Fitch Ratings has affirmed the 'BBB+' long-term rating on the following
Baptist Health Care Corporation's (BHCC) outstanding debt:
--$148.8 million Escambia County, FL health facilities authority revenue
bonds (Baptist Hospital Inc. Project), series 2010A.
The Rating Outlook has been revised to Positive from Stable.
Security interest in certain pledged revenues, mortgage pledge on Gulf
Breeze Hospital, and debt service reserve fund.
KEY RATING DRIVERS
IMPROVED OPERATING PERFORMANCE: BHCC earned $26.8 million in operating
income in fiscal 2013 (Sept. 30, 2013; audited), which is increased from
2012's $17.3 million profit. Management attributes the improved
performance to $8.2 million of recorded meaningful use monies, volume
growth in key service lines such as orthopedics and cardiology, and
continued cost management. Specially, BHCC's operating margin and
operating EBITDA margins of 3.9% and 9.5% compared favorably against
Fitch's 'BBB' category medians of 1.8% and 9%, respectively.
LEADING MARKET POSITION: Despite operating in a competitive service
area, BHCC controls the top market position in its primary service area
(PSA; on an adult inpatient basis). Supported by specific service line
volume growth through successful strategic physician alignment
initiatives, BHCC's market share was nearly 36% through March 31, 2013,
which demonstrates an improving trend from 34% in 2011. BHCC's next
closest competitor is Sacred Heart Hospital (part of Ascension Health;
revenue bonds rated 'AA+'; Stable Outlook by Fitch), which has an
approximate 34.5% share.
ENHANCED LIQUIDITY POSITION: As of Dec. 31, 2013 (three months into
fiscal 2014; unaudited), BHCC had an unrestricted cash and investments
total of $231.3 million, which translated into 124.8 days cash on hand,
12.2x cushion ratio, and 98.1% cash-to-debt. These metrics have improved
consistently since fiscal 2008. The unrestricted cash growth is
supported by improving operations, better investment returns, muted
capital spending, and revenue-cycle initiatives that have helped drive
down accounts receivable.
MANAGEABLE CAPITAL PLANS: With all major construction completed,
management intends to spend approximately $86 million on capital over
the next three years, which Fitch views as manageable. BHCC has no plans
for any significant additional debt over the medium term, which should
contribute to further balance sheet growth.
EFFECTIVE MANAGEMENT PRACTICES: Despite some management turnover in
2013, Fitch views BHCC's management practices favorably, which are
highlighted by growing the organization's market position and financial
profile; maintaining an attractive physical plant, and producing
top-tier quality care metrics.
SUSTAINED OPERATING PERFORMANCE EXPECTED: Fitch expects BHCC to maintain
solid operating performance as it continues to capitalize on its
strategic investments. Positive rating movement may be warranted if BHCC
can sustain its improved operating metrics relative to historical
levels, which should also produce enhanced liquidity ratios and debt
service coverage metrics.
BALANCE SHEET GROWTH: Fitch expects BHCC's balance sheet metrics to
continue to improve as the organization does not have any planned
sizeable capital expenditures. Although somewhat light for the 'BBB+'
rating level, Fitch views the positive trend in unrestricted balance
sheet resources favorably and believes with continued improvement upward
rating pressure may be warranted.
BHCC operates Baptist Hospital, a 492-bed tertiary care hospital in
Pensacola, FL; Gulf Breeze Hospital, a 77-bed acute care hospital in
Gulf Breeze, FL; Atmore Community Hospital (49- licensed beds) and Jay
Hospital (55-licensed beds) operating in certain counties in southern
Alabama and northern Florida; and other health care related entities.
Total operating revenue in fiscal 2013 was approximately $690 million.
BHCC won the Malcolm Baldrige National Quality Award in 2003 and is an
indicator of the organization's high quality and safety standards. BHCC
covenants to provide annual audits within 150 days of fiscal year end
and quarterly unaudited financials or the first three quarters within
45 days of quarter end.
RATING AFFIRMATION OF 'BBB+'
The 'BBB+' rating affirmation is supported by BHCC's solid operating
performance, which helps produce good debt service coverage, leading
market position and manageable capital plans over the medium term.
