Fitch Ratings has affirmed the 'A+' rating on the following North
Carolina Medical Care Commission bonds, issued on behalf of Vidant
Health (Vidant; fka University Health Systems of Eastern Carolina):
--$121.3 million series 2008.
The Rating Outlook is Stable.
Vidant has an additional $409.4 million in bonds outstanding that Fitch
does not rate.
The bonds are a general and unsecured obligation of the obligated group,
which includes the parent company and the flagship facility, Vidant
KEY RATING DRIVERS
STEADY OPERATING PERFORMANCE: The affirmation at 'A+' reflects Vidant's
steady operating performance, supported by strenuous efficiency and cost
containment efforts across its system. Fiscal 2013 (Sept. 30 year end)
results were solid with an 11.6% operating EBITDA margin and 13% EBITDA
ADDITIONAL DEBT EXPECTED: Vidant expects to issue an additional $142
million in debt later this year which, together with philanthropic
contributions, will fund a cancer center at its flagship hospital in
Greenville. Fitch believes Vidant has additional debt capacity at its
current rating as long as solid operating performance is maintained. The
cancer center should help bolster Vidant's market position and reduce
outmigration for cancer services.
SOLID MARKET POSITION: After several years of growth via acquisition and
medical staff integration, Vidant has maintained a leading position
within its 29-county service area equal to 36.7%. Continued efforts to
expand its ambulatory network in the region, increase physician
recruitmentat the community hospitals and drive high acuity cases to the
tertiary flagship should help preserve Vidant's competitive position.
CHALLENGING SERVICE ENVIRONMENT: Fitch notes the total service area has
generally negative economic indicators. This is borne out in Vidant's
somewhat high level of Medicaid at 17.5% of gross revenues in 2013.
Still, Vidant has been successful at minimizing its exposure to self-pay
and charity, receives cost-based reimbursement for Medicaid services,
and should have steady supplemental DSH and UPL funding through 2015.
BALANCE SHEET STABILITY: Vidant is planning to undertake additional debt
and project spending over the near term and is projecting its cash flow
to remain steady through construction. Fitch expects liquidity will be
maintained in line with the increase in debt, and related metrics remain
consistent with the 'A' rating category.
Vidant Health is an integrated health care system centered in Greenville
and serving 29 counties across eastern North Carolina. The system
includes its flagship tertiary provider Vidant Medical Center, eight
other acute care hospitals including Vidant Roanoke-Chowan Hospital,
Vidant Edgecomb Hospital, Vidant Chowan Hospital, Vidant Bertie
Hospital, Vidant Beaufort Hospital, Vidant Duplin Hospital, Vidant Pungo
Hospital, The Outer Banks Hospital, various physician practices,
outpatient services, home health, hospice, and wellness services. Total
system revenues were $1.6 billion in fiscal 2013 (year ended Sept. 30).
Fitch uses consolidated financial statements in its analysis. The
Obligated Group (OG) currently includes the parent corporation and
Vidant Medical Center. For fiscal 213, the OG contributed 77% of total
revenues and substantially all assets to the consolidated group.
Vidant provides quarterly (within 45 days) and annual (within 120 days)
disclosure via the Municipal Securities Rulemaking Board's EMMA System.
Disclosure includes financial statements and utilization information.
Vidant has been successful in its operating efficiency and ambulatory
market reach efforts, successfully offsetting flat to declining
inpatient activity and preserving operating cash flow at or above
Fitch's 'A' category median since fiscal 2011. During fiscal 2013,
Vidant generated a healthy 4.4% operating margin by exerting tight
controls in labor and supply costs, coupled with growth in its
integrated medical staff and associated volumes.
SOLID MARKET FOOTPRINT
Vidant serves the 29 contiguous counties in eastern North Carolina
including approximately 1.3 million people, east of Raleigh, and its
primary service area (PSA) is identified as the 13 continues where
Vidant has a physical presence. Fitch notes that Vidant maintains strong
market share of over 77% in the PSA in 2012, and its total service area
share has grown to 36.7% in 2012 from 28.6% in 2009. Vidant derives
approximately 1/3 of its patients from Pitt County, which benefits from
the economic activity and population growth generated by East Carolina
University and the City of Greenville. Fitch rates Pitt County's general
obligation bonds 'AA+' with a Stable Outlook.
Still, Fitch notes that overall area economic indicators remain somewhat
negative, particularly outside the economic engine of Greenville.
Poverty rates, unemployment rates, and income levels are generally
unfavorable to state and national averages. While North Carolina has
chosen not to participate in the Medicaid expansion, Vidant has thus far
been able to temper these environmental challenges through cost-based
Medicaid reimbursement and approximately $55 million in disproportionate
share hospital (DSH) and other supplemental funds in fiscal
2013.However, beyond 2015 the level of funding for these programs is
uncertain and is a longer-term credit concern.
MANAGEABLE DEBT PROFILE
As of Sept. 30, 2013 Vidant had a total $562 million in debt outstanding
which was approximately 52% fixed to 48% variable rate. During 2012 and
2013 Vidant replaced its variable rate demand debt with variable rate
direct placements. Approximately $48 million will term in 2018, with
another $112 million subject to tender in 2023 and $102 million to
mature in 2028. Fitch views the elimination of demand debt favorably
against Vidant's balance sheet metrics which are somewhat light for the
Vidant also novated its $202 million notional value swap to Wells Fargo
in 2012, increasing its collateral posting threshold to $30 million. As
of Dec. 31, 2013 the mark-to-market on the swap was negative $20.3
million, requiring no collateral to be posted.
Over the next 12-24 months Vidant is anticipating issuing approximately
$142 million in debt to partially finance a cancer center on its main
campus in Greenville. The cancer center would provide the eastern region
with a central resource for radiation, infusion, and surgical cancer
services and help reduce outmigration to Raleigh. Fitch believes that
Vidant has additional debt capacity at its current rating level given
its steady cash flow levels. However, Fitch notes the additional debt
has not been incorporated into the current rating action and will
evaluate the impact of the financing on the rating when the bonds are
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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