Fitch Affirms Orange Regional Medical Center, NY's Revs at 'BB+'; Outlook Stable
Fitch Ratings has affirmed the 'BB+' rating on the approximately $256 million of Dormitory Authority of the State of New York, Orange Regional Medical Center (ORMC) Project, revenue bonds series 2008.
The Rating Outlook is Stable.
The bonds are secured by a revenues pledge and a mortgage.
KEY RATING DRIVERS
REALIZING BENEFITS OF NEW FACILITY: ORMC successfully transitioned into its new replacement facility in August 2011, and the much improved operating EBITDA margin, 10.2% through the six-month interim period ended June 30, 2012, is an indication of improved operating efficiency of the new facility.
OPERATING LOSSES PERSIST NEAR TERM: However, given the increase in depreciation and interest expense from the new facility, ORMC budgeted a $7.7 million loss from operations for fiscal 2012 and Fitch expects that operating losses are likely to continue in the near term. However, operating EBITDA margins are expected to remain solid.
ELEVATED DEBT BURDEN: Owing to the cost of the new facility, ORMC's debt burden is very high and one of the main factors of its below investment grade rating. Maximum annual debt service (MADS) coverage by EBITDA was at 1.7 times (x) for the six months ended June 30, 2012, and MADS is a very high 6.3% of revenues, as compared to the below investment grade median of 2.7%.
INVESTING IN PROGRAMS: As a response to both softening inpatient volumes and in an effort to further stem outmigration for services, management is investing in a number of programs which are expected to bolster volumes and generate revenues. These include a newly opened Level II NICU, filing Certificate of Need (CON) applications for an open heart program and for Level II trauma designation and establishing a separate pediatric emergency department.
WEAK LIQUIDITY: Days cash on hand (DCOH) have been maintained at 73 days for the last 18 months, close to the below investment grade median of 75 DCOH, but both the 2.9x cushion ratio and cash to debt at 25% are significantly below the non-investment grade medians.
WHAT COULD TRIGGER A RATING ACTION
FAILURE TO SUSTAIN SOLID CASH FLOW: Given its high debt burden, it is imperative that ORMC maintains the solid operating cash flow exhibited through the fiscal 2012 year to date period. The inability to sustain cash flow would likely result in negative rating pressure.
Debt payments are secured by a gross receipts pledge and a mortgage pledge.
ORMC ended fiscal 2011 (year end Dec. 31) with an operating loss of $4.5 million, translating to a negative operating margin of 1.3% and operating EBITDA margin of 5.7%. The operating loss was in a large part related to the need to still operate the two hospitals before the completion of the new facility in August 2011, as well as a number of one-time expenses associated with the move to the new hospital and the staff training and adjustment to a new facility.
However, based on the six-month interim period ended June 30, 2012, ORMC is beginning to realize the benefits of increased operating efficiency with the move to the new facility. While ORMC reported operating loss of $3 million for the 2012 interim period, partially driven by increased depreciation expense, equal to a negative operating margin of 1.6%, operating EBITDA margin was a robust 10.2%, comparing favorably even to the 'BBB' rating median of 8.3%. ORMC budgeted to end fiscal 2012 with operating loss of $7.7 million, but expects to end with a lower loss based on $3 million prior year settlement which had not been budgeted for. ORMC's fiscal 2012 budgeted operating EBITDA is $38.7 million (11% operating EBITDA margin).
Despite decline in discharges of 2.9% in 2011 and 8.5% for the interim period, management reports that overall market share is stable. Volumes were initially slower as physicians and staff had to become accustomed to the new facility, but census is slowly building up. Some of the decline in discharges was impacted by increasing observations days, which the hospital only began tracking in January of this year. Management is focused on revenues generation and is proceeding with developing several new programs, which should be accretive to profitability, but may, such as in the case of the open heart program, take some time before becoming operational.
Market share for the primary and secondary service area combined, was reported at 38.2% for 2011, double that of ORMC's nearest competitor, St. Luke's Cornwall Hospital with a 19.1% share. Crystal Run Healthcare (Crystal Run), a 185 physician strong multispecialty clinic located in close proximity to ORMC, is a source of 35% of all inpatient admissions to the hospital and refers its patients primarily to ORMC. ORMC recruits physicians with the assistance of Crystal Run and is contracting to staff its pediatric emergency department with pediatric subspecialists from Crystal Run.
ORMC has a relatively heavy debt burden, which Fitch would expect to moderate over time. MADS EBITDA coverage, based on $23.3 million MADS, was 0.8x in fiscal 2011 and is reported at 1.7x through the six months ended June 30, 2012. Debt service coverage calculated under ORMC's bond document requirements was 1.6x in fiscal 2011. Fitch uses MADS number of $23.3 million which includes, in addition to ORMC's series 2008 bond debt service, several loans and capitalized leases, which have a short amortization structure. Starting with fiscal 2015, MADS declines to $20.2 million. The debt profile is 100% fixed rate, which is appropriate for the rating level.
The Stable Outlook is based on Fitch's expectation that the new facility will enable ORMC to continue to realize improved efficiency, which together with programmatic investment, will result in sustained strong operating cash flow. The relatively modest capital needs should, together with higher profitability, results in improved liquidity over time. However, given its high debt burden, the failure to sustain the strong cash flow exhibited in fiscal 2012 would likely result in downward rating pressure. Upward rating movement is limited until there is significant improvement in debt ratios and liquidity.
ORMC operates a new 374-bed facility, located in Wallkill, NY, approximately 65 miles northwest of New York City. Total revenue in fiscal 2011 was $344 million. ORMC covenants to provide annual audited information within 150 days of fiscal year end and unaudited quarterly statements within 45 days of quarter end for the first three quarters and within 60 days of the end of the fourth quarter.
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', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 23, 2012.
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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