Nov 8 - Fitch Ratings has affirmed the ‘A’ rating on Jackson County Schneck Memorial Hospital’s (JCSMH) outstanding debt issued by Indiana Finance Authority. The series 2006A&B bonds were issued by the Indiana Health and Educational Facility Financing Authority. The bonds are listed below:
--$15.9 million series 2010; --$15 million series 2006A; --$19.2 million series 2006B. The Rating Outlook is Stable. SECURITY: The bonds are secured by gross revenues, a debt service reserve fund, and any other property which is subjected to the lien of the bond indenture or pledged/or assigned to the bond trustee. KEY RATING DRIVERS STRONG FINANCIAL PROFILE: JCSMH continues to have a strong financial profile, which is highlighted by excellent balance sheet indicators, solid profitability, and robust debt service coverage. Fitch views JCSMH’s financial profile as a primary credit strength. DOMINANT MARKET POSITION: JCSMH has a leading and dominant market share of approximately 67% in its primary service area (PSA). The hospital’s closest competitor has an 11% position. MANAGEABLE CAPITAL NEEDS: With no large capital needs, JCSMH has very manageable capital plans, which calls for approximate expenditures of $15 million over the next three fiscal years. Management intends to fund all capital items, which is primarily routine facility maintenance and renovations, from unrestricted cash and/or operating cash flow. DIMINISHING DEBT BURDEN: Maximum annual debt service (MADS) of $3.4 million represented 2.7% of total revenues through Sept. 30, 2012 (nine-months unaudited), which is consistent with Fitch’s median of 2.8% and marks the fourth consecutive year of a declining debt burden. SMALL REVENUE BASE: With total net operating revenues of approximately $110 million in fiscal 2011 (Dec. 31; audited), JCSMH has a small revenue base for the rating category. However, Fitch believes the organization’s financial strength helps alleviate the inherent risks associated with smaller providers. CREDIT PROFILE RATING AFFIRMATION OF ‘A’ The rating affirmation of ‘A’ reflects the organization’s strong financial profile, leading market position, and manageable capital needs. Fitch’s main credit concerns include JCSMH’s elevated bad debt expense and relatively high portion of Medicaid payors. Nine-months through fiscal 2012 (Sept. 30, 2012; unaudited), JCSMH recorded operating income of $7.2 million, which translated into a 7.6% operating margin and 15.9% operating EBTIDA margin. These metrics compared favorably against Fitch’s ‘A’ category medians of 2.8% and 9.8%, respectively. Moreover, historical operating profitability is viewed favorably by Fitch as JCSMH has averaged a 9% operating margin and 18.5% operating EBIDTA margin over the past four fiscal years. Strong profitability has led to robust debt service coverage as JCSMH has averaged 5.8x MADS coverage over the past four years and had 7.6x EBITDA coverage through the September 2012 interim period. At Sept. 30, 2012, JCSMH had approximately $121.6 million of unrestricted cash and investments, equating to 487.9 days cash on hand, 35.7x cushion ratio, and 250% cash to debt. Fitch views the organization’s balance sheet metrics favorably and provides JCSMH ample financial cushion for its small revenue base. Bad debt as a percentage of total net operating revenue reached an all-time high for the organization in fiscal 2011 at 13.1%, totaling $17.6 million, which is increased from $13.2 million in the previous year. Additionally, JCSMH’s Medicaid payor base was 12% of gross revenues in fiscal 2011, which is relatively high and exposes the organization to reimbursement risk at the federal and state level. Management believes both the increased bad debt expense and elevated level of Medicaid payors is resultant from a service area that was adversely affected by the national recession. OUTLOOK The Stable Outlook reflects Fitch’s expectation that JCSMH will continue to maintain its strong financial profile and leading market position in the service area. Positive rating pressure may be warranted if JCSMH continues to produce strong cash flows, while further reducing its debt burden. DEBT PROFILE JCSMH’s debt portfolio is approximately 60.9% fixed rate with the remaining 39.1% made-up of variable rate bonds. The organization’s outstanding series 2006B bonds are held by BB&T Corporation (BB&T; rated ‘A+/F1’ by Fitch) through October 2014. At that time, BB&T may exercise a put option on the bonds, or refinance the remaining principal with JCSMH. If the put is not exercised, JCSMH may re-issue bonds with another bank or in the bond market. The aggregate MADS used in Fitch’s analysis incorporates all outstanding debt including note payables. ORGANIZATIONAL OVERVIEW Jackson County Schneck Memorial Hospital is located in Seymour, IN, approximately 60 miles south of Indianapolis. As a county-owned acute care hospital, JCSMH is licensed for 166 beds and had total revenue of $110.1 million in fiscal 2011. JCSMH has 93 staffed beds, plus 20 beds utilized primarily for outpatient surgery and observation patients. DISCLOSURE JCSMH has covenanted to provide financial information to the MSRB’s EMMA system. Quarterly disclosure includes a balance sheet, income statement, and utilization statistics. Management was candid and timely in its responses to Fitch during the credit review process.