Fitch Affirms Arkansas Valley Reg Med Center's -CO- $10.19MM Revs 'BBB'.
The 'BBB' rating reflects Arkansas Valley Regional Medical Center's (AVRMC) dominant market position, healthy liquidity, and adequate pro forma debt service coverage. The rating affirmation takes into account an expected $10.4 million variable-rate debt borrowing by AVRMC in the next two months, $7.5 million of which, management indicates, will reimburse AVRMC's balance sheet for on-campus capital expenses in the past two years. If there is any significant change to this proposed debt issuance, Fitch will review this rating. Fitch has assumed pro forma maximum annual debt service to be roughly $1.5 million.
AVRMC captures more than 70% market share in its primary service area (PSA), which includes Otero and Bent Counties. AVRMC's geographic positioning, approximately 60 miles from its nearest competitor, also qualifies the hospital as a sole community provider which entitles the hospital to additional reimbursement. Fiscal 2004 saw a positive operating margin of 1.1% (unaudited), with non-operating revenue augmenting an excess margin of 2.9%. However, without a retroactively-settled amount of Colorado indigent care program funds of roughly $600,000 AVRMC received in June 2004, AVRMC's operating margin would have been negative 0.3%. Fitch considers state and federal Medicaid revenue to be a risk. Debt service coverage was strong at 3.3 times (x), but would decline to 2.0x with the proposed issuance of debt. While liquidity had declined to 125.1 days cash on hand in 2004, the reimbursement from bond proceeds should increase this level to roughly 218 days cash and cash to debt levels should be 81.2% after the 2004 issuance. Fitch views the hospital's management agreement with Quorum, which was renewed in July 2001 and expires in July 2006, as a positive credit factor as it gives AVRMC access to group purchasing discounts, physician recruitment efforts, and strategic planning exercises.
Credit concerns include AVRMC's increasing debt load, modest size, high dependence on governmental payors, reliance on a small medical staff and weak socio-economic and demographic characteristics, in addition to the current economic conditions of its primary service area. Fitch believes that AVRMC's modest revenue base of approximately $30 million is an inherent concern. The high dependence on governmental payors, representing about 60% of gross revenues, is a risk as its exposes AVRMC to potential legislative reimbursement cutbacks. AVRMC's reliance on a small number of active medical staff will remain an ongoing concern. The hospital's service area exhibits weak socio-economic and demographic characteristic including below average income levels, and higher than average unemployment rates. A main driver of the weak operating performance in fiscal 2004 was the doubling of bad debt year over year, to $2.23 million, largely as a result of drought conditions in southeastern Colorado and its effect on the agriculture and livestock industries, a major industry in the PSA.
The Stable Rating Outlook reflects Fitch's expectation that AVRMC will improve profitability in fiscal 2005, and produce sufficient cash flow to moderate its debt burden after the proposed issuance of debt. Failure to improve operating margins may lead to downward pressure on the rating.
Arkansas Valley Regional Medical Center located in La Junta, CO (approximately 100 miles southeast of Colorado Springs, CO) is comprised of a 90-bed hospital and a 115-bed nursing home. Total revenues in fiscal year 2004 were $33 million. AVRMC's bond documents require annual disclosure 150 days after year-end, but interim financial statements are not required, which Fitch views as weak.
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|Date:||Jul 8, 2004|
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