Fitch Ratings has downgraded to 'A' from 'A+' its ratings on the
following revenue bonds issued on behalf of Salem Hospital, obligated
group member of Salem Health, Oregon):
--$50,000,000 Salem Hospital Facility Authority (OR) (Salem Hospital
Project) var rate rev bonds ser 2008C (LOC: Bank of America, N.A.);
--$75,000,000 Salem Hospital Facility Authority (OR) (Salem Hospital
Project) var rate rev bonds ser 2008B (LOC: U.S. Bank National
--$60,232,197 Salem Hospital Facility Authority (OR) (Salem Hospital
Project) rev bonds ser 2008A;
--$120,000,000 Salem Hospital Facility Authority (OR) (Salem Hospital
Project) rev bonds ser 2006.
The Rating Outlook is Stable.
Debt payments are secured by a gross revenue pledge of the obligated
group (Salem Hospital). For fiscal 2012 (unaudited; Sept. 30 year-end),
Salem Hospital accounted for 96% of Salem Health's operating revenues
and 98% of its total assets.
KEY RATING DRIVERS
COMPRESSED FINANCIAL PROFILE: The rating downgrade to 'A' from 'A+' is
supported by Salem Health's current financial profile, which is now more
in line with the 'A' rating. Further, Fitch believes the financial
profile will remain compressed over the medium term as operations remain
challenged by a weak regional economy.
PRESSURED PROFITABILITY: Financial results for fiscal 2012 were markedly
lower than expected with profitability margins comparing unfavorably to
Fitch's 'A' category medians as net patient revenue growth suffered from
systemically low inpatient activity. Salem Health reported $4.8 million
in operating income for fiscal 2012, or a 0.8% operating margin, down
from $21.4 million in the prior year (3.6%). Fitch expects operating
profitability to remain pressured through fiscal 2013 and management has
budgeted a 1.7% operating margin for fiscal 2013.
PERFORMANCE IMPROVEMENT PLAN: Beginning March 2012, management
implemented a financial improvement plan driven primarily by strong cost
savings. The plan relies on both labor and non-labor cost savings,
supply chain and revenue cycle management, and enhanced productivity to
achieve $15.3 million in annualized savings by Sept. 30, 2013. Fitch
notes that the weak fiscal 2012 financial results even included $8.8
million of realized cost savings due to management's plan.
GOOD LIQUIDITY: Liquidity relative to expenses is very good as Salem
Health had 254.4 days cash on hand (DCOH) at Sept. 30, 2012, compared to
Fitch's 'A' category median of 191 days. Though the strong balance sheet
growth reflects favorable investment portfolio performance, it also
reflects sizably reduced capital spending over the last three fiscal
years, which averaged 71.8% of depreciation annually.
LEADING MARKET SHARE: Salem Health maintains a leading and dominant 77%
inpatient market share position in the primary service area, and a
leading 24% market share in the secondary service area.
MODERATELY HIGH DEBT BURDEN: Though Salem Health has no new debt plans,
Fitch believes Salem Health's pressured profitability and cash flow
generation leaves no room for any additional debt capacity at the
The rating downgrade to 'A' from 'A+' reflects Salem Health's current
financial profile, which is more reflective of the 'A' rating level and
is expected o remain so over the medium term. Profitability for fiscal
2012 was only just above break-even and was aided by strong cost saving
measures. For fiscal 2013, profitability is budgeted to improve modestly
but remain low for the rating category.
Regional Economy Pressures Profitability
The weak regional and state economies have resulted in persistently high
unemployment rates and led to systemically low inpatient activity and an
unfavorable shift in its payor mix. As a result, net patient revenue for
fiscal 2012 fell by 4% from the prior fiscal year and negatively
impacted profitability. For fiscal 2012, Salem Health generated $4.8
million in operating income, equating to a meek 0.8% operating margin,
which is markedly lower than the 3.6% operating margin for fiscal 2011
and is lower than Fitch's 'A' category median of 2.8%.
In response to the flagging profitability, management implemented a
financial improvement plan beginning in March 2012 to yield $7.5 million
in cost savings by Sept. 30, 2012 and $15.3 million in annual cost
savings by March 2013. The plan relies on labor and non-labor cost
savings, supply chain and revenue cycle management, and enhanced
productivity. Management reports it exceeded its target for Sept. 30,
2012 with $8.8 million of cost savings realized. Although these cost
saving measures are viewed positively, Fitch is concerned about the
decline in revenue and pressure on profitability. Salem Hospital has
budgeted a 1.7% operating margin for fiscal 2013.
Unrestricted cash and investment levels have risen steadily over the
last three fiscal years due to low capital spending and favorable
investment returns, especially in fiscal 2012. As of Sept. 30, 2012,
Salem Health had $345.9 million in unrestricted cash and investments,
equating to a very good 254.4 DCOH and an average 115.4% cash to debt
position, compared to Fitch's respective 'A' category medians of 191
days and 116.4%.
Minimal Capital Spending
Capital spending has ebbed dramatically over the last three fiscal years
as Salem brought a new hospital tower online in 2009. The low capital
spending trend also reflects the Salem Health Board's desire to preserve
and grow liquidity, especially in light of pressured profitability and
cash flow generation. As a result, capital spending was a mere 58.1% of
depreciation expense in fiscal year (FY) 2012; 85% for fiscal 2011, and
72.2% for 2010. The fiscal 2013 budget incorporates $49.7 million in
capital spending, including $8 million in contingency spending, which
equates to 117% of depreciation expense.
Moderately High Debt Burden
Salem Hospital's debt burden is moderately high as maximum annual debt
service (MADS) accounts for 3.5% of operating revenue, which is high
compared to Fitch's 'A' category median of 2.8%. Further, MADS coverage
by 2012 operating EBITDA, at 3.0 times (x), is weak when compared to
Fitch's 'A' median of 4.1x. While Salem Health has no new debt plans,
Fitch believes that Salem Health's current cash flow generation leaves
no room for any sizable additional debt capacity at the current rating.
As of Sept. 30, 2012, Salem Health had $299.8 million in long-term debt
outstanding, of which $125 million (42%) are variable rate demand bonds
supported by two letters of credit (LOCs) provided by Merrill Lynch Bank
of America and US Bank, which expire on Dec. 1, 2013 and April 30, 2016,
respectively. Fitch notes that Salem's cash to puttable debt is strong
at 2.7x. In addition, Salem's investments are highly liquid. Salem
Health has entered into a fixed payor interest rate swap agreement with
UBS, with an aggregate notional amount of $75 million. As of Oct. 31,
2012, the swaps had a mark-to-market value of negative $19.4 million,
and collateral posting is required above a $20 million threshold.
The Stable Outlook is predicated on Fitch's expectation that management
will remain focused on its financial improvement plan, maintain current
balance sheet strength, and achieve its aforementioned budget target for
About the Organization
Salem Hospital is a 424-staffed-bed hospital located in Salem, OR,
approximately 45 miles south of Portland. Salem Health reported $581.7
million in operating revenue for fiscal 2012 (unaudited). Salem Health
covenants to provide annual audited financial statements to the
Municipal Securities Rule Making Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria', June 12, 2012;
--'Non-Profit Hospital and Health System Rating Criteria', July 23, 2012.
Revenue-Supported Rating Criteria
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.
AVAILABLE ON 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
[ Back To NFVZone's Homepage ]