Fitch downgrades Baptist’s bond rating

Bonds-investmentJACKSON — Fitch Ratings has downgraded approximately $97.1 million Mississippi Hospital Equipment and Facilities Authority revenue bonds, series 2007A, issued on behalf of Mississippi Baptist Health System (MBHS) to from “BBB+” to “BBB”.

The rating outlook is “stable”.

Fitch wrote: The rating downgrade reflects MBHS’s profitability deterioration in fiscal year (FY) 2013 and through the eight-month interim period of 2014 (ended April 30, 2014). MBHS’s operating margin fell to a negative 5.4% in FY 2013 (operating loss of $22.6 million), significantly off budget, primarily due to flat volumes, lower Medicaid reimbursement, and non-recurring costs associated with the implementation of a new IT system. Management is projecting to end FY 2014 (year ending Aug. 30) slightly better than FY 2013 and to return to breakeven profitability in FY 2015, which Fitch believes to be likely due to a number of cost savings and revenue cycle initiatives being implemented in FY 2014.

INCREASED DEBT BURDEN: MBHS’s debt burden remains elevated for the rating category reflecting a $25.4 million financing executed in 2014, with maximum annual debt service (MADS) equal to 4.1% of total revenues, compared to Fitch’s ‘BBB’ category median of 3.5%. In addition, compressed profitability resulted in weak MADS by earnings before interest, taxes, depreciation and amortization (EBITDA) coverage of 1.4x in FY 2013.

SOLID LIQUIDITY: MBHS’s unrestricted liquidity position decreased by 6.4% from April 30, 2013, but remained strong for the rating category with 178.2 days cash on hand (DCOH) and 12.3x cushion ratio at April 30, 2014, compared to median ratios of 144.7 days and 10.2x respectively. MBHS’s liquidity position is viewed by Fitch as a mitigating factor against weak profitability.

INCREASED CAPITAL SPENDING: MBHS’s capital spending has been robust in the past four audited years and reached a peak in FY 2013 at 272.1% of depreciation expense. Capital expenditures are projected to be elevated over the near term, but are expected to drop below depreciation by FY 2016.

RATING SENSITIVITIES

OPERATING PERFORMANCE IMPROVEMENT: Fitch believes MBHS’s operating improvement initiatives will take hold in the near term and generate improved operating profitability in FY 2015 in line projected targets. Further negative rating actions could ensue if operating performance materially deviates from projected levels for FY 2015 or if there is further material decline in liquidity metrics.

CREDIT PROFILE

MBHS operates a 435 staffed-bed hospital in Jackson, MS. MBHS holds a leading 25% market share in a competitive primary service area (PSA) which is defined as the greater Jackson metropolitan area. MBHS’s two largest competitors have a 23% and a 19% market share in the PSA, respectively. MBHS’s total operating revenues equaled $417 million in fiscal 2013.

WEAKENED PROFITABILITY

MBHS recorded a $22.6 million loss in FY 2013, resulting from flat revenues, increased expenses and depreciation. Through the eight-month interim period of 2014, MBHS’s operating loss was $15.9 million, equating to a negative 5.5% operating margin, slightly below FY 2013 levels. MBHS is undergoing a revenue cycle improvement engagement with Huron Consulting Group and has implemented a number of cost reduction initiatives in FY 2014 in order to improve performance. In addition, FY 2015 will not reflect approximately $7.6 million in non-recurring costs associated with consulting fees and IT platform implementation recorded in FY 2014. Management expects to end FY 2014 with a $21.5 million operating loss and anticipates the majority of the benefits from its initiatives to be realized in FY 2015 and to end the next fiscal year at breakeven.

ELEVATED DEBT BURDEN

Following the execution of a $25.4 million New Market Tax Credit financing (not rated by Fitch), MBHS’s total debt equaled approximately $247 million at April 30, 2014, MADS coverage by EBITDA was 1.8x through the interim period, slightly better than in FY 2013, but still below category median of 3.1x. Fitch expects MBHS’s coverage to improve in FY 2015 as operations stabilize.

SOLID LIQUIDITY

MBHS’s $211.6 million in unrestricted cash and investments at April 30, 2014 equated to 178.2 DCOH and a 12.3x cushion ratio which compares favorably to the ‘BBB’ category medians. However, unrestricted cash and investments to debt of 85.6% is slightly below Fitch’s category median of 91.7%. Liquidity metrics have deteriorated somewhat from prior years’ levels reflecting high capital spending and weaker operating cash flow. Fitch expects MBHS to begin further strengthening their balance sheet once the operating improvements take hold in the medium term.

INCREASED CAPITAL SPENDING

MBHS is in the process of renovating its main hospital campus, with two out of the four existing floors having been renovated to date. Management states that future capital expenditures in relation to the renovation will be approximately $20 million. In addition, MBHS is in the process of building a replacement facility for its Leake Memorial Critical Access Hospital. The project is being funded via the $25.4 million New Market Tax Credit financing and expected to be completed in December 2014. Capital expenditures are projected to be elevated over the near term, but are expected to drop below depreciation by FY 2016 once both projects are completed.

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