Published: March 09, 2011
Fitch Affirms Shannon Health System's (TX) Revs at 'BBB+'; Outlook Remains Stable
CHICAGO - (BUSINESS WIRE) - As part of its ongoing surveillance efforts, Fitch Ratings has affirmed
the following bonds issued on behalf of Shannon Health System (SHS) at
'BBB+':
--$14,660,000 Tom Green County Health Facilities Development Corporation
hospital revenue bonds, series 2001.
The Rating Outlook remains Stable.
RATING RATIONALE:
--The 'BBB+' reflects SHS's leading market position, adequate liquidity
metrics, low debt burden with strong coverage, and strong support from
the Shannon Trust, against a challenging payor mix and a history of
inconsistent operating performance.
--SHS maintains the leading market share of approximately 65% in its
primary service area.
--Days of cash on hand (DCOH) is light, but cushion ratio and cash to
debt are well above the 'BBB' median level.
--SHS's strong debt service coverage and leverage metrics meet or exceed
the medians for the category, especially due to SHS's rapid paydown of
its existing debt.
--SHS relies heavily on government payors, which represented a high
58.1% of gross revenues in fiscal 2010, making it highly vulnerable to
changes in state and federal reimbursement levels.
KEY RATING DRIVERS
--The Stable Outlook reflects Fitch's expectation that SHS will continue
to generate positive operating margins. Positive operating cash flow
against modest capital needs should support balance sheet preservation.
--The extent to which SHS is able to successfully offset anticipated
reductions in Medicaid, disproportionate share hospital (DSH) and upper
payment limit (UPL) payments from the state could impact the rating.
SECURITY:
The bonds are secured by a pledge of gross revenues and a mortgage on
all real property of the obligated group.
CREDIT SUMMARY:
The affirmation at 'BBB+' reflects SHS's solid liquidity position
relative to debt, low debt burden, improving operations, and strong debt
service coverage for the rating category. As of the fiscal year ending
Sept. 30, 2010 (draft audit), SHS had approximately $62.2 million in
unrestricted cash and investments and $17.6 million in total outstanding
debt, which improved to $64.9 million in unrestricted cash against $13.7
million in total debt as of the three-month interim period ending Dec.
31, 2010. In the three-month interim period, SHS's liquidity relative to
its debt position was strong as demonstrated by 473.3% cash to debt and
a 24.6 times (x) cushion ratio. Both metrics were well above Fitch's
'BBB' category medians of 8.5x and 75.9%, respectively. In fiscal 2010,
approximately $4.5 million in notes payable to the Shannon Trust was
forgiven, which reduced maximum annual debt service (MADS) to $2.6
million, which was less than 1% of total revenue in fiscal 2010. Debt to
capitalization and debt to EBITDA improved to 9.4% and 0.9x
respectively, as of Dec. 31, 2010, which both compare favorably against
Fitch's 'BBB' medians of 50.1% and 4.5x, respectively. Additionally,
debt was further reduced as of Dec. 31, 2010 to $13.7 million. MADS
coverage by EBITDA was a very strong 7.4x in fiscal 2010, ahead of 2.4x
in prior year, and was 7.6x for the interim period. In May 2011, SHS may
exercise its option to redeem the remaining outstanding debt at 101% of
par, and currently has no plans for additional debt.
SHS continues to have the leading market position in its service area.
In 2010, Shannon had an approximate 65% total market share in its PSA,
which has been consistently maintained since the initial rating in 2001.
SHS's primary competitor, San Angelo Community Medical Center, had a
market share of approximately 35% in fiscal 2010, which was unchanged
from fiscal year (FY) 2006. An additional positive rating factor is the
strong support SHS has historically received from the Shannon Trust
(Trust). SHS received approximately $6 million in contributions from the
Trust for capital expenditures in fiscal 2010, ahead of the $5.7 million
received in fiscal 2009.
Credit concerns include an erratic profitability trend, an unfavorable
payor mix, and an economically challenged service area. After generating
operating losses from fiscal 2006-2009, SHS recorded a modest 1.4%
operating margin ($4.4 million in operating income) in fiscal 2010,
driven primarily by rigorous expense controls, revenue cycle
improvements, improved documentation and billing practices, and clinical
volume growth. Despite an increase in ambulatory volumes, management was
able to carve out $1.5 million in supply costs, which helped boost
revenue by 7.7% over prior year against a 5.5% increase in total
expenses. Further, days in accounts receivable were reduced to a very
low 35.6 in fiscal 2010, from 39.1 in fiscal 2009. Continued operational
improvement will depend upon SHS's ability to maintain cost controls,
and successfully recruit, retain, and ramp-up physician practices rather
than depending on agency (locum tenen) physicians as in prior years.
SHS continues to be challenged by its service area. Located in San
Angelo, SHS serves a wide West Texas service area with both relatively
stagnant population growth and below-average wealth indicators,
reflected in a high 10.6% Medicaid and 8.9% self-pay payor percentage in
2010. Further, SHS anticipates that a constrained state budget will
negatively impact Medicaid reimbursement, and could also impact DSH/UPL
payments. SHS received $15.5 million in DSH/UPL payments in fiscal 2010,
equating to approximately 4.9% of net patient revenues. SHS's future
profitability is extremely vulnerable to changes in state and federal
reimbursement methodology given the hospital's exposure to governmental
payors.
The Stable Rating Outlook reflects Fitch's belief that SHS will continue
to generate positive operating margins and cash flow at adequate levels
to support capital expenditures, via successful physician recruitment
and continued cost controls. Further, Fitch expects SHS's liquidity
position will remain strong relative to the organization's outstanding
debt, or that SHS will utilize its liquid resources and available funds
from the Trust to retire its debt in 2011. Finally, Fitch believes that
SHS has some operational flexibility to offset anticipated reductions in
reimbursement from the state; however, a significant deterioration in
operating profitability as a result of these challenges would pressure
the rating.
Headquartered in San Angelo, Texas, SHS is a full-service health care
delivery system operating a 421-licensed bed hospital, multi-specialty
physician clinic, health plan, and other related entities. The obligated
group includes only the corporate parent and the hospital, and accounted
for 91.9% of the system's assets and 72.4% of revenues in fiscal 2010.
SHS's total revenues in unaudited fiscal 2010 were approximately $318
million. Annual financial information is provided within 150 days of its
fiscal year-end and quarterly disclosure within 60 days of quarter-end,
via the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'
This action was informed by the sources of information identified in the
Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec.
29, 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
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Fitch Ratings
Primary Analyst
Emily E. Wadhwani,
+1-312-368-3347
Associate Director
Fitch, Inc.
70 W.
Madison Street
Chicago, IL 60602
or
Secondary Analyst
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Tain, +1-415-732-7576
Senior Director
or
Committee
Chairperson
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Senior Director
or
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