Fitch Ratings has affirmed the 'BB' rating on North Carolina Medical
Care Commission bonds issued on behalf of Halifax Regional Medical
--$13.4 million series 1998.
The Rating Outlook is revised to Positive from Stable.
HRMC has an additional $6.5 million in direct placement bonds which
Fitch does not rate.
The bonds are secured by a pledge of gross receipts, a negative mortgage
lien, and a debt service reserve.
KEY RATING DRIVERS
RELATIONSHIP WITH NOVANT: The Outlook revision to positive reflects the
benefits being realized from HRMC's new relationship with Novant Health
(revs rated 'AA-'/Stable Outlook by Fitch). Following a one year
management agreement effective March 2014, HRMC is in the midst of the
due diligence phase of a likely merger with Novant Health. It is Fitch's
expectation that this strategic partnership will continue to provide
both operational and financial benefits to HRMC.
LOW DEBT BURDEN: HRMC's light debt burden allows for healthy debt
service coverage at its rating level despite light operating cash flow.
No additional debt is planned, and HRMC's capital reinvestment in recent
years has allowed for a stable average age of plant equal to 11.8 years
as of fiscal 2013.
STABLE BALANCE SHEET: HRMC's liquidity levels provide for some cushion
against its operating performance, and related metrics are favorable for
the rating category. In addition, consistent improvement in receivables
is clear, with days in A/R falling to 44.8 in fiscal 2013, from 59.4 in
MIXED SERVICE AREA CHARACTERISTICS: While HRMC's long-standing position
as a sole community hospital and market share leader is a significant
credit strength, the service area's overall socioeconomic profile is
generally unfavorable. HRMC is exposed to a high level of
government/self-pay revenues, equal to 73% of its gross revenues in 2013.
STABLE FINANCIAL PERFORMANCE: It is Fitch's expectation that HRMC will
sustain its current financial profile over the near to medium term,
supported by its relationship with a larger system. Upward rating
pressure is likely should HRMC sustain current levels of performance
over the next 12-24 months.
HRMC is a 204 licensed-bed community medical center providing primary
and secondary care services. The medical center is located in Roanoke
Rapids, approximately 75 miles northeast of Raleigh. The system also
includes approximately 60 physicians within a medical group and a
foundation. In fiscal 2013 (Sept. 30 year-end) HRMC had $89.9 million in
total operating revenue.
RELATIONSHIP WITH NOVANT
Following over a year of searching, HRMC has identified Novant Health as
its partner. In December 2013, HRMC announced its intent to merge with
Novant, following a one-year management agreement and du diligence
period. Following department of justice approval, Fitch anticipates that
HRMC will be folded into the Novant system sometime in late 2014 or
Fitch views this management agreement and proposed merger positively, as
it has begun to provide HRMC with strong system supports in management,
strategic direction, and improved operating performance. Should the
merger be executed as expected, it could provide HRMC with up to $35
million in capital commitment from Novant over five years.
For additional information on Novant Health, please see Fitch's report
titled 'Novant Health, Inc., North Carolina' dated April 10, 2013.
PROFITABILITY SUFFICIENT FOR DEBT
Despite a light operating EBITDA of 4.3% at fiscal 2013, HRMC covered
MADS by same at 1.8x in fiscal 2013. Fitch believes the management
agreement executed in March with Novant has already begun producing
operating benefits to HRMC, as evidenced by an improved operating EBITDA
of 8.9% and coverage of 3.5x through the June 2014 interim period.
Offsetting this improvement is HRMC's ongoing reliance on approximately
$5 million in Medicaid supplemental payments. This poses some concern,
as the long-term viability of Medicaid reimbursement is uncertain beyond
2014. Additionally, HRMC has some difficulty retaining a consistent
medical staff complement due to its rural location, which has led to
some volume fluctuations impacting profitability.
Still, through June 30, 2014 HRMC produced a solid 3% operating margin,
ahead of its breakeven budget. Capital expenditures are estimated near
$4 million, or just above 100% of depreciation expense.
BALANCE SHEET STEADY
With $22.4 million in unrestricted cash at June 30, 2014 HRMC had 105.3
days of cash on hand (DCOH) and 115.1% cash to debt, both solid for the
rating level. A light debt burden is evidenced by debt to capitalization
of 38.4% at June 30 2014, which helps offset HRMC's light and sometimes
variable cash flow.
Total debt equaled $19.5 million, which is 100% fixed rate.
Approximately $6.5 million of that debt is directly placed with BB&T and
has a seven-year term with options to renew. Per its indenture, HRMC
covered maximum annual debt service (MADS) of approximately $1.7 million
by 3.2x at June 30, 2014.
Disclosure to Fitch has been adequate with quarterly disclosure,
although only audited annual disclosure is required in the bond
documents. HRMC provides disclosure upon request to other third parties.
Fitch notes that quarterly disclosure includes a balance sheet and
income statements; however, a statement of cash flows and management
discussion and analysis is not provided.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30,
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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