SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has affirmed its 'A' rating on the following bonds issued on behalf of Forrest County General Hospital (Forest Health) (MS):
--$70,000,000 Mississippi Hospital Equipment and Facilities Authority revenue bonds, series 2010;
--$43,265,000 Mississippi Hospital Equipment and Facilities Authority, series 2009.
The Rating Outlook is revised to Negative from Stable.
Debt payments are secured by a pledge of the gross revenues of the obligated group.
KEY RATING DRIVERS
COMPRESSED FINANCIAL PROFILE: The Outlook revision to Negative reflects Forrest Health's elevated debt burden and pressured profitability. Though liquidity remains good for the rating category, leverage metrics worsened due to new borrowings, and profitability fell markedly below historical norms.
ELEVATED DEBT BURDEN: Forrest Health's debt burden is high for the rating category. In fiscal 2012, Forrest Health entered into two capital lease agreements ($46.6 million) and a $20 million bank loan. In addition, Forrest Health plans to undertake a $5 million bank loan in fiscal 2013. Pro forma maximum annual debt service (MADS), which includes the $5 million bank loan, increases to $20.4 million from $15.1 million. Pro forma MADS coverage by EBITDA was 2.8x in fiscal 2011 (1.9x interim) compared to the 'A' category median of 4.1x. Also, pro forma MADS accounted for 4.3% of total operating revenue in fiscal 2011 compared to Fitch's 'A' median of 2.8%.
PRESSURED CORE PROFITABILITY: Fitch expects fiscal 2012 profitability to end up well below budget and be shored up solely by $21.1 million in expected supplemental governmental funds. Forrest Health reported $13.3 million in operating income (2.9% operating margin) for the 11-month interim period (ended Aug. 31, 2012), which is down from the $31.2 million and $32.7 million reported for the prior year period and for fiscal 2011, respectively. This decline reflects depressed inpatient volumes at Forrest General Hospital as a result of implementation of a new electronic medical record system and associated expenses, lower Medicare rates, and rising labor expense associated with the opening of Forrest Health's Highland Hospital new facility.
SOLID LIQUIDITY: Balance sheet metrics exhibit very good liquidity relative to expenses as unrestricted cash and investments at Aug. 31, 2012 equated to 213.1 days cash on hand. Because of Forrest Health's new borrowings, cash to debt during the same time period fell to 119.9% but remains in line with Fitch's 'A' category median of 116.4%.
GOOD MARKET SHARE AND PHYSICIAN ALIGNMENT: Forrest Health's operations benefit from its strong market position and a highly-aligned physician engagement strategy.
HIGH DEPENDENCE ON DSH/UPL REVENUE RESUMES: As Fitch has noted in the past, profitability remains highly dependent on disproportionate share (DSH) and upper payment limit (UPL) payments. Though Forrest Health succeeded in posting positive operating margins for fiscals 2010 and 2011 without such funds, increasing operating expenses related to the organization's strategic growth initiatives will challenge management to maintain such gains.
SIGNIFICANT INVESTMENT IN PLANT: Forrest Health is in the second year of its sizable $150.9 million three-year capital plan. Capital spending on new construction and renovation activity is expected to culminate with the fiscal 2013 opening of Forrest Health's Orthopedic hospital, which Fitch views favorably. Funding sources rely on operating cash flow and new debt in the form of capitalized leases and bank loans.
WHAT COULD TRIGGER A RATING ACTION
INABILITY TO MEET PROJECTIONS: Fitch expects that Forrest Health will meet its fiscal 2013 projections, which includes operating income of $13.56 million (including DSH/UPL supplemental funds). If Forrest Health's financial performance does not meet expectations, downward rating pressure is likely.
High Debt Burden
Debt burden is high as long-term debt increased sharply in fiscal 2012 to $193 million from $136 million for the prior year. Having assumed two capitalized leases ($46.4 million) and a bank loan ($20 million) in fiscal 2012, Forrest Health has plans to undertake a $5 million bank loan in fiscal 2013. The two bank loans amortize over five years, which exacerbates debt burden as pro forma MADS increases to $20.4 million from $15.1 million, as provided by management and exclusive of the tax subsidy on the series 2010 Build America Bonds. Including the fiscal 2013 bank loan, pro forma MADS coverage by EBITDA was 2.8x in fiscal 2011 (1.9x interim) compared to the 'A' category median of 4.1x. Also, pro forma MADS accounted for 4.3% of total operating revenue in fiscal 2011 compared to Fitch's 'A' median of 2.8%.
