Fitch Ratings has upgraded to 'AA-' from 'A+' the rating on the
following Industrial Development Authority of Arlington County, Virginia
hospital revenue bonds issued on behalf of Virginia Hospital Center
-- $127.5 million series 2010.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues of the VHC
obligated group, which consists solely of Virginia Hospital Center.
Fitch reports on the performance of the consolidated Virginia Hospital
Center Arlington Health System (VHC), which includes the Virginia
Hospital Center Physician Group as well as several other affiliates.
KEY RATING DRIVERS:
METRICS CONSISTENT WITH 'AA' MEDIANS: The upgrade to 'AA-' is based on
VHC's profitability, coverage and liquidity metrics which are now
consistent or better than Fitch's 'AA' medians, location in a
demographically attractive market and modest capital needs.
EXCELLENT LIQUIDITY: Strong operating cash flow has enabled VHC to
further strengthen its robust liquidity position. At year-end 2013, VHC
reported unrestricted cash and investments of $643 million, equal to 704
days cash on hand (DCOH), 55.9x cushion ratio, and cash equal to 504.5%
of long-term debt, all significantly higher than the 'AA' category
medians. VHC's investment allocation is aggressive, but in Fitch's view
acceptable given the liquidity levels.
STRONG PROFITABILITY MAINTAINED: VHC continues to produce strong
operating results based on robust utilization, to a large part due to
higher than originally anticipated volume of Kaiser Permanente (Kaiser)
patients pursuant to a contract that was extended to November 2016. VHC
produced operating and operating EBITDA margins in 2012 (fiscal year end
Dec. 31) of 5.1% and 13.3%, respectively, and 6.3% and 15% in fiscal
2013 (unaudited), exceeding the 'AA' category medians.
MODEST CAPITAL NEEDS: VHC has a new patient tower erected in 2004 and
faces no significant capital needs other than routine capital
investments roughly equal to depreciation in the near- to medium-term.
Debt load is manageable with maximum annual debt service (MADS) equal to
3% of revenues, and MADS coverage by EBITDA was a robust 6.9x for fiscal
COMPETITIVE SERVICE AREA: VHC's market share has steadily been
increasing over the last decade and is now the highest in its service
area at 34.2%, but the area remains competitive with Inova's two
facilities in Fairfax and Alexandria and an HCA hospital under
MAINTAIN STRONG OPERATING PROFILE: While the budget for fiscal 2014
calls for a slightly lower operating EBITDA margin of 11.5%, Fitch
expects VHC to maintain its robust liquidity metrics while sustaining
coverage metrics consistent with the rating category. Fitch views VHC's
strong liquidity position as a mitigant against the potential operating
volatility associated with VHC's smaller revenue base relative to the
rating category. Fitch views VHC's strong liquidity position as a
mitigant against the potential operating volatility associated with
VHC's smaller revenue base relative to the rating category.
Because of good cash flow and strong investment returns, VHC cash and
unrestricted investments increased to $643.1 million at 2013 year-end,
equal to 704 DCOH from $417.9 million two years ago (503 DCOH), well
exceeding the 'AA' category medians of 254 DCOH, and VHC now has
cash-to-debt of 504%, as compared to the 'AA' median of 174%. Fitch
notes that VHC's investment allocation is aggressive, with close to 60%
in equity and 15% in alternative investments, but in Fitch's view this
is acceptable given the liquidity levels and given all of VHC's
long-term debt in fixed-rate mode and no swap exposre. Additionally,
the investment policy requires that the market value of fixed income
investments be at all times not less than 75% of outstanding long-term
debt. Fitch views VHC's strong liquidity position as a mitigant against
the potential operating volatility associated with VHC's smaller revenue
base relative to the rating category.
SOLID PROFITABILITY MAINTAINED
VHC reported operating income of $19.9 million for the year ended Dec.
31, 2012, equal to an operating margin of 5.1% and operating EBITDA
margin of 13.3%, and for fiscal 2013 (unaudited) operating gain of $24.3
million, equal to operating margin of 6.3% and operating EBITDA margin
of 15%. Fitch's 'AA' medians for operating and operating EBITDA margins
are 4.2% and 11.8%, which VHC exceeded consistently for the last five
years. As had been planned, Kaiser added obstetrics to the services
which are provided for their subscribers at VHC and births increased by
over 1,000 last year, a 16% increase. Similarly, admission grew by 7.6%
last year. The partnership agreement with Kaiser, which designates VHC
as the hospital of choice for Kaiser subscribers, runs to 2017 and
management does not anticipate that the contract would not be extended.
Kaiser patients accounted for 24% of VHC's managed care revenues in
2013, up from 18% two years ago, and their census has significantly
exceeded expectations with approximately 80-90 Kaiser patients in the
hospital on any given day.
MODEST CAPITAL NEEDS
As VHC has a patient tower housing most patient care areas constructed
in 2004, the organization has no major capital needs over the near- to
medium-term. The capital budget for the current fiscal year is $30
million, roughly mirroring depreciation expense and primarily focused on
infrastructure needs and IT investment. While VHC may face some capacity
issues in the future if inpatient volumes continue to grow, these can be
accommodated using space in the older hospital facility, which is
currently primarily used for non-patient care. Fitch views the
relatively light debt burden as a credit positive. MADS coverage by
EBITDA of 6.3x is better than the 'AA' category median of 4.2x and MADS
as a percent of revenues is moderate at 3%. Debt-to-capitalization is a
very low 15%.
COMPETITIVE SERVICE AREA
VHC operates in an affluent (Arlington County rated 'AAA', Stable
Outlook by Fitch) but relatively competitive service area. Market share
has increased over the last decade and was most recently reported at
34.2%, compared to Inova's 32.2% for their Fairfax facility and 23.1%
for the Inova Alexandria facility. VHC's market share has steadily
increased every year since 2004; in 2009 it was under 30% while Inova
Fairfax's was 40%. VHC is bolstering its presence on the fringes of its
service area through the location of a half-dozen outpatient clinics.
The contract with Kaiser is a major driver behind the strong inpatient
volumes and management is working closely with Kaiser to accommodate the
needs of their subscribers. Proposed construction of an HCA facility
approximately 20 miles from VHC, to be completed in late 2015, is not
seen as a serious risk because of difficult traffic patterns in this
area. Physician recruitment, given the attractiveness of the service
area, has not been an issue for this organization in the past. A recent
launching of a joint insurance product between Aetna and Inova has not
had an impact on VHC, but could present some risk in the future.
Virginia Hospital Center Arlington Health System (VHC) is a 342-bed
tertiary teaching hospital located in Arlington, VA, which is across the
Potomac River from Washington DC. VHC generated total revenues of $385
million in unaudited fiscal 2013. VHC covenants to provide audited
financial statements within 180 days of fiscal year end, and quarterly
disclosure within 45 days of quarter's end. Disclosure is reported to
the Municipal Security Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 23, 2013.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
20, 2013 .
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems 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
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
[ Back To NFVZone's Homepage ]