Fitch Ratings assigns a long-term rating of 'BB+' to approximately $98.3
million of series 2014 revenue bonds issued by Decatur Hospital
Authority (TX) on behalf of Wise Regional Health System (WRHS).
The Rating Outlook is Stable.
The series 2014 bonds are expected to sell as fixed-rate tax-exempt
bonds. The proceeds will be used to refund WRHS's series 2004 bonds,
fund the debt service reserve fund at $9.5 million, as well as provide
$10 million in new money. The refunding will decrease maximum annual
debt service (MADS) from $12.5 million to approximately $11 million (pro
forma MADS was provided by the underwriter). The bonds are expected to
price the week of June 2, 2014 and mature in 2044.
Bond payments are secured by a pledge of gross revenues of the
authority's hospital facilities, a fully funded debt service reserve
fund, and a first lien on certain mortgaged property and land on which
hospital facilities are located.
KEY RATING DRIVERS
RECENTLY IMPROVED PROFITABILITY: WRHS recorded a 12.8% operating margin
in fiscal year (FY) 2013 (December 31), up significantly from 0.9% in FY
2011. The recent increase in profitability is attributed to historically
steady population growth and increasing volumes, as well as significant
governmental funding from the 1115 Medicaid Waiver program. Management
is budgeting for an average operating margin of 8% from FY 2014 to FY
2017, which Fitch believes to be consistent with the rating.
HIGH LEVERAGE: Pro forma total long-term debt of $142 million results in
extremely stressed leverage metrics. WRHS's pro forma unrestricted cash
and investments-to-total debt of 32.3% and cushion ratio of 4.2x based
on FY 2013 results both compare unfavorably to Fitch's 'below investment
grade' medians of 53% and 5.4x, respectively.
EXTENSIVE CAPITAL PLANS: The system has additional expansion plans in
the near- to medium-term, which could potentially include the addition
of a new bed tower to the current East Campus. Management states that
financing and construction for the project could begin in as early as
three years, with total project costs of approximately $62 million,
which would potentially stress capital metrics.
LOW, BUT IMPROVING LIQUIDITY: WRHS had $45.9 million in unrestricted
cash and investments at Dec. 31, 2013, which equated to 112.4 days cash
on hand (DCOH). While the system's unrestricted cash and investments
doubled from 2011 to 2013, Fitch believes there is a need for
significant additional liquidity growth to support current and future
LEADING MARKET SHARE: WRHS's market share in its primary service area
(PSA) increased from 56% in 2011 to a leading 65% in 2012. No other
single hospital comprises a market share greater than 10% in the PSA.
Fitch views the systems strong market presence as a credit positive.
LITTLE ROOM FOR ADDITIONAL DEBT: Fitch believes WRHS does not have
capacity for additional debt at the current rating level. Any additional
debt would be expected to be complemented with a commensurate increase
WRHS is a healthcare system located in Decatur, TX and owned and
operated by the Decatur Hospital Authority. The authority is not a
taxing district and therefore the system is not supported by tax
collections. Currently, WRHS operates a 134-bed general acute care
hospital which is split into two campuses, the West Campus and the East
Campus. In addition, WRHS operates a campus in Bridgeport, TX with 36
licensed beds, currently used as an outpatient facility. Furthermore,
WRHS opened its new 12-bed Parkway Surgical and Cardiovascular Hospital
in May 204 in Fort Worth, TX. WRHS has a number of affiliated
physicians in the Fort Worth area and expects surgical volumes at the
new facility to reach 2,000 by 2016. WRHS reported $180.1 million in
total net revenues in FY 2013.
RECENTLY IMPROVED PROFITABILITY
WRHS's profitability has experienced robust year-over-year growth over
the past three years, due to increased volumes as well as significant
contributions from the Texas Medicaid 1115 Waiver program, which is set
to expire in 2016. Operating income grew from $1.2 million in FY 2011 to
$23 million in FY 2013, while operating margin increased from 0.9% to
12.8%, which is significantly above the category medians. Management is
budgeting for an 8.5% operating margin in FY 2014.
Fitch notes that a significant portion of budgeted operational
improvements is expected to materialize through revenue growth, as
opposed to cost reductions. Driven by the growth in profitability, debt
service coverage by earnings before EBITDA has also improved over the
same time period and was 3.1x in FY 2013. Profitability in the interim
period was compressed, with a 1.8% operating margin and an 11.5%
operating EBITDA margin (both adjusted to include accruals of certain
1115 Waiver funds), largely due to start-up costs at the Parkway
Post the 2014 issuance, WRHS's total debt would be approximately $142
million. The increased leverage will result in a very stressed 32.3%
cash-to-debt and 4.2x cushion ratio based on FY 2013 results, both
comparing unfavorably to category medians. In addition, the system's
modest revenue base results in 6.1% Pro forma MADS as a percent of
revenues, compared to the 'below investment grade' median of 3.1%. Pro
forma MADS coverage is improved due to savings via refinancing and is
3.5x based on FY 2013 results.
EXTENSIVE CAPITAL PLANS
WRHS has exhibited a fairly aggressive growth strategy in recent years,
and has substantial capital plans in the medium term to accommodate the
steady population growth. Management discussed plans for a possible
second tower to be built on their East Campus in as soon as three years.
The approximate cost of the project could be as high as $62 million, $22
million of which is expected to be generated from cash flow, which would
be further dilutive to the system's leverage metrics. Additionally, the
$10 million of new money from the 2014 issuance may be used for future
capital projects, which may include a physical therapy and wellness
center which would open up space in the East Campus structure for
expansion of hospital services in the future. Fitch acknowledges the
necessity of such expansion projects, but notes that WRHS's current
financial profile does not have any room for additional debt at the
current rating level.
LOW, BUT IMPROVING LIQUIDITY
WRHS's cash position has materially improved over the last few years,
with unrestricted cash and investments increasing 105%, from $22.4
million in FY11 to $45.9 million in FY 2013. At 2013 year-end the
system's reported unrestricted cash and investments equated to 112.4
DCOH, above the 'below investment grade' median of 73.2 days. At March
31, 2014 DCOH was slightly down at 107.4 days. Management is forecasting
an increase in liquidity over the near- to medium-term and expects DCOH
to equal 193.1 by 2017 year-end. Financial projections do not
incorporate the potential tower expansion project.
LEADING MARKET SHARE
WRHS's market share in its PSA increased from 56% in 2011 to a leading
65% in 2012, with no other single hospital comprising a market share
greater than 10% in the area. Fitch views the system's strong market
presence as a credit positive, but notes that the system's aggressive
expansion plans into territories closer to the high growth area of the
Dallas-Forth Worth Metroplex will likely face much higher levels of
competition than it has in its current market.
WRHS covenants to provide annual disclosure of audited financials within
four months of the fiscal year end and quarterly disclosure of interim
financials within 45 days of the quarter end. Annual and quarterly
disclosure reports are filed on the Municipal Securities Rulemaking
Board's EMMA Web site.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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