Fitch Ratings has assigned a 'BBB+' rating to Upper Chesapeake Health System's (UCHS) $125,280,000 series 2008A and 2008B bonds. The bonds are expected to be issued through the Maryland Health and Higher Educational Facilities Authority. Fitch has also affirmed the underlying 'BBB+' rating on UCHS' outstanding parity bonds which include the series 2007C bonds. The Rating Outlook is Stable.
Proceeds of the new issue will be used to refund UCHS' series 2007A and 2007B auction-rate bonds. The series 2008 bonds will be issued as variable-rate demand bonds (VRDBs) with direct-pay letter of credit (LOC) support. Bank of America, N.A. (IDRs rated 'AA/F1+' by Fitch) will be the LOC provider for the series 2008A bonds and Branch Banking & Trust Company (IDRs rated 'AA-/F1+') will be the LOC provider for the series 2008B bonds. Fitch will assign ratings to the series 2008 bonds based on the LOC support closer to the date of issuance. The series 2008A and 2008B bonds are expected to price the week of Aug. 4, 2008.
The series 2007C bonds are expected to be converted from auction rate to fixed rate mode on Aug. 8, 2008. The fixed-rate bonds will retain their existing insurance policy by Financial Securities Assurance, Inc. (insurer financial strength rated 'AAA' by Fitch). The pricing for the conversion is expected to take place on July 22, 2008.
The affirmation of the 'BBB+' rating is based on UCHS' historically strong operational performance and volume growth and dominant market position in a growing service area. In fiscal 2007 and year-to-date 2008, UCHS continued to post operating margins that exceeded Fitch's 'BBB' medians with margins of 2.3% and 4.9%, respectively. The solid performance is aided by robust volume growth at both of UCHS's hospitals, Upper Chesapeake Medical Center (UCMC) and Harford Memorial Hospital (HMH).
For the year ending Dec. 31, 2007, adult admissions were up 9.4% over the prior year, while births increased 5.6%. UCHS holds a solid and growing market share of 55.1% (fiscal 2007) in its primary service area (PSA) which is comprised mostly of fast growing Harford County, MD (GO bonds are rated 'AA+' by Fitch). UCHS expects the implementation of Base Realignment and Closure (BRAC) recommendations, which will relocate multiple U.S. Defense Department operations to the nearby Aberdeen Proving Grounds, to bolster the PSA's population growth by additional 4.2% annually from 2011 to 2015. In total, the PSA's population is expected to increase to 358,368 by 2015 from 281,556 in 2008, or 27.3%.
Primary credit concerns are UCHS' high debt burden and limited liquidity as well as potential capital needs in the mid-to-long term to accommodate expected growth in the service area. The hospital is highly leveraged, with debt-to-capitalization at 68% at the end of fiscal 2007, and maximum annual debt service (MADS) represented 4.4% of revenues for the year then ended. Both figures exceed Fitch's 'BBB' medians of 47.1% and 3.5%, respectively.
Unrestricted cash and investments declined to $62.8 million as of March 31, 2008 from three months' prior amount of $68.2 million due to investment losses, bringing days cash on hand ratio down to 99.7 days from 121.9 days. Future liquidity growth is expected to be constrained by contractual distributions to St. Joseph's Medical Center under the terms of a joint venture agreement (payments were $3.3 million in fiscal 2007 and $3.8 million in fiscal 2006). Management expects that the anticipated population growth will require additional inpatient capacity at both campuses within four to five years.
Given UCHS' heavy debt burden, the additional borrowing required to fund the construction of upwards of 100 additional beds would generate negative rating pressure, absent the creation of one or more strategic partnerships to facilitate capital access. Furthermore, recent steps taken by the Maryland Health Services Cost Review Commission (HSCRC) to expand the State's Medicare waiver cushion suggest a moderate curtailment in reimbursement rate growth, which could somewhat reduce UCHS' operating profitability from historical levels. Nonetheless, the rate stability engendered by the HSCRC remains a credit strength.
The Stable Outlook reflects UCHS' growing volume, stable operations and attractiveness as an affiliation partner, which mitigate concern regarding future capital needs. Net patient revenues are projected to increase by 43% from fiscal 2007 ($230 million) to 2012 ($330 million) with operating margins exceeding 3% during this period, which Fitch believes is achievable.
Upper Chesapeake Health System has 251 staffed beds at two hospitals in Bel Air and Havre de Grace, MD, located approximately 30 and 55 miles, respectively, northeast of Baltimore, as well as other related facilities. In 2007, UCHS had $233.4 million in total operating revenue. UCHS covenants to disclose quarterly and annual audited financial statements to the Nationally Recognized Municipal Securities Information Repositories. Quarterly disclosure has been timely and includes a balance sheet, income statement, and utilization statistics, but excludes a cash flow statement.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
Alex Bumazhny, +1-212-908-0341
Jeff
Schaub, +1-212-908-0680
Christopher Kimble, +1-212-908-0226 (Media
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