Fitch Ratings has assigned a 'BBB' rating to the following Indiana
Finance Authority bonds, issued on behalf of The Methodist Hospitals
--$48.7 million revenue refunding bonds, series 2014.
The bonds will be issued as fixed rate, be used to refund the
outstanding 2001 bonds, fund a debt service reserve, and pay costs of
issuance, and are expected to price the week of August 11 via
In addition, Fitch affirms the following Indiana Health Facility
Financing Authority bonds issued on behalf of TMH:
--$6.8 million revenue bonds, series 1996 at 'BBB';
--$51.9 million revenue bonds, series 2001 at 'BBB'.
The Rating Outlook is revised to Positive from Stable.
The bonds are secured by a pledge of gross revenues and a debt service
KEY RATING DRIVERS
STRONG LIQUIDITY: TMH continues to maintain robust liquidity metrics for
the rating category, demonstrated by 208.1 days of cash on hand (DCOH)
and 208.7% cash to debt at the interim period ended June 30, 2014. TMH's
balance sheet metrics have consistently exceeded Fitch's 'BBB' category
medians of 144.7 DCOH and 91.7% cash-to-debt since fiscal 2007, and its
debt burden will continue to moderate with the series 2014 refunding.
MANAGEABLE DEBT PLANS: Post issuance, TMH will have a total $71.4
million in debt and capital lease obligations, equal to a low 2.1x
EBITDA and 22.1% capitalization. While future capital plans may include
an increase in long-term debt, Fitch believes they will be manageable
against TMH's balance sheet strength.
ADEQUATE PROFITABILITY: TMH continues to produce sufficient operating
cash flow, generating a 9% operating EBITDA and 10.4% EBITDA margin in
fiscal 2013. A decline to 7.7% operating EBITDA through the six-month
interim period ended June 30, 2014 resulted from below-budget
performance in the first quarter due in large part to very poor weather.
Still, cash flow was healthy enough to produce 3.5x coverage of pro
forma maximum annual debt service (MADS), which exceeds Fitch's 'BBB'
category median of 2.7x. Fitch anticipates TMH will rebound to prior
SUPPLEMENTAL REVENUE RISK LESSENED: While TMH's exposure to supplemental
and government reimbursement remains a fundamental concern, extension of
the Indiana provider tax program through June 30, 2017 lessens that risk
over the near term. TMH's exposure to governmental payors will continue
to present credit risk going forward as overall state and government
funding levels are reduced. Fitch views as positive that TMH leadership
remains committed to managing its net profitability absent supplemental
FUTURE CAPITAL PLANS: Pending further development of TMH's master
facility plans, future borrowing for capital expenditures may approach
$65 million; however, Fitch believes that TMH's financial profile could
absorb it at a higher rating level. Upward movement in the rating is
likely should TMH's sustain its healthy liquidity and return to positive
operating performance, and its future capital plans remain in line with
Serving northwest Indiana, TMH operates a 302-bed acute care facility in
Gary (Northlake campus), IN and a 313-bed acute care facility in
Merrillville, IN (Southlake campus), and other various clinical
entities. The system is also supported by a foundation. Total reported
revenues for 2013 (Dec. 31 fiscal year-end) were $346.7 million, which
Fitch adjusts to exclude investment income.
BALANCE SHEET STRENGTH
The Outlook revision to Positive is driven in significant part by the
consistent strength of TMH's liquidity position, against what Fitch
believes will be manageable capital and debt levels over the near- to
medium-term. TMH's balance sheet strength remains a key credit factor,
as demonstrated by a healthy 24.6x pro forma cushion ratio as of June
30, 2014, more than double Fitch's 'BBB' category median of 10.2x.
The series 2014 bonds are expected provide present value savings, and
reduce MADS to approximately $6.9 million from a level currently above
$9 million. In conjunction with this financing, TMH also plans to
defease its series 1996 bonds using equity. Post-issuance the series
2014 bonds will be the only bond debt outstanding. TMH also has an
additional $20 million in capital leases, with approximately $2.7
million in annual payments included in MADS.
FUTURE CAPITAL PLANS
TMH continues to formulate its master facility plan, which is likely to
result in a debt financing for increased capital expenditures within the
next two years. Over the near term, key projects will include $5
million-$8 million for an emergency department expansion and intensive
care renovation at Northlake, and other expansion and renovation
projects are being developed over the medium term. While Fitch believes
it is likely that TMH can accommodate increased spending and debt at a
higher rating level, upward rating movement will depend in part upon
review of finalized capital and financing plans over the next 12-24
TMH remains reliant upon supplemental revenues via the state and federal
DSH program, which is subject to pressure under health reform. Fitch
notes that the provider tax program in Indiana was recently extended
through June 2017, which should preserve Medicaid DSH funding though the
medium term. Following the expected decrease of Medicare DSH by $3.2
million in 2014, TMH expects to receive a total $42 million in Medicaid
and $10 million in Medicare DSH in 2014. Fitch believes TMH's continued
reliance on these supplemental funds will remain a credit concern for
the foreseeable future.
TMH covenants to disclose audited financial statements within 150 days
of fiscal year end. Annual disclosure is posted to the Municipal
Securities Rulemaking Board's EMMA system. While TMH does not covenant
to disclose quarterly statements, it does so voluntarily to bondholders
via EMMA. Quarterly disclosure includes balance sheet, income statement,
statement of cash flows, utilization, and management discussion and
analysis. Fitch notes that management has been very accessible, timely
and thorough in its disclosure.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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