Oct 1 (Reuters) - (The following statement was released by the rating agency)
CHICAGO, October 01 (Fitch) Fitch Ratings has affirmed the 'BB+' rating on the following revenue bonds issued by Norman Regional Hospital Authority, OK: --Approximately $88.5 million series 2007; --Approximately $67 million series 2005; --Approximately $45.9 million series 2002; --Approximately $16.5 million series 1996B. The Rating Outlook is revised to Positive from Stable. SECURITY The bonds are secured by a pledge of gross revenues of the obligated group. KEY RATING DRIVERS IMPROVING FINANCIAL PROFILE: The Outlook revision to Positive from Stable reflects Norman Regional Hospital's (NRH) sustained improvement in financial profile driven by strong operating profitability resulting in improving liquidity indicators and moderating leverage position. NRH posted operating EBITDA margins of 10.9% and 11.5% in fiscal 2011 and 2012, respectively, which handily exceeds the 'BBB' median of 8.3%. HIGH DEBT BURDEN: NRH's debt burden is high as indicated by maximum annual debt service (MADS) equating to 5% of fiscal 2012 revenues compared to the 'BBB' category median of 3.3%. Thus, despite strong cash flow generation, coverage of maximum annual debt service (MADS) by EBITDA of 2.1x and 2.3x in fiscal 2011 and 2012, respectively trails the 'BBB' category median of 2.8x. GROWING LIQUIDITY: Since fiscal year end 2010, NRH's unrestricted cash and investments has grown from $68.4 million to $110.9 million at FYE 2012. As result liquidity indicators at June 30, 2012 (138.6 days cash on hand, 5.8x cushion ratio and 48.7% cash to debt) are significantly improved and are approaching investment grade medians. LEADING MARKET SHARE: NRH holds a leading market share of approximately 55% in its primary service area of Cleveland County compared to about 9% for its closest competitor. Since City Council must give approval to any hospital or physician construction project, entry into the service area has been limited. WHAT CAN TRIGGER A RATING ACTION: Continuation of recent operating performance resulting in improved liquidity position and further moderation of NRH's debt burden should lead to an upgrade of the rating over the next 12-24 months. CREDIT PROFILE The Positive Outlook reflects NRH's continued improvement to its financial profile with profitability, liquidity and capital related metrics all improved year-over-year. NRH's position as the market leader in the service area is another credit strength. Sustained improvement in financial performance over the next one to two years will likely result in positive rating action. The primary credit concern continues to be NRH's high debt burden, which although improved from fiscal 2011, remains high. At fiscal 2012 year end June 30, 2012, NRH had $110.9 million in unrestricted cash and investments, a 14% increase from fiscal 2011, equating to 138.6 days cash on hand, which is in line with the 'BBB' category median of 138.9 days. Cash to debt of 48.7% and cushion ratio of 5.8x are both up from the prior year but still below the respective 'BBB' category median of 82.7% and 9.4x. In fiscal 2012 NRH posted a 2.2% operating margin, which exceeded its budgeted target of 1.7%. This improvement can be attributed to both an increase in revenue (up 9% year-over-year) and expense management. Better volumes, especially an 8% increase in outpatient surgeries, contributed to the revenue growth. Cost reduction efforts are a priority; the board has set a directive to reduce $32 million in costs cumulatively over the next three years. These initiatives include achieving labor efficiencies, decreasing supply costs and finding pharmacy savings. Solid operating cash flow is expected to be sustained while operating margins gradually improve. In 2010 NRH ended a period of significant capital spending, which included the building of its new HealthPlex facility that opened in 2009. NRH's average age of plant in fiscal 2012 was nine years compared to the 'BBB' category median of 10.5 years, reflecting its strong investment in plant. Because of significant capital spending from 2008-2010, NRH's debt burden is high. This is Fitch's primary credit concern as MADS equated to a significant 5% of fiscal 2012 revenues, which is improved from 5.5% in fiscal 2011 and 5.7% in fiscal 2011 but still well above the 'BBB' category median of 3.3%. Future capital spending continues to be modest; the capital budget for 2013 is $13.5 million, which Fitch believes is manageable. The service area is a credit positive with an unemployment rate in Cleveland County of 4.4% as of July 2012, which is below the national average. Government payors have been relatively stable at a moderate 53.7% of gross revenues in fiscal 2012. Provision for bad debt is trending down, declining 5% in fiscal 2012 from fiscal 2011. NRH controls 55% of the market share in the primary service area, which as a credit strength. The closest competitor, Integris Southwest Medical Center of Oklahoma, has just 9% of the market. Norman Regional Hospital Authority is a public trust that was created by the city to operate Norman Regional Hospital, a 337 licensed bed acute care hospital. The system is currently composed of Norman Regional Hospital, 45-bed Moore Medical Center and HealthPlex Hospital, a 136 bed hospital located four miles from the main hospital that opened in October 2009. Total operating revenue in fiscal 2012 was $386.2 million. NRH discloses quarterly and annual financial information and utilization statistics to the MSRB's EMMA system.
(Reporting By Joan Gralla)