In fiscal 2013, BHCC generated $26.8 million in operating income, which
was improved from fiscal 2012's $17.3 million, and translated into a
3.9% operating margin and 9.5% operating EBITDA margin (excludes $7.6
million from the sale of Baptist Leadership Group, which Fitch considers
a one-time event). Overall, Fitch views BHCC's improved operating
metrics favorably and as a primary credit strength. In fiscal 2014,
management is budgeting for a 2.5% operating margin, which Fitch views
as conservative as it excludes approximately $32 million of potential
gains including $6.4 million in meaningful use monies and $9.2 in net
gains from the sale of The Manor, among other things.
Continuing to support the improved operating performance are several
initiatives such as growing the organization's employed physician base
through strategic physician alignment, implementation of various expense
reduction and revenue enhancement plans (including revenue cycle and
supply chain management), and enhancing key service lines (cardiology
and orthopedics) that have helped grow the organization since 2010.
Specifically, Fitch views BHCC's relationship with the 'Andrews
Institute' (a joint-venture ambulatory surgery center with
world-renowned orthopedic surgeon Dr. James Andrews) favorably and has
allowed the organization to grow its market position in orthopedics, but
also contribute to the organization's financial improvement. This
relationship dates back to 2006, and, since which time the orthopedic
service-line profitability has nearly doubled to an approximate $21
million contribution margin (from $10 million). Orthopedics volume
continues to be positive, which management expects will continue as the
Andrews Institute has a regional and national draw.
Additionally, in July 2013 BHCC became a member of the Mayo Clinic Care
Network (Mayo), which provides certain benefits such as co-branding and
physician integration tools. Fitch views this relationship favorably as
BHCC is the only Mayo affiliate in the Gulf Coast region, which extends
approximately 150 miles.
KEY CREDIT CONCERNS
Fitch's key credit concerns include BHCC's somewhat light balance sheet
for the rating level and competitive service area. In fiscal 2013, BHCC
had 127.3 days cash on hand, 11.5x cushion ratio, and 92% cash-to-debt,
which is relatively consistent with Fitch's respective 'BBB' category
medians of 144.7 days, 10.2x, and 91.7%. Despite absolute unrestricted
cash improvement since 2008 Fitch still views BHCC's balance sheet
strength as a primary credit concern. Fitch expects further balance
growth for positive rating movement to occur.
BHCC operates in a highly competitive service area, which is split among
three main providers. BHCC is the market leader; however, Sacred Heart
Hospital maintains a very close second position of 34.5%, while West
Florida (part of HCA) has a 23.3% share. Fitch believes it is essential
for BHCC to continue its strategic alignment initiatives with physicians
in the service area to maintain its leading market position.
Additionally, Fitch believes it is imperative for BHCC to continually
invest in its physical plant to maintain competitiveness.
As of Sept. 30, 2013, total outstanding debt was approximately $238
million and includes $182 million of bonded debt, $35 million of notes
payable, and $21 million of capital leases and other debt. Fitch used a
maximum annual debt service (MADS) of $19 million, which incorporates
all debt (assumes full amount drawn under capital lease) and treats
balloon indebtedness in accordance with BHCC's master trust indenture.
The debt portfolio is 74% fixed rate and 26% variable rate, which Fitch
views as relatively conservative.
BHCC has three outstanding swaps for a total notional amount of $65.3
million and includes a basis swap with Citi for $40 million and two
floating- to fixed-rate swaps with Bank of America for $25.3 million.
BHCC is required to post collateral at its current rating level if the
mark to market exceeds $3.25 million per counterparty. To date, there
have been no collateral postings.
MADS coverage by EBITDA was 4x and operating EBITDA was 3.4x, in fiscal
2013, which exceeded Fitch's 'BBB' category medians of 3.1x and 2.7x,
respectively. BHCC's debt service coverage levels are improved from
fiscal 2012's 2.9x and 2.8x. Overall, Fitch views the debt service
coverage improvement favorably and continued output of solid coverage
levels may lead to positive rating pressure over the next 12-24 months.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated June 3, 2013
'Nonprofit Hospitals and HealthSystems Rating Criteria', dated May 20,
2014 Outlook: U.S. Nonprofit Hospitals and Healthcare Systems
Revenue-Supported Rating Criteria
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