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Fitch Affirms Northeast Georgia Health System's Revs at 'A'; Assigns 'A' IDR; Outlook Stable.

New York: Fitch Ratings has assigned an 'A' Issuer Default Rating (IDR) to Northeast Georgia Health System (NGHS) and affirmed the 'A' rating on the following bonds issued by the Hospital Authority of Hall County and the City of Gainesville (the authority) on behalf of NGHS:

--$170 million revenue anticipation notes, series 2017A;

--$75 million revenue anticipation notes, series 2017C;

--$135.5 million revenue anticipation notes, series 2014B;

--$68.3 million revenue anticipation notes, series 2010A.

The Rating Outlook is Stable.

SECURITY

Bond payments are secured by a pledge of gross revenues of the obligated group and a leasehold mortgage on certain properties, including Northeast Georgia Medical Center - Gainesville.

ANALYTICAL CONCLUSION

The 'A' IDR and revenue bond ratings reflect NGHS's leading market position, robust operating profitability levels, and solid financial position. The rating also incorporates the expectation that NGHS maintains a net leverage position consistent with an 'A' rating through the cycle, despite an economic stress where economic and investment performance is negatively impacted.

KEY RATING DRIVERS

Revenue Defensibility: 'bbb'; Dominant Market Position in Growing Service Area

NGHS's midrange defensibility is supported by its dominant market position in its growing primary service area (PSA) of Hall County. Fitch believes the organization's well-aligned physician base and strong brand should continue to support its dominant market position moving forward. Additionally, NGHS's payor mix remained stable, with combined Medicaid and self-pay accounting for less than 20% of gross revenues.

Operating Risk: 'aa'; Robust Operating Margins and Manageable Capital Needs

Fitch believes NGHS's effective cost controls, rapidly growing volumes, and leading market share should continue to translate into robust operating profitability levels moving forward. Despite margin compression related to start-up costs of its new facility (NGMC - Braselton), dilution from its recent NGMC - Barrow acquisition, and elevated expenses related to an IT systems implementation, NGHS still managed to average a robust 12.4% operating EBITDA margin and 14.5% EBITDA margin over the last three fiscal years. Additionally, strong reinvestment in its plant has translated into an average age of plant of 9.1 years, which provides for manageable capital expenditures moving forward.

Financial Profile: 'a'; Solid Financial Position Maintained Through the Cycle

After recovery from a stressed scenario, where economic and investment performance is negatively impacted, NGHS maintains strong operating profitability levels and a net leverage position consistent with an 'a' financial profile assessment through the cycle. NGHS's strong operating margins provide sufficient financial cushion in a stressed economic environment.

Asymmetric Additional Risk Considerations

No asymmetric risk considerations affected this rating determination.

RATING SENSITIVITIES

Continued Profitability and Liquidity Growth: The 'A' rating assumes NGHS will sustain its strong operating profitability and cash flow levels moving forward, which supports improvement in its net leverage position even in the stress depicted by the rating case scenario. There may be negative pressure on the rating if NGHS's operating profitability or cash flow levels begin to deteriorate which results in a weaker liquidity position.

CREDIT PROFILE

NGHS, headquartered in Gainesville, GA, approximately 53 miles northeast of Atlanta, operates a total of 657 acute care beds under a single hospital license on two hospital campuses (NGMC - Gainesville and NGMC - Braselton). NGMC - Braselton opened in April 2015 and is located approximately 17 miles from NGMC - Gainesville and 45 miles from Atlanta. Additionally, NGHS acquired Barrow Regional Medical Center, a 56 licensed bed hospital located in Winder, GA, on Dec. 31, 2016, which has been effectively renamed NGMC - Barrow. Also included in operations are two employed multispecialty physician groups, a physician-hospital organization (PHO) network, hospice program, and two skilled nursing facilities. Fitch analysis is based on consolidated financial statements. In fiscal 2017, NGHS reported total operating revenues of $1.2 billion.

Revenue Defensibility

NGHS maintained a solid payor mix in fiscal 2017 as evidenced by self-pay and Medicaid accounting for a low 17% of gross revenues, which is in line with a midrange assessment for revenue source characteristics. Furthermore, combined Medicaid and self-pay has consistently been below 20% over the last four fiscal years. However, in combination with Medicare comprising 48.5% of gross revenues in fiscal 2017, exposure to governmental payors remained moderate at 58%. In fiscal 2017, commercial health insurance comprised 30.9%, with Blue Cross accounting for the majority of commercial exposure.

NGHS holds a significant leading market share in its primary service area (PSA) of 84.9%, with no other hospital holding greater than a 5% market share. NGHS operates the only two hospitals in its PSA, with the closest competitor located 25 miles away. Additionally, NGHS remains the market leader in its secondary service area and has continuously grown its market share in its entire service area to 40.4% in fiscal 2017 from 20.4% in fiscal 2012. Furthermore, NGHS has seen considerable growth in the Greater Braselton service area where its market share has grown to 37.4% in fiscal 2017 from 21.8% in fiscal 2012.

NGHS's growing market share and growing population base is reflected in its inpatient and outpatient utilization, which has consistently increased over the last three fiscal years. From fiscal 2014 to fiscal 2017, NGHS's inpatient admissions increased 35%, emergency department visits increased 48%, and outpatient visits increased 49%. Year-over-year increases remain robust with inpatient admissions increasing 11%, emergency department visits increasing 15%, and outpatient volumes increasing 10% in fiscal 2017. These strong growth rates in utilization reflects the strong population growth in NGHS's service area, the opening of NGMC - Braselton, the acquisition of NGMC - Barrow, NGHS's strong physician alignment initiatives, and its continued reinvestment in its facilities. Overall, Fitch believes the NGHS's strong physician alignment, including ongoing growth in its employed medical groups, and strong brand should support its leading market position moving forward.

The total service area includes over 16 counties in Georgia, with a population of over 950,000. NGHS's PSA is defined as Hall County, which accounted for approximately 44% of inpatient admissions in fiscal 2017. Hall County has exhibited strong growth rates with the population growing 8% over the last five years, which is favorable to both state and national averages. Additionally, the county's unemployment rate and income levels remain in line with both state and national averages. Overall, NGHS's service area characteristics should translate into a consistent payor mix.

Operating Risk

Operating profitability levels have remained strong but have been compressed in recent years from historical levels. Operating EBITDA margins averaged 17.8% between fiscal 2009 and fiscal 2014, but declined to a (still strong) average of 12.4% over the last three fiscal years. In fiscal 2017, NGHS reported an 11.1% operating EBITDA margin and 13.2% EBITDA margin which are both consistent with an 'aa' operating cost flexibility assessment. Fitch attributes margin compression over the last few years to ongoing IT systems implementation, dilution from its NGMC - Barrow acquisition, and start-up costs from its new facility coming online (NGMC - Braselton). Despite the compression, NGHS's effective cost management practices, leading market share, and increasing volumes have continued to translate into robust operating profitability levels. Given the successful implementation of Epic, which went live Oct. 1, 2017, and NGMC - Barrow being in the system for nine months of fiscal 2017, Fitch believes operating margins will gradually improve to historical levels over time and will remain consistent with an 'aa' assessment.

Overall, NGHS has a strong track record of continued reinvestment in its plant, as evidenced by the average $129 million spent in annual capital expenditures, or 202% of depreciation, over the last four fiscal years. This strong reinvestment has translated into an average age of plant of 9.1 years in fiscal 2017, which is consistent with an 'aa' assessment. Fitch believes that NGHS will continue its strategic reinvestment in its plant moving forward, with the expectation of capital expenditures averaging 130% of depreciation over the next five years. Despite the somewhat heavy reinvestment, NGHS's strong profitability and cash flow levels should fund all capital needs as management has no additional debt plans at this time.

Financial Profile

NGHS has steadily increased its unrestricted cash and investment position in recent years. Fiscal 2017 unrestricted cash and investments of $892 million were 35% higher than fiscal 2014. Fitch attributes NGHS's steady liquidity growth to the system's strong cash flow and profitability levels. Fiscal 2017 cash to adjusted debt (which includes 5x operating leases and no pension liability since NGHS's funding levels are above 80%) of 87.9% and a net adjusted debt to adjusted EBITDA (NADAE) of 0.7x. Fitch expects NGHS to continue to grow liquidity and reduce its net leverage position.

NGHS's operating profitability remains strong but below historical levels due to the start-up costs of NGMC - Braselton, dilution from its acquisition of NGMC - Barrow, and the implementation of IT systems. With these big changes behind them, Fitch's base case assumes that NGHS's revenue growth will outpace expense growth in most years and that NGHS will slowly begin to return to its robust historical operating levels. Given NGHS's strong track record of ongoing investment in its facilities, Fitch assumes NGHS's capital expenditures will average approximately 130% of depreciation over the next five years. Despite the high capital expenditure levels, NGHS is able to improve its cash to adjusted debt position and NADAE to 140% and negative 1.3x, respectively, by year five of the base case.

The rating case applies Fitch's standard stress over a five-year period, with the assumption that capital expenses are limited to (relative to the base case) during an economic stressed period. Given NGHS's strong average age of plant, Fitch believes that NGHS could limit some strategic capital investment until the economy recovers. NGHS's investment allocation is somewhat aggressive, which results in a 14% investment return loss in year one of the Fitch Analytical Stress Test rating case. Despite a stress where economic and investment performance is negatively impacted, NGHS maintains a net leverage position, relative to its operating profile, consistent with an 'a' financial profile assessment through the cycle. Despite the stress scenario, NGHS shows improvement in its net leverage position through the cycle, which is reflective of the large degree of financial flexibility afforded by its strong operating profitability and cash flow levels.

Asymmetric Additional Risk Considerations

No asymmetric risk considerations affected this rating determination.

In fiscal 2017, NGHS has approximately $1 billion in long-term debt outstanding, which includes approximately $10 million in capitalized leases and $52 million of unamortized bond premiums. NGHS's debt profile consists of approximately 67% underlying fixed-rate bonds and 33% underlying variable-rate bonds. NGHS is counterparty to three fixed payor swaps and a basis swaps, including two fixed payor swaps entered into in October 2016. These swaps effectively convert 18% of the total outstanding bonds to a synthetic fixed-rate. NGHS is subject to collateral thresholds on one of its fixed payor swaps and its basis swap; no collateral was required to be posted at Sept. 30, 2017.

Approximately 42% of NGHS's long-term debt is backed by a Hall County tax pledge, including the series 2017B bonds, series 2014A bonds, and the series 2010B bonds, which are currently rated 'AA', Outlook Stable under Fitch's 'U.S. Public Finance Tax-Supported Rating Criteria.' Pursuant to an intergovernmental agreement, the county is required to levy up to 7 mills to pay debt service if hospital system revenues are insufficient. The tax pledge does not factor into NGHS's 'A' IDR.

NGHS has a defined pension plan, which was closed to new employees on Jan. 1, 2006. As of fiscal 2017, the pension was 92% funded with a 3.85% discount rate producing an unfunded liability of $23.4 million.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Aug 10, 2018
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