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Fitch Rates Bexar County Hospital District (TX) 2018 Bonds 'AA+'; Outlook Stable.

Austin: Fitch Ratings has assigned a 'AA+' rating to the following Bexar County Hospital District, TX (BCHD) bonds:

--$308 million BCHD certificates of obligation (COs), series 2018.

In addition, Fitch has affirmed the 'AA+' rating on the following debt:

--$644 million in outstanding COs (series 2009B and 2010) and limited tax refunding bonds (series 2016);

--Issuer Default Rating (IDR).

The Rating Outlook is Stable.

The series 2018 COs are expected to sell the week of April 2nd and close the week of April 23rd. The bond proceeds are expected to be used for construction of the Women's and Children's Tower Project, a Heart and Vascular Institute, Advanced Endoscopy Services facilities and West Parking Garage renovation, and to pay costs of issuance.

SECURITY

The COs and limited tax bonds are payable from a limited property tax levy. The COs are also payable from a limited pledge of $1,000 of the surplus revenues of the district's hospital system. The district's property tax rate is limited to a maximum rate of $0.75 per $100 of taxable assessed valuation (TAV) for all purposes.

ANALYTICAL CONCLUSION

The 'AA+' IDR is based on BCHD's significant tax margin, strong cost management and leverage relative to liquidity throughout the cycle in Fitch's rating case. The rating reflects Fitch's expectation that the district will continue to demonstrate operating cost flexibility as measured by profitability consistent with its current performance. The district's 'AA+' rating further reflects an uncommonly strong revenue defensibility assessment of 'aa', given its tax levy authority, allowing Fitch to place the final rating in the 'AA' category, despite an overall financial profile that is more typical of an 'A' category credit.

KEY RATING DRIVERS

Revenue Defensibility: 'aa'; Significant Tax Margin in Growing Service Area

The 'aa' revenue defensibility assessment is driven by the district's significant taxing margin and considers its role as a regional safety net health services provider with a weak payor mix. Service area characteristics are solid, with San Antonio's population growing at a 9% CAGR for the last five years.

Operating Risk: 'a'; Strong Cost Management and Only Elevated Capital Needs

An expectation of strong cost management considers the district's historical profitability, five-year operating budget plans, and stabilizing influence of Community First Health Plans (CFHP), the district's sponsored health plan. Elevated capital requirements reflect the district's average age of plant at a very young 8.5 years, robust historical capital investments, and its manageable five-year capital plan.

Financial Profile: 'a'; Stable Financial Profile through The Cycle

The 'a'; financial profile assessment considers BCHD's leverage relative to liquidity in the context of strong revenue defensibility and strong operating cost flexibility. Fitch expects BCHD to maintain a stable financial profile through the cycle based on its strong cost management and tax base. The district recovers from economic stress represented in the rating case as a 2% decline in revenues in year one and a 1% decline in revenues in year two.

Asymmetric Additional Risk Considerations

There are no asymmetric additional risk considerations.

RATING SENSITIVITIES

Operating Cost Flexibility: A sustained decline in Bexar County Hospital District's profitability materially below levels presented in Fitch's analysis could pressure the current rating.

Capital Requirements: A material increase in capital requirements above those reflected in Fitch's analysis could also pressure the current rating.

CREDIT PROFILE

BCHD was created in 1955 as a political subdivision of the State of Texas, independent and legally separate from Bexar County and provides comprehensive healthcare services to Bexar County and throughout South Texas. The district is governed by a seven-member board selected by the Bexar County commissioners to serve two-year staggered terms. Its facilities include University Hospital (a 716-bed acute care facility), seven outpatient primary/specialty care clinics, five dialysis centers and six preventive health clinics. Since 1968, the district has been affiliated with the University of Texas Health Science Center (UT), serving as the major teaching sites for many of the UT healthcare programs, including the graduate medical education program. The affiliation with the University of Texas (revenue financing system bonds rated AAA/Stable) is viewed as a positive credit factor. The district's fiscal 2017 (unaudited) revenues totaled $1.8 billion.

Revenue Defensibility

Total fiscal 2017 (unaudited) revenues of $1.8 billion include $788 million of net patient service revenues (44%), $521 million of premium revenues (29%) and $404 million of tax revenues (23%). The district's payor mix includes a high 47% combined exposure to Medicaid and self-pay components.

The district's strong $157 billion TAV has realized a high 7.2% CAGR over the past 10 years and a higher 9.1% CAGR over the past five years through tax year 2017. The TAV has low volatility, realizing only a single year of a decline (1% in 2010) over the past 15 years. The tax base is diverse and top 10 taxpayers represent a low 3.8% of total TAV.

The district has the independent legal ability to raise tax rates. The district has the ability to levy up to $0.75 per $100 TAV and currently levies $0.28, of which $0.24 is used for maintenance and operations (M&O) support, and $0.04 is used for debt service. While the district has the ability to levy up to $0.75 for M&O support and debt service payments, if a proposed tax rate results in an 8% year-over-year M&O levy increase (adjusted for removal of new properties), the proposed rate increase may be subject to election if petitioned by voters. Fitch estimates that the district's tax rate capacity provides up to $746 million of additional tax revenue based on the current TAV and $0.47 tax rate cap capacity (cap of $0.75 less current rate of $.28).

Fiscal 2017 net patient service revenue included about $50 million of largely pass-through revenues from four nursing homes under management agreements with nursing home operators which began in fiscal 2015. The district's supplemental funding program revenue support represents about 12% of total revenues and includes modest funding for the district's skilled nursing facility program participation.

BCHD is the largest public hospital district in Texas as measured by assets and fulfills an essential role in providing safety net healthcare services in Bexar County, its primary service area. It serves as a level 1 trauma center for 22 south Texas counties and is one of nine level 1 pediatric centers in Texas. However, the district reports a relatively weak 12% inpatient market share in its primary service territory, despite a strong market share in emergency and pediatric emergency care service lines. BCHD also serves as a leading stroke and diabetes treatment center and reports that it provides the area's most comprehensive outpatient services from its downtown campus.

The district partners with UT Health - San Antonio, formerly known as The University of Texas Health Science Center at San Antonio (UTHSCSA), under a 15-year agreement renewed in 2015 with two five-year automatic extensions. This affiliation provides extensive service line collaboration and the district's facilities serve as teaching facilities for UT Health San Antonio's health care programs. The district owns Community First Health Plans, Inc. (CFHP), a nonprofit HMP, established in 1995, to provide health care coverage to Bexar and seven surrounding counties. The district employs physicians through Community Medicine Associates (CMA), established in 1999.

Bexar County, with an estimated 2016 population of 1.9 million, is home to San Antonio (IDR AAA), the seventh largest city in the U.S. Prominent sectors include military and government, domestic and international trade, convention and tourism, medical and healthcare, and telecommunications. The county's population has realized a 9% CAGR over the past five years. Unemployment is low and median household income trends modestly below that of the U.S. average.

The local economy continues to expand rapidly with continued sector development in high technology, medical and healthcare, higher education, financial services, and others providing diversity beyond the military which remains a major economic factor. Joint Base San Antonio including Lackland Air Force Base, Randolph Air Force Base, Brooke Army Medical Center, and Fort Sam Houston account for over 90,000 military and civilian personnel (about 10% of employment). These facilities benefited from very large investments and additions to troop strength in past base realignments.

Operating Risk

BCHD has maintained sound profitability over the past five years while undertaking significant service expansion that provides a foundation for ongoing utilization growth. The district opened its downtown clinical services Robert B. Green Pavilion in January 2013, followed by its one million square foot new patient University Hospital Sky Tower in April 2014. The sky tower represented significant growth adding 420 to the hospital's 614 licensed beds, an expanded emergency department and two floors of surgical suites. Beginning in 2015, the district began participating in the skilled nursing facility (SNF) Minimum Payment Program to improve delivery of long term care in its service area. The district currently owns the licenses for four SNFs that account for about $50 million of largely pass through revenues within its net patient service revenues. During 2016, the district opened a new pediatric emergency department, expanded same day/urgent pediatric services and opened a new family practice clinic. Service line enhancements during fiscal 2017 included a dialysis replacement facility, a new outpatient clinic, hospital pharmacy and operating room expansions.

BCHD reported solid fiscal 2017 (unaudited) operating EBITDA of 9.2% which is modestly below the average five-year operating EBITDA of 10.8% due primarily to the significant strategic investments completed over the past five years that provide a foundation for future utilization growth. The district's expected profitability is generally consistent with recent performance, incorporating an EPIC implementation during fiscal 2018 through 2020, phase out of certain DSRIP supplemental funding in 2020 and 2021, and opening of the Women's and Children's Inpatient Tower in 2022. The district expects that growth in existing or new supplemental funding programs will offset some or all of the phase out of DSRIP funding.

CFHP was established in 1995 by UHS to assist in providing and arranging health care services. It is a financially accretive provider organized as a health maintenance organization (HMO) serving BCHD's primary and seven-county secondary service area. UHS is the sole corporate member of CFHP and CFHP is reported as a blended component unit of BCHD. CFHP receives premiums based on its contractual arrangements with physician groups, ancillary service providers, and hospitals, including UHS.

The district's average age of plant of only 8.5 years reflects five-year capital spending through 2017 equal to 217% of depreciation. Five-year pro forma capital spending equals a lower 143% of depreciation, and includes routine spending of about $30 million per year. Non-routine projects include the Women's and Children's Tower project and West Parking renovation adjacent to the Sky Tower, as well as build-out of 43,000 square feet of shell space in the Sky Tower for a Heart and Vascular Institute and an Advanced Endoscopy Services & Interventional Radiology facility. The Women's and Children's Tower will add 250 inpatient rooms, along with labor and delivery and women's operating rooms. It will also include Level IV neonatal intensive care unit and a dedicated pediatric emergency room. The projects are expected to be funded with $308 million of series 2018 GOs and $82 million of cash. The district's $100 million EPIC implementation capital project will be cash funded. Based on the strength of the tax base, the district does not anticipate the need to increase its tax rate for the project's debt service.

Financial Profile

The district's cash to debt and cash to adjusted debt of 133% and 94% respectively as of Dec. 31, 2017, reflect unrestricted cash and investments of $895 million in relation to $670 million of long-term fixed rate GO debt and adjusted debt. Under Fitch's criteria, adjusted debt includes Fitch's capitalization of operating leases (estimated at $60 million) and Fitch's adjusted net pension liability (estimated at $224 million based on a 6% discount rate, instead of the $139 million level reported by the district, which is based on a 7.5% discount rate). The district migrated to a cash balance plan in 2012, limiting exposure to significant pension liability changes. Net adjusted debt to adjusted EBITDA, which is a measure of how many years of cash flow is needed to repay long-term debt outstanding, was solid at 0.3x at Dec. 31, 2017.

Fitch used the district's 2018 budget and five-year pro forma as a reasonable guide for base case revenue and expense growth assumptions and capital spending. The fifth year of Fitch's base and rating case includes a $15 million addition of depreciation from the completed tower project (included within total expenses), but not otherwise captured in the EBITDA margin. The base and rating case include the district's $308 million GO issuance and do not reflect additional new debt thereafter. The rating case applies standard economic stress. Modest reductions in the rating case capital spending for years one and two reflect the district's discretion with respect to routine capital spending. The rating case also reflects an adjustment to recognize the strength of the district's tax base. The district recovers from the application of economic stress as indicated by a fifth year net adjusted debt to adjusted EBITDA in year five of negative 0.2x. Cash to debt of 142% and cash to adjusted debt of 105% also reflect recovery from economic stress in Fitch's rating case.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U7TX
Date:May 26, 2018
Words:2225
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