $4.5 million in outstanding 2006A bonds. This attests to management's conservative practices as $10.5 million in outstanding 2006A bonds were defeased in May 2013. Both of these actions have reduced the organization's debt burden which is viewed favorably.


The new MADS figure represented 1.9% of fiscal 2015 (hospital-only) revenues which compares favorably to Fitch's 'A' category median of 2.7%. Debt to capitalization was 11.4% in fiscal 2015 which also compares favorably to the 'A' category median of 36%. Furthermore, JCSMH has no new debt plans and its manageable capital plans are expected to be funded from unrestricted cash or operating cash flow.

DISCLOSURE

JCSMH has covenanted to provide audited financial statements and operating data within 180 days of fiscal year end and quarterly financial information and operating data within 60 days of each quarter end. All information will be posted to MSRB's EMMA website.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013457

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013457

Endorsement Policy
https://www.fitchratings.com/regulatory

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