July 2, 2012 / 8:26 PM / 5 years ago

TEXT-Fitch affirms William Health System, Va. revs

July 2 - Fitch Ratings has affirmed the rating on the following bond issued on behalf of Prince William Health System (PHWS) at 'A'. --$66.7 million series 2002 Industrial Development Authority of the City of Manassas, Virginia Hospital Revenue Bonds --$8.5 million series 1993 Industrial Development Authority of the County of Prince William, Virginia Hospital Revenue Bonds The Rating Outlook is Stable. KEY RATING DRIVERS MERGER INTO NOVANT HEALTH: Prince William Health System's 2009 merger into Novant Health (Novant, revenue bonds rated 'AA-'; Stable Outlook, by Fitch) provides many benefits including an unconditional guarantee to provide funds for payment of debt service and a capital commitment of approximately $240 million. STRONG OPERATING RESULTS: Financial performance has continued to improve since fiscal 2008 with operating and operating EBITDA margins of 7.6% and 14.3% in fiscal 2011, exceeding Fitch's 'A' category medians of 2.6% and 9.4%, respectively. ROBUST BALANCE SHEET: Unrestricted cash and investments totaled approximately $168 million as of March 31, 2012, providing robust support for payment of debt service with a cushion ratio of 22 times (x) and 212.6% cash to debt, easily exceeding Fitch's 'A' category medians of 15.4x and 113.8%, respectively. LEADING MARKET SHARE IN A FAVORABLE SERVICE AREA: PWHS holds a strong 52% leading market share in its primary service area (PSA), which is characterized by favorable demographic and economic indicators which exceed both state and national averages. SECURITY The bonds are secured by a pledge of the gross receipts of the obligated group and an unsecured guarantee of debt service payment by Novant. CREDIT SUMMARY The affirmation of the 'A' rating is supported by the benefits derived from joining the Novant system (revenue bonds rated 'AA-'; Stable Outlook by Fitch), strong operating results, a robust balance sheet and a leading market share in a favorable service area. As part of the merger agreement executed in 2009 between PWHS and Novant, Novant unconditionally guarantees that it will provide funds, if necessary, to pay PWHS debt service. Fitch views the guarantee agreement favorably, although it does not provide for any direct recourse for PWHS bondholders. Additionally, Novant agreed to provide $240 million to PWHS for capital expenditures. Additional benefits to PWHS from Novant include physician recruitment initiatives and managed care contracting. Operating profitability continued to improve, averaging 4.7% between fiscal 2009 and fiscal 2011 representing a significant improvement over the negative 0.3% average between fiscal 2006 and fiscal 2011. Operating and operating EBITDA margins of 7.6% and 14.3% in fiscal 2011 were strong relative to Fitch's 'A' category medians of 2.6% and 9.4%, respectively. The improved operating performance reflects a continued focus on expense management and operating efficiencies. This focus is reflected in a decrease in personnel costs as a percent of revenue decreased from 51.3% in fiscal 2008 to 39.6% in fiscal 2011. The strong profitability, combined with a moderate debt burden, produced robust MADS coverage of 4.7% EBITDA in fiscal 2011 relative to Fitch's 'A' category median of 3.7x. Unrestricted cash and investments increased approximately 13% since fiscal 2010 to $168.3 million as of March 31, 2012, providing robust support for payment of debt service. Cushion ratio of 22 times (x) and 212.6% cash to debt easily exceeded Fitch's 'A' category medians of 15.4x and 113.8%, respectively. PWHS maintains a strong and leading 52% market share in its primary service area (PSA). The PSA is characterized by favorable demographics and economic indicators which exceed both state and national averages. Prince William County (general obligation bonds rated 'AAA' by Fitch) had a low unemployment rate of 4.7% in November 2011 due to the stability provided by the presence of local military bases and the federal government. The Stable Rating Outlook reflects Fitch's expectation that PWHS will maintain its improved operating performance and liquidity position and that Novant will continue to provide an unconditional guarantee on the timely payment of debt service. Continued strong operating profitability and improvement in liquidity metrics could result in upward rating movement. PWHS, headquartered in Manassas, Virginia, operates a 170 licensed bed acute care community hospital and other healthcare related entities. Total operating revenues equaled $246.6 million in fiscal 2011. PWHS covenants to provide annual disclosure within 150 days of the end of each fiscal year. PWHS provides quarterly disclosure to bond holders upon request within 45 days of the end of each fiscal quarter.

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