Pressured Core Profitability
Profitability for the 11-month interim period (ending August, 31, 2012) was down markedly from the prior year period and from historical norms. Further, excluding net supplemental governmental funds, Forrest Health would have posted an operating loss unlike results for fiscals 2010 and 2011. The pressured interim profitability is related to higher labor expenses associated with the recent opening of Forrest Health's Highland Hospital replacement facility, depressed inpatient volumes, and lower Medicare reimbursement rates.
Balance sheet metrics remain solid despite the additional debt in fiscal 2012 and 2013. At Aug. 31, 2012, Forrest Health's unrestricted cash and investments totaled $232 million, which equals 213.1 days cash on hand and 119.9% cash to debt; both favorable compared to the respective 'A' category medians of 191 days and 116.4%. Cushion ratio of 11.4x is somewhat below the 'A' category median of 16.3x, but in line or improved from historical performance of 7.2x in fiscal 2009, 9.5x in fiscal 2010 and 11.5x in fiscal 2011.
Market Share and Physician Alignment
Market share improved to 45.3% in 2011, up from 44% the prior year. Wesley Medical Center, Forrest Health's primary competitor, experienced a decline in market share to 25.7% from 28.3%. Forrest Health leverages its strong relationship with the Hattiesburg clinic (a large multi-specialty medical group in Hattiesburg) and has developed a hub-and-spoke model in southern Mississippi through hospital affiliations with smaller rural hospitals. Fitch expects Forrest Health's market share to continue to grow as the organization leverages its physician relationships to enhance referrals from several rural hospitals in the secondary service area.
Dependence on Supplemental Governmental Funds Resumes
As Fitch has noted in the past, profitability was highly dependent on disproportionate share and upper payment limit supplemental funds (DSH/UPL). In response to the uncertainty of DSH and UPL funding, management undertook strong cost control and revenue enhancement measures in fiscals 2009 and 2010. As a result, Forrest Health posted operating income of $32.7 million and $25.2 million for fiscals 2011 and 2010, respectively, including net DSH/UPL funds of $24 million and 24.9 million. However, in light of interim results and management's financial projections, reliance on DSH/UPL funds is set to resume in fiscal 2012 through 2015, which Fitch views negatively. Forrest Health anticipates receipt of $22.1 million in DSH/UPL funds for fiscal 2013.
Forrest Health is in the second year of its sizable $150.9 million three-year capital plan. Capital spending on new construction and renovation activity is expected to culminate with the fiscal 2013 opening of Forrest Health's Orthopedic hospital. This new facility was financed by a $31.7 million capital lease in fiscal 2012. Management expects operations at this facility to be staffed by a 13-member orthopedics group affiliated with Forrest Health and to be accretive financially.
In fiscal 2012, Forrest Health completed construction and opening of its new 60-bed Highland Hospital replacement facility. The $61.7 million project was completed on time and on budget. Lastly, Forrest Health is installing new electronic medical record and patient accounting software at its flagship Forrest General Hospital. The $25.7 million project is expected to be completed in fiscal 2013. Management anticipates receipt of $20 million in meaningful use funds over the next four years, although such funds are not reflected in the pro forma figures.
Outlook to Negative
Fitch believes that Forrest Health's financial profile has been negatively affected by markedly increased debt burden and pressured profitability. A rating downgrade is precluded at this time due to good balance sheet strength and Fitch's expectation that profitability should rebound in response to Forrest Health's strategic growth initiatives. However, failure to meet projections of an operating income of $13.6 million in fiscal 2013 could result in a rating downgrade.
About the Organization
Forrest Health owns and operates two hospitals including Forrest General Hospital, a 400-staffed bed, acute-care hospital, with an 88-bed chemical dependency and psychiatric facility and 24-bed rehabilitation unit, located in Hattiesburg, MS, and Highland Community Hospital, a 95-bed, full-service acute care medical facility located in Picayune, MS. FCGH also leases 33 beds for long-term acute care to Regency Hospital, and operates, but does not own, Walthall County Hospital in Tylertown, MS., Jefferson Davis Community Hospital in Prentiss, MS., and Marion General Hospital in Columbia, MS.
Forrest HealthCGH covenants to disclose quarterly and annual financial information and utilization statistics to the MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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Source: Fitch Ratings