Fitch Affs Cumberland County Hospital System, North Carolina, Bonds at 'A-'.
The rating affirmation reflects CFVHS's dominant market position, solid historical operating performance, low debt burden, and good debt service coverage. CFVHS continues to benefit from being the only non-military hospital located in Cumberland County that provides comprehensive tertiary and acute care services. In fiscal 2003, CFVHS had a dominant market share of 86.4% in the primary service area, which has allowed the hospital to maintain favorable contract terms with managed care payors. CFVHS's operating performance remains solid with operating income of $9.3 million (2% margin) in fiscal 2004, despite incurring two professional liability lawsuits in the amount of $5 million (margins have averaged 2.4% over the last four years). CFVHS posted an operating margin of 1.7% through the three months ended Dec. 31, 2004 and has budgeted a 2.5% margin for the full fiscal year 2005.
CFVHS's debt burden remains low with maximum annual debt service (MADS) at 2.5% of revenue that has resulted in good MADS coverage by EBITDA of 3.6 times (x) in fiscal 2004. While CFVHS's flagship hospital continues to experience significant capacity constraints, management has created more capacity by transferring long-term acute care patients to its Highsmith-Rainey facility (converted into a long-term acute care hospital in June 2004). As a result, volume growth at Cape Fear Medical Center in fiscal 2004 has been strong, with patient discharges, outpatient surgeries, and outpatient visits growing by 9.2%, 5.4%, and 14%, respectively.
CFVHS's credit risks include future capital needs, high Medicaid exposure, rising bad debt expense, moderate liquidity, and growing agency usage. CFVHS is currently contemplating a major facility expansion in order to address the hospital's capacity constraints. The proposed project would cost approximately $100-$115 million and add an additional 96 beds to the hospital. Financing plans are uncertain at this time; however, it will most likely be financed through a combination of debt and cash flow. Liquidity indicators are moderate with 133 days cash on hand and cash-to-debt of 112% at fiscal 2004. Ongoing risks include CFVHS's vulnerability to potential changes in Medicaid reimbursement, as it comprised over 18% of gross revenues in fiscal 2004. In addition, CFVHS relies heavily on Medicaid disproportionate share payments, which were $12.5 million in fiscal 2003 and $14.7 million in fiscal 2004. Fitch believes the potential for future changes in the North Carolina Medicaid program may significantly have an impact CFVHS in the form of either cuts in reimbursement, reduction in disproportionate share payments, or rising bad debt from more uninsured. CFVHS continues to experience rising bad debt expense, which was high at 10.7% of revenues in fiscal 2004. In addition, Fitch is concerned with CFVHS's rising nurse agency usage, which increased to $8.9 million in fiscal 2004 from $4.3 million in the prior year. The increase was primarily due to increased staffing needs at the long-term acute care facility. CFVHS has budgeted agency expense to decline to $2.4 million for fiscal 2005; however, through the four months ended Jan. 31, 2005 costs have been $3.9 million.
The Rating Outlook is Stable. Fitch expects CFVHS to continue to generate consistent operating profitability due to its dominant market position. Fitch believes CFVHS has some debt capacity at its current rating level. Fitch will reevaluate the rating as the financing plan for the hospital expansion is finalized sometime in late 2005.
CFVHS, located in Cumberland County, NC, is a comprehensive health care provider comprising a 426-bed acute care hospital, a 112-bed long-term acute care hospital, and a 78-bed rehabilitation facility. Total revenue in fiscal 2004 was approximately $464 million. CFVHS covenants only to provide bondholders with annual audited financials within 210 days of fiscal year-end, which Fitch views negatively. However, Fitch expects CFVHS to covenant to provide quarterly disclosure to bondholders with the upcoming debt issuance. To date, quarterly disclosure to Fitch has been good in terms of content and timeliness, and includes a balance sheet, income statement, and utilization data.
Outstanding bond issues:
-- $105,845,000 County of Cumberland, NC, hospital revenue bonds (Cumberland County Hospital System), series 1999 'A-';
-- $22,355,000 County of Cumberland, NC, hospital facility revenue refunding bonds (Cumberland County Hospital System), series 1993 'A-'*;
-- $6,720,000 County of Cumberland, NC, hospital revenue bonds (Cumberland County Hospital System), series 1991 'A-'*.
*This is an underlying rating. Bonds are insured by MBIA Insurance Corp., whose insurer financial strength is rated 'AAA' by Fitch.
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|Date:||Mar 3, 2005|
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