Fitch Affirms Dimensions Health Corporation's (MD) Rev Bonds at 'CC'
Fitch Ratings affirms the 'CC' rating on the approximately $57 million Prince George's County, Maryland, project and refunding revenue bonds series 1994.
DHC is the operator of three county-owned facilities known as Dimensions Health System (DHS).
Debt payments are secured by a pledge of the gross revenues of the obligated group and a fully funded debt service fund.
KEY RATING DRIVERS
HEIGHTENED RISK UNTIL LONG-TERM PLAN IS IMPLEMENTED: DHS' financial performance continues to be dependent on annual appropriations from the county and state. The failure to secure a long-term solution, which requires finding sufficient sources of funding for its significant capital needs, is essential for DHS' long-term viability.
TRANSFORMATION OF DHS: The implementation of the memorandum of understanding (MOU) between DHS, the state of Maryland (the state), Prince George's County (the county), the University of Maryland Medical System (UMMS) and the University System of Maryland (USM), with the goal of reorganizing DHS, is proceeding according to plan with a certificate of need (CON) for a new facility expected to be submitted by March 2013.
NO FINANCIAL FLEXIBILITY: DHS' financial profile continues to be precarious, as reflected in the going-concern language in its audits since 2005. Although financial results improved for the most recently ended fiscal year, the bulk of the improvement is related to an $8 million increase in county and state grant funding, which are both subject to annual appropriation. DHS is reliant on these funds to support its operations. The county and state have pledged to continue to provide $30 million of annual financial assistance until 2015, by which time it is expected that a permanent plan for the transformation of DHS will be in place.
IMPLEMENTATION OF OPERATIONAL IMPROVEMENT: Management is focused on streamlining system operations in order to reduce operating losses and increase revenues.
WHAT COULD TRIGGER A RATING ACTION
Although the partnership to transform DHS is viewed favorably, it is unlikely that a rating change will occur until a definitive plan to address DHS' financial and capital needs has been finalized and the sources of payment for implementation have been identified.
The affirmation of the 'CC' rating reflects DHS' stressed financial situation which requires the ongoing financial support of the state and the county (both rated 'AAA' with a Stable Outlook by Fitch) in order to meet its financial and bond payment obligations.
Reflecting the essentiality of DHS' role as the safety net provider, both the state and the county have committed to continue their grant support to DHS of $15 million each for fiscal 2012. This level of support is also expected to be maintained for 2013-2015, subject to appropriation approval, in order to enable DHS to continue to meet its operating needs, albeit at a minimal levels, and debt service payments. The state is also expected to appropriate an additional $24 million for DHS' capital needs over the next three years.
Fitch views as positive the July 21, 2011 announcement of a partnership between DHS, the state and the county and UMMS, for developing a comprehensive plan to provide for health care needs of county residents, which is intended to address the long-standing financial and capital needs of DHS. One of the articulated goals of the partnership is the plan to build a new regional medical center and health sciences campus to be located in central Prince George's County, which would augment and/or replace some of DHS' facilities. However, this solution will require significant state and local funding support, which has not yet been identified. In addition, several prior attempts at addressing DHS' situation had proven to be unsuccessful.
UMMS has already completed an initial study of the health care needs of the county's population. The study estimated the costs of implementing the strategy, not including the costs of an ambulatory network, to be approximately $600 million. The ultimate plan will also need to address approximately $78 million of DHS' unfunded pension and post-retiree liabilities, outstanding debt and unfunded retiree benefits, and will also require a transfer of the ownership of DHS' assets from the county to the new entity. Currently, the MOU parties are in Phase Ib of the plan, which will determine the size, scope and funding sources for the new regional facility.
Fitch views as positive that the process spelled out in the MOU is proceeding according to plan with the various partners implementing their respective roles. The MOU has not been affected by the recent turmoil in DHS' executive leadership. DHS' CEO since August 2010 resigned effective Feb. 25, 2012 as a result of an investigation pointing to his possible involvement in a corruption case involving a convicted county executive. The board appointed the system's CFO, who had been serving as acting CEO since Dec. 5, 2011, to be permanent CEO on March 22, 2012.
DHS' Prince George's Hospital Center serves as one of two safety net hospitals in the county, which together with other system inpatient and outpatient facilities provides for the essential health care needs of the underinsured and indigent population of the service area. The system has a history of extremely weak financial performance that is consistently below Fitch's investment grade medians. DHS' audited financial statements have been receiving 'going concern' opinions for the past seven years.
DHS ended fiscal year 2011 (year end June 30) with a positive operating income of $13.4 million, equal to an operating margin of 3.6% (Fitch includes grant funds in operating income; excluding the grant revenues, DHS would have reported an operating loss of $17.8 million). The stronger fiscal 2011 operating results were a function of both higher grant funding and the initial results of a financial improvement initiative. Grant revenues in fiscal 2012 were $31.1 million, as compared to $22.7 million in the prior year. For the eight-month interim period ended Feb. 29, 2012, DHS reported operating income of $7.2 million (includes grant revenues of $23.7 million), for operating margin of 2.7%. Excluding the grant revenues, the interim period ended with operating loss of $14.7 million. Underscoring the level of dependence on outside sources of revenue, for the same eight-month period in the prior year, DHS recorded an operating loss of $8.8 million due to a delay in the receipt of grant funding (loss of $17.6 million before the grant receipts).
Coverage of maximum annual debt service (MADS) by EBITDA was solid at 3.8 times (x) in fiscal 2011 and 3.4x through the interim period. DHS' debt burden is relatively manageable with MADS representing a moderate 2% of revenues. Liquidity continues to be extremely weak, days cash on hand (DCOH) were at 35.4 days at fiscal 2011 year-end and dropped to 24.4 days for the interim period, reflecting the lag in the receipt of the remainder of the 2012 grant funding.
A sale of the 61 long-term beds at the Gladys Spellman Specialty and Nursing Center to a for-profit operator is in process, with proceeds of approximately $486,000 expected before 2012 fiscal year end. The remaining 46 chronic care beds were transferred to Laurel Hospital, with 22 in use, and management reports positive results from the improved reimbursement base.
Dimensions Health System had $374 million in total revenues for fiscal 2011. The system posts annual and interim financial statements on the 'www.dimensionshealth.com' website, which does not provide management analysis and commentary, but management analysis and commentary is provided to bondholders.
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 20, 2011;
--'Nonprofit Hospitals and Health Systems Rating Criteria', Aug. 12, 2011;
--'Fitch Affirms Dimensions Health Corporation's (MD) Rev Bonds at 'CC', Oct. 31, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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