RATING ACTION AFFECTS TOTAL OF $564 MILLION OF RATED DEBT
Health Care-Long-term Care
NV
Opinion
NEW YORK, May 4, 2011 -- Moody's Investors Service has affirmed Renown Health's (NV) A3 long-term and
underlying ratings on $564 million of outstanding revenue bonds. Conduit issuers
of the bonds include the City of Reno and Washoe County. The outlook remains
negative.
SUMMARY RATING RATIONALE: The A3 long-term rating reflects Renown Health's
position as Reno's leading provider of healthcare services. Renown Health is an
integrated delivery system, offers tertiary and quaternary services, and enjoys
a sizable regional footprint. The maintenance of the negative outlook is largely
the result of ongoing regional economic pressures, which are reflected in
Renown's growing exposure to Medicaid, flat revenue and admissions' growth, and
increasing exposure to charity care and bad debt expense. Renown's significant
debt burden makes Renown particularly susceptible to operating pressures, as the
organization has historically relied on above average operating cashflow margins
in order to achieve acceptable debt service coverage levels for the A3 rating
category. While Renown has improved its operating performance over the last
year, failure to further improve operating performance measures in support of
better debt service coverage levels would likely result in a downgrade.
STRENGTHS
*Sizable integrated delivery system with leading market share of
64%; significant regional presence with nine imaging centers, a number of owned
physician practices, a second hospital in southern Reno, and a joint venture
interest in a community hospital in Gardnerville, Nevada.
*Modest current capital needs
*Significantly improved cash position despite current operating pressures, with
cash on hand improving to 191 days as of March 31, 2011 (per unaudited interim
financial statements) versus 166 days at fiscal year end (FYE) 2010
*Exclusive provider of certain services, including the region's only pediatric
intensive care unit and Level II trauma center, leading to a high Medicare case
mix index of 1.83 in fiscal year (FY) 2010
*Proactive, seasoned management, enabling Renown to respond aggressively in the
face of significant operating pressures
CHALLENGES
*Economic slowdown in the region, with high level of mortgage defaults and high
unemployment; Nevada has the highest unemployment rate in the country
*Ongoing operating pressures with exposure to Medicaid increasing to 18.7% of
gross revenues in FY 2010 compared with 14% in FY 2008, and with charity care
and bad debt expense combined increasing to a total of $462 million in FY 2010
compared to $266 million in FY 2007; although operating measures improved in the
last year, they remain well below historical levels; operating cashflow margin
measured 9.4% through nine-months of FY 2011 (based on unaudited interim
financial statements), and 9.0% in FY 2010, compared with an average of 12.4%
from 2004 through 2009
*High leverage producing weak debt measures for the rating category, with an
unfavorable ratio of debt-to-cash flow of 7.2 times (through nine months
year-to-date (YTD) 2011), and maximum annual debt service (MADS) coverage of 3.0
times
*Competitive operating environment with competition from a large
multi-state system, and an exclusive payer culture
DETAILED CREDIT DISