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Fitch Upgrades Heartland Health (MO) Rev Bonds to 'AA-'; Assigns 'AA-' IDR; Outlook Stable.

New York: Fitch Ratings has assigned an Issuer Default Rating (IDR) of 'AA-' and upgraded the revenue bond rating to 'AA-' from 'A+' on the following debt issued by the St. Joseph Industrial development Authority (MO) and Missouri Health and Educational Facilities Authority (MO) on behalf of Heartland Health (Heartland Regional Medical Center, dba Mosaic Life Care):

--$68.4 million variable rate demand bonds (VRDB), series 2009A*;

--$50.0 million fixed rated revenue bonds series 2012

*Underlying rating. The series 2009A VRDB bonds are supported by a letter of credit (LOC) from US Bank that expires in November 2021.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group and a first mortgage on Heartland Regional Medical Center (HRMC), the sole member of the obligated group. As of June 30, 2012, HRMC satisfied the mortgage release provisions of the master trust indenture but has chosen to keep the mortgage in place at this time.

ANALYTICAL CONCLUSION

The upgrade of the revenue bond ratings to 'AA-' from 'A+' reflects Mosaic's continued improvement in liquidity position, rebound in operating margins in fiscal 2018, and strengthened capital-related ratios. The 'AA-' rating is supported by Mosaic's strong financial profile in the context of a midrange revenue defensibility and strong operating risk profile assessment, but also reflects a smaller, more rural service area. Mosaic's financial profile demonstrates resilience in Fitch's through the cycle analysis, even under a forward-looking stressed scenario where a moderate economic disruption is applied.

KEY RATING DRIVERS

Revenue Defensibility: 'bbb'; Leading Market Position

Mosaic's midrange revenue defensibility is supported by a leading 80% market share within its primary service area (PSA). The leading market share is supported by the system's approach of offering value based care, quality and patient safety. Mosaic's payor mix is midrange as Medicaid and self-pay total just 19% of gross revenues as of fiscal 2018, and service area characteristics are generally stable and expected to support its current payor mix.

Operating Risk: 'a'; Improved Margins in 2018 after Compressed Results

Mosaic's operating risk assessment is strong, given its historically steady and more recently improved operating margins after a year of compressed results in fiscal 2017. Fitch believes Mosaic's leading market position and effective cost controls will continue translating into strong operating profitability going forward. Furthermore, anticipated future capital expenditures are manageable.

Financial Profile: 'aa'; Strong Financial Profile Through the Cycle

Mosaic's financial profile is strong. Strong liquidity and good operating profitability provide substantial financial cushion under a stress scenario. Fitch expects Mosaic to sustain strong operating profitability that supports their robust net leverage position, with cash to adjusted debt not expected to go below 200% and net adjusted debt to adjusted EBITDA remaining solidly (favorably) negative throughout the cycle.

Asymmetric Additional Risk Considerations

No asymmetric risks were factored into the rating assessment.

RATING SENSITIVITIES

STABILITY EXPECTED: The Stable Outlook reflects Fitch's expectations that Mosaic will maintain its leading market position and good operating margins that will allow the system to sustain key financial leverage metrics, which are consistent with the current rating category.

While not expected, a sustained decline in operating margins or material weakening of liquidity that leads to thinner net leverage ratios could pressure the rating.

CREDIT PROFILE

Heartland Health is comprised of the following: HRMC, a 352-operated bed hospital located in St. Joseph, Missouri; Heartland Long Term Acute Care Hospital, a 41 bed LTACH located in St. Joseph, Missouri; Northwest Medical Center, a 25-bed critical access hospital acquired in December 2014 located in Albany, Missouri; Midwestern Health Management, Inc.; and HHS Properties, Inc.. Heartland Health had total operating revenues of $668 million in fiscal 2018.

Revenue Defensibility

Mosaic's revenue source characteristic is midrange. The service area is stable, which is reflected in a payor mix where Medicaid and self-pay totaled just 19% of gross revenues as of June 30, 2018. Over the last five fiscal years, Medicaid and self-pay totals have averaged about 20%, and Fitch expects Mosaic's payor mix to remain in this range for the near to intermediate term.

Mosaic's market position is midrange. The system has a leading 80% inpatient market share in its PSA. The PSA covers Andrew and Buchanan counties in Missouri and Doniphan County in Kansas, plus portions of other counties in the surrounding area. HRMC is the only tertiary referral hospital between Kansas City, MO and Omaha, NE. High-acuity services provided by HRMC include level II trauma, open heart surgery, neurosurgery, orthopedics, and oncology. Additionally, Mosaic provides services at 40 clinical locations.

