Fitch Ratings has affirmed the 'BBB-' rating on the following bonds
issued on behalf of Beebe Medical Center (Beebe) by the Delaware Health
--Approximately $19.3 million series 2005A.
The Rating Outlook is Stable.
The bonds are secured by a pledge of Beebe's gross receipts and a
mortgage on its principal facilities.
KEY RATING DRIVERS
GOOD MARKET POSITION: Beebe enjoys a stable market share in the low 60%
range, which is supported by the continued expansion of its ambulatory
presence and growth of its Beebe Physician Network (BPN).
2014 INTERIM PERIOD OPERATING LOSS: After generating operating gain of
$3.4 million in 2013 (year-end June 30) equal to an operating margin of
1.2%, Beebe reported an operating loss of $2.9 million through March 31,
2014, the third quarter of the current fiscal year. Factors contributing
to the loss included an increase in Medicare patients, implementation of
a replacement electronic health record (EHR) platform, as well as an
increase in expenses related to the growth of the employed physician
IMPROVED LIQUIDITY: Liquidity was boosted by the May 2013 release of
collateral required by a Letter of Credit bank following the settlement
of the Bradley litigation. At March 31, 2014 Beebe reported unrestricted
cash of $91.7 million, translating to 118.6 days cash on hand (DCOH), a
cushion ratio of 14.2 times (x) and cash equal to 153% of pro forma debt.
MANAGEABLE DEBT LOAD: Beebe's debt load is manageable despite the
addition of new money in the 2014 transaction, which only increased MADS
by $0.5 million. MADS remains a moderate 2.2% of revenues but MADS
coverage by EBITDA at 2.9x through the 2014 interim period is slightly
lower than the 'BBB' median of 3.1x.
RETURN TO OPERATING PROFITABILITY: Beebe's return to operating
profitability, while maintaining improved liquidity, could result in
positive rating pressure.
Beebe Medical Center is a 210 licensed-bed acute hospital located in
Lewes, Delaware with $284.3 million of consolidated system operating
revenues in fiscal 2013. In addition to the Medical Center, the
consolidated system includes a Foundation and the BPN.
GOOD MARKET POSITION
Beebe's inpatient admissions increased by 4.5% in 2013 and inpatient
volume continues to be strong through the third quarter of 2014 with a
5.8% increase over the prior year period. The growth is supported by the
growth of BPN, as well as the expansion of its ambulatory coverage,
particularly in the secondary service area. Beebe responded to the
increasing competition for the ambulatory market share by opening three
ambulatory locations (Millsboro, Georgetown and Milton) and continued to
recruit both primary care physicians, as well as specialists, as
reflected in the growth of the BPN, which now employs 57 physicians, up
from 38 in 2012.
2014 INTERIM PERIOD OPERATING LOSS
Fiscal 2013 was the first year after the final settlement of the Bradley
case and the absence of legal expenses, coupled with good volumes,
produced gain from operations of $3.4 million, with operating margin
only slightly short of the budgeted 1.5%. A major driver of the
operating loss of $2.8 million through the third quarter of 2014 was a
shift of the payor mix from commercial to higher Medicare (now 60.7% of
gross revenues) as the populationages and retirees move into the area.
The shift reduced revenues by approximately $4 million. Additional
strains included the ramp up expenses of the new ambulatory centers, and
the implementation of the new Cerner EHR, which went live in March 2014.
The results also reflect the increase in the loss from the BPN, which
increased to $15.2 million through March 31, 2014 as compared to $12.4
million for the entire 2013 year. Beebe is slowing down the recruitment
of specialists and at this time plans to only add primary care
physicians to the network. Management reported that the subsequent
months since the end of the third quarter show stronger results.
Management's expectation is that the 2014 fiscal year will end with a
loss from operations but one that is somewhat smaller than the third
RECENTLY COMPLETED TRANSACTION
On June 2, 2014 Beebe closed two direct bank purchase transactions with
PNC Bank, N.A. (PNC), for which Fitch was not asked to provide the
rating. The variable rate $31 million series 2014A refunded the
outstanding series 2002 bonds, which had not been rated by Fitch, and
funded $15 million of new money for various small projects and equipment
purchases. In recent years capital investment was understandably
curtailed pending the outcome of the Bradley litigation. The rate for
the 2014A series is 75.5% of one month LIBOR plus 81 basis points. The
proceeds of the series 2014B were used to refund the outstanding series
2004A bonds. The initial bank commitment period for both series is for
seven years and PNC provided a forward fixed rate lock for the series
2014B at interest rate of 2.016%. Debt service reserve funds were not
funded in connection with the 2014 bond issues.
At March 31, 2014 Beebe had $91.7 million of unrestricted cash and
investments, an increase from $60.7 million at end of 2012. Liquidity
improved due to the release of $18.5 million of collateral in May of
2013. Cash equal to 153% of pro forma debt, including the $15 million of
new money in the recent transaction, is better than the 'BBB' category
median of 131%, as is the cushion ratio at 14.2x. DCOH at 118.6 days are
still lower than the median of 144.7 DCOH.
MANAGEABLE DEBT LOAD
Despite the increase in debt from the new money in the 2014
transactions, Fitch views Beebe's debt load as still moderate. Coverage
of MADS by EBITDA was a 3.4x in fiscal 2013, but was lower at 2.9x
though the 2014 interim period, though still close to the 'BBB' category
median of 3.1x. As pro forma MADS is only slightly higher, MADS as a
percent of revenues remains moderate at 2.2%, compared to the 'BBB'
category median of 3.5%. Capital plans include the construction of a
school of nursing. However, the majority of the approximately $10.3
million cost will be funded from philanthropy, with $8 million already
raised and held in restricted donor funds. The remaining $2 million will
be funded from internal cash flow over the next 12-18 months.
Beebe covenants to disclose annual audited financial statements and
management discussion and analysis as well as quarterly financial
statements including balance sheet, income statement, and utilization
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'Nonprofit Hospitals and Health Systems Rating Criteria'(May 20, 2014).
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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