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Fitch Maintains the Rating Watch Negative on Lafayette General Medical Center's (LA) Revs.

New York: Fitch Ratings maintains the Rating Watch Negative on the 'A-' rating for the following bonds issued on behalf of Lafayette General Medical Center, Inc. (LGMC):

--$70,000,000 Louisiana Public Facilities Authority hospital revenue and refunding bonds (Lafayette General Health System Project) series 2016A;

--$31,163,312 Louisiana Public Facilities Authority hospital revenue and refunding bonds (Lafayette General Health System Project) series 2016B;

--$84,840,000 Louisiana Public Facilities Authority hospital revenue bonds, series 2010.

SECURITY

Debt payments are secured by gross revenues of the Obligated Group (OG) and a mortgage on LGMC's property. The OG consists of LGMC, Lafayette Health Ventures, Inc., Acadia General Hospital, Inc., Abrom Kaplan Memorial Hospital, St. Martin Hospital, Inc. and University Hospital and Clinics, Inc. (UHC). The OG comprises the vast majority of assets and revenues of the parent corporation, Lafayette General Health System, Inc. (LGHS).

KEY RATING DRIVERS

CHANGE IN CRITERIA: The Rating Watch Negative reflects Lafayette General Medical Center's heightened risk of transition under Fitch's 'Exposure Draft: U.S. Not-for-Profit Hospitals and Health Systems Rating Criteria' published on Sept. 6, 2017. LGMC's overall leverage profile was identified as deviating from the expectations for the 'A' rating category (as outlined in the rating positioning table in the exposure draft) as part of an initial assessment of credits that are most likely to transition under the new criteria.

SOFTER RECENT PERFORMANCE: Fiscal year 2016 (FY16; Sept. 30 year end) and FY17 (unaudited) results show LGMC with 0.0% and 0.2% operating margins, respectively, after a 3.2% operating margin in FY15. Staffing cost related to the ramping up of Lafayette General Southwest (LGSW; an HCA hospital in Lafayette that LGMC acquired in 2015) and a payor mix shift toward Medicaid at the flagship hospital largely drove the decline in performance. LGMC has implemented an improvement plan and is pursuing other strategic initiatives, including better utilization of LGSW, which is expected to steadily improve LGMC's performance over the next two to four years.

GROWING HEALTHCARE SYSTEM: With the acquisition of LGSW, LGMC's inpatient market share increased to over 50% in its primary service area of Lafayette and it is now more than twice its nearest competitor. LGMC also maintains a solid 34% inpatient market share in a larger six parish region. Since FY12, LGMCs net patient service revenue has nearly doubled, with the number of owned hospitals at six, plus two other hospitals that LGMC's manages through collaboration agreements. Over the last eight years, LGMC has grown from a mostly single site hospital in Lafayette to a larger regional referral center that has a competitive market share in 10 parishes.

THIN LIQUIDITY: At Sept. 30, 2017, LGMC had $193.0 million in unrestricted cash and investments, which equated to 101.7 days cash on hand (DCOH) and 70.5% cash to debt, both of which trail Fitch's respective 'A' medians of 218 days and 150.6%. Offsetting the lower liquidity levels has been steady growth in LGMC's absolute liquidity. Unrestricted liquidity grew by $25.8 million from FY16 to FY17, through a combination of lower days in accounts receivable, modest cash flow, and lower capital spending.

MIXED DEBT BURDEN: Maximum annual debt service (MADS) as percent of revenue at Sept. 30, 2017 was 2.2% relative to Fitch's 'A' median of 2.7%. However, debt to EBITDA was 5.7x relative to median 4.6x was elevated relative to a median of 3.3x. The elevated debt to EBITDA reflects the thinner operating performance as well as the effect of debt issuances in the last two years. Fitch expects LGMC's debt burden to moderate as capital needs remain manageable over the next two to three year and the debt amortizes.}

RATING SENSITIVITIES

RESOLUTION OF RATING WATCH: The Rating Watch Negative will be resolved following a full credit review of Lafayette General Medical Center within six months of the final adoption of the Not-for-Profit Health Care Criteria.

CREDIT PROFILE

Lafayette General Health System, Inc. (LGHS) is a Louisiana nonprofit corporation and operates is the parent corporation of the OG System. LGHS consists of six hospitals, including LGMC, nine professional centers and several physician clinics. LGHS maintains clinical affiliations with six other hospitals and has a clinical presence in a 10-parish south-central region of Louisiana. The flagship hospital, LGMC, is a 299-licensed bed acute care hospital facility located in Lafayette, LA, which is approximately 133 miles west of New Orleans.

Fitch's analysis is based on the consolidated system results of which the OG comprises the vast majority of assets and revenues. The system's consolidated operating revenues were $495.5 million in FY17 (unaudited).

THINNER TWO YEAR PERFORMANCE

Over the last two years, LGMC has produced a breakeven operating margin after a five year period of above median performance. The stress on operations has largely been driven by staffing costs at LGW and a shift in payor mix at LGMC.

In 2015, LGMC purchased LGSW from HCA. Under HCA, the hospital, which has 128 certified beds and is located in Lafayette, had been running at a very low census. To quickly ramp up the hospital, LGMC brought in a sizable amount of agency nurses, the cost of which outpaced the additional revenues from LGW. In FY17, LGMC reduced the agency cost by $7.7 million as part of a larger cost reduction and efficiency initiative that produced $47 million in savings in FY17. LGMC is now moving forward on revenue enhancing initiatives at LGSW. Among the initiatives, LGMC plans to shift elective orthopedic services to LGSW and open a small skilled nursing unit. The post-acute beds will provide additional capacity for LGMC and help it manage patient flow.

Fitch still views the LGSW acquisition positively. It removed a competitor from the market and provided need capacity for LGMC. LGMC management reports that the flagship hospital is often at full capacity and runs on diversion for the middle part of most weeks. While the ramp up has been slower than anticipated, Fitch believes the hospital will be financially accretive in the three to five year timeframe.

The other pressure on LGMC's performance was a rise in Medicaid at its flagship hospital. Louisiana expanded Medicaid in 2016 and the number of uninsured individuals that converted to Medicaid exceeded state projections. The flagship hospital saw Medicaid rise to 20% of its gross revenues in FY17 from 16% in FY16. Many of these Medicaid patients were formerly uninsured patients, who had traditionally gone to UHC, the area's safety net hospital, but self-selected to go to LGMC once they had insurance. While UHC receives supplemental funding to help offset the losses on taking care of Medicaid patients, LGMC does not receive similar funding.

LGMC is responding to this shift through an outpatient strategy. Many of the Medicaid patients utilizing LGMC were using the emergency room because they didn't have a primary care physician. LGMC plans to provide more access to primary care in the community, for example through urgent care centers, which should better align the level of care to the clinical setting.

Overall, LGMC's operational performance improved slightly in FY17, and LGMC is budgeting for another slight improvement in FY18, with the system projecting to reach a 3% operating margin by 2021. Fitch believes this goal is reasonable given LGMC's strong market position and the untapped revenue potential at LGW.

Debt Profile

At Sept. 30, 2017, LGMC had S273.8 million in debt of which approximately 69% fixed rate. About 37% of the debt is bank placed, with three three separate series of bonds that are placed with two banks. The renewal date in 2019 is for $30 million of debt. The other two series have renewal dates in 2026. LGMC has no outstanding swaps.

DISCLOSURE

LGMC covenants to supply bondholders with quarterly disclosure of financial and operating statements.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
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Date:Mar 6, 2018
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