Supporting Mosaic's leading market share is a strong overall reputation for value based and quality care, which is reflected by strong quality and patient satisfaction scores. Mosaic is a member of the Mayo Clinic Care Network; the Network is a national network of healthcare providers committed to serving patients and their families through clinical collaboration. The membership allows Mosaic to consult with Mayo specialists to improve overall treatment for the patient.

Mosaic has signed a letter of intent with SSM Health regarding the potential purchase of St. Francis Hospital (SFH), which is an 81-bed acute care hospital in Maryville, MO about 45 minutes north of HRMC. Mosaic views this opportunity as beneficial to long-term strategy. Management reports a high degree of culture and community alignment with their current brand in the Maryville market.

Mosaic's PSA characteristics are stable and should support its current payor mix over time. The largest of the three counties within the PSA, Buchanan County, MO has experienced population growth, unemployment rate, and median household income generally on par with the state of Missouri.

Operating Risk

Mosaic's operating cost flexibility is strong. The system's operating EBITDA and EBITDA margins have averaged a solid 8.7% and 13.0% respectively over the last five fiscal years. Margins have been fairly consistent but experienced compression in fiscal 2017. Operating EBITDA margins were 6.8% primarily due to margin compression from a prior expansion strategy into the North Kansas City market. Mosaic has since moved on from that expansion strategy and saw an improvement in operating EBITDA margin to 9.8% in fiscal 2018.

Other factors leading to the improvement of Mosaic's margins included the voluntary exit of non-profitable service lines and the successful implementation of several operating improvement initiatives. Some of the operating improvement initiatives included cost saving with reductions in staffing, improved revenue cycle collection, 340b program enhancements, and lease reductions. Mosaic's margins in fiscal 2018 were also supported by increased volume (admissions up 5%) and continued high acuity with a Medicare case index of 1.7.

Looking forward, Mosaic sees opportunity for further expense improvement in staffing efficiencies, revenue cycle management, 340b programs, and supply chain.

Mosaic's capital expenditure requirements are midrange. The average age of plant at 15 years as of fiscal year-end 2018 is high. Capital expenditures averaged 100% of depreciation the last five fiscal years. Recent key capital projects have included reinvestment in IT infrastructure (Mosaic is fully integrated on Cerner Systems), purchase of Northwest Medical Center in 2014 and rehabilitation of the German American Building to an office building. Looking forward, Fitch expects Mosaic's capital expenditures to average about 130% of depreciation over the next five years, which should bring the average age of plant down a modest amount. Projects will include a floor buildout at the main tower of HRMC, refurbishments in the ICU, cancer center, and at the Northwest Medical Center. Also included in future capital expenditures is the impact of the strategic acquisition of St. Francis Hospital.

Financial Profile

Mosaic's leverage profile was strong as of June 30, 2018, as cash to adjusted debt equaled approximately 230% and net adjusted debt to adjusted EBITDA was better than (favorably) negative 3x. Cash to adjusted debt has steadily improved over the last five fiscal years due to an improving liquidity position and moderating debt burden. Fitch uses debt equivalents from the 2018 fiscal-year end, with roughly $42 million for capitalized operating leases (calculated at a 5.0x multiple of lease expense) and no defined benefit pension liability (Heartland fully terminated the defined benefit pension plan in fiscal 2018, incurring a one-time pension termination accounting (GAAP) entry of $27 million non-cash).

In the base case Fitch utilizes Mosaic's revenue and expense CAGR for the last five fiscal years. Fitch expects operating EBITDA margins for Mosaic in the range of 9.5% over the next five fiscal years. Fitch expects capital expenditures to average about 130% over the next five fiscal years, as capital expenditures will include routine and strategic investments. No additional debt is assumed in the base case. Overall, Fitch expects Mosaic to improve its liquidity position, debt to moderate further, and to continue benefiting from its leading market position.

The rating case assumes the standard stress to revenues (two points lower than the base case year one revenue growth, one point lower in year two, one point higher in year three and equal to the base case in years four and five) and asset allocation. However, to reflect a realistic response to the revenue and portfolio stress, capital expenditures are reduced by about four million from the base case in fiscal 2020 and 2021, reflecting flexibility to reduce or defer certain capital expenditures during a stress scenario. Mosaic's balance sheet is strong throughout the rating case as cash to adjusted debt does not fall below 200% and net adjusted debt to adjusted EBITDA remains favorably negative in the rating case.

Asymmetric Additional Risk Considerations

No asymmetric risks were factored into the rating assessment.

Mosaic's debt structure is mostly variable rate and totaled $202 million at fiscal year-end 2018. Mosaic has one swap in place, a floating to fixed rate swap ($47 million notional). Wells Fargo is the counterparty. The swap had a negative termination value of $3.7 million to Heartland at fiscal year-end 2018.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U4MO
Date:Jan 17, 2019
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