Fitch Ratings has downgraded to 'A-' from 'A' the rating on the
following series of bonds issued by Jacksonville Health Facilities
Authority (FL) on behalf of Brooks Health System (BHS):
--$91.7 million series 2007.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues of the obligated
group and a mortgage on Brooks Rehabilitation Hospital.
KEY RATING DRIVERS
INCREASED DEBT BURDEN: The rating downgrade to 'A-' from 'A' reflects
the increased debt burden since Fitch's last rating. Maximum annual debt
service (MADS) of $14.5 million is up from the $9.4 million used in
Fitch's last rating review and represents a very high 12.6% of 2013
total revenues. Despite strong EBITDA generation, historical coverage of
MADS is light at 1.9x and 1.6x in 2013 and 2012, respectively. However,
coverage of MADS by EBITDA through the six-month interim period ended
June 30 was stronger at 2.8x.
ROBUST LIQUIDITY: A key credit strength supporting the 'A-' rating
remains BHS's strong liquidity indicators. At June 30, unrestricted cash
and investments of $296.3 million equated to 886.9 days cash on hand
(DCOH), 20.5x cushion ratio, and 134.2% cash-to-debt, all of which
exceeded Fitch's 'A' category medians by a large margin. BHS's draws on
several lines of credit, totaling $37.2 million at June 30, 2014, were
included in total long-term debt for Fitch's analysis.
LEADING MARKET POSITION: BHS has a dominant 95% market share of
inpatient rehabilitation services in the North Florida and Southeast
Georgia market, a large network of outpatient clinics, as well as
post-acute services, including home health and skilled nursing facility
(SNF). In addition, BHS is in the process of constructing a 111-bed SNF,
as well as 10,000 square foot flagship outpatient facility.
MODEST REVENUE BASE: BHS's revenue base, although increased from $101.5
million in FY2010, remains small with $115 million in total revenue in
FY2013, largely due to its specialized services in rehabilitation.
Additionally, Medicare payments make up a large 54% of BHS's gross
reimbursement, contributing to its modest revenues.
MAINTENANCE OF CURRENT PROFILE: Fitch expects BHS to maintain its
balance sheet strength and to produce operations that support stable
debt service coverage.
BHS is located in Jacksonville, Florida and consists of Brooks
Rehabilitation Hospital (157 beds); Bartram Crossing, a 100-bed SNF;
Bartram Lake, a 61-room assisted living facility with two memory units;
multi-site outpatient centers; Brooks Health Development, Brooks Health
Foundation, Brooks Home Care Advantage, a comprehensive home health
service; and BH Holdings.
The 'A' rating is supported by BHS's strong liquidity metrics and its
stable position as the dominant provider of rehabilitation services in
the North Florida and Southeast Georgia market, which is further
supported by its expanding role as a provider of a wide spectrum of
post-acute care services. Fitch views BHS's liquidity as a major credit
strength, which helps to offset a concentrated revenue base. Fitch's
main credit concern is BHS's high debt burden with relatively weak
coverage relative to Fitch's 'A' category median.
ELEVATED LEVERAGE POSITION
The further increase in debt since Fitch's last review combined with
BHS's future expansion plans (which are likely to require additional
borrowing) are the main driver of the downgrade. Fitch had previously
expressed a concern regarding BHS's ability to take on additional debt
without a negative impact on its rating. In 2013, BHS issued $35 million
of bank-placed debt. Further, the corporation has approximately $37.2
drawn under a line of credit agreement. MADS of $14.5 million represents
a very high 12.6% of 2013 revenues. Coverage of 1.9x in 2013 is weak
relative to Fitch's 'A' category median of 3.8x. However, Fitch notes
that coverage through the six-month interim period was a much improved
2.8x.BHS may use an additional $7 million draw on its line of credit by
the end of the 2014 calendar year to finance the land acquisition and
the cost of the outpatient center.
The 2013 private placement was a fixed rate, 20-year loan with a 2.4%
interest rate. BHS has two other private-placement loans with
variable-rate interest rates with par of $60.4 million. BHS's debt
composition is 44% variable and 56% fixed rate. BHS has swaps on its
outstanding series 2007, 2010 and 2011 long-term debt with a notional
par of $152 million. The mark-to-market valuation at June 30, 2014 was a
negative $4.7 million and there is no collateral posting requirement on
the largest $91.7 million fixed- to variable-rate swap on the series
2007 bonds. The other variable- to fixed-rate swaps have collateral
posting at $10 million; posting is currently not required.
STRONG LIQUIDITY POSITION
Fitch views BHS's liquidity position as a major credit strength. At June
30, 2014 (the interim period), BHS reported unrestricted cash and
investments of $296.3 million, an increase of 40% from two years ago.
BHS's liquidity at the 2014 interim period translated to a formidable
886.9 DCOH, 22.1x cushion ratio, and 155% cash-to-debt, all of which
significantly exceed Fitch's respective 'A' category medians of 199.2
DCOH, 17x and 131.2%. BHS's investment allocation is somewhat
aggressive, with 80% invested in equities, 10% in fixed income and 10%
in alternative investments.
LEADING MARKET POSITION
BHS holds a leading market share of 95% of the inpatient rehabilitation
admissions within a 60-mile radius around Jacksonville. Inpatient
admissions increased every year over the last four years and were 4.6%
higher year-over-year through the six-month interim period. BHS has
faced very limited competition for rehab services in its market. An
HCA-owned facility is planning to open a 20-bed rehab unit at one of its
hospitals 20 miles from BHS, which is not likely to have a major impact
on BHS volumes. BHS continues to see strong demand for its outpatient
services through its operation of 28 clinics in a wide geographic area.
BHS is also implementing a strategy of being a provider of a
comprehensive spectrum of post-acute services. Brooks Bartram Crossing,
the 100-bed SNF, opened in July 2013 in a favorable location across the
street from Baptist Medical Center South in Jacksonville and is
connected to a new 61-bed assisted living facility on the same campus,
which includes two 12-bed memory care units, the second of which will
open shortly. BHS also operates a 40-bed rehab unit at Halifax Health
(rated 'BBB', Negative Watch by Fitch) as a joint venture and operates a
35-bed SNF at St. Vincent's Southside Hospital, which is focused on the
treatment of joint replacement.
BHS is also planning to construct a 111-bed SNF - University Crossing -
next to the BHS main campus. The approximately $22 million cost of the
facility will be funded with a portion of the proceeds of a $35 million
private-placement loan which was issued in 2013. Construction is
expected to be completed in the fall of 2015. University Crossing will
have two specialty units - a 10-bed low-level brain injury unit and a
12-bed ventilation unit. Additionally, BHS will build a large, 10,000
square foot flagship outpatient facility in Orange Park, which will
include a neuro recovery unit. Completion of the $5 million facility is
anticipated in the fall of 2015. BHS is also purchasing land in the
Orange Park area for future development.
WEAK OPERATING RESULTS
Operating performance has historically been weak with operating losses
fluctuating between $4 million in fiscal 2010 to $9.3 million in 2013.
However, through the interim period ended, BHS recorded a $3.4 million
operating profit, even though management still budgets for a smaller
$2.4 million loss for FY2014 and projections call for positive operating
results only in FY2016. BHS participates in a Medicare Bundled Payment
Program for certain diagnoses and to date the experience has been
positive, with net savings expected at approximately $2 million in this
BHS has covenanted to provide quarterly disclosure within 45 days of
each fiscal quarter-end and audited financial statements within 120 days
of each fiscal year-end to the Municipal Securities Rulemaking Board's
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria, May 30,
--'Revenue-Supported Rating Criteria, June 16, 2014.
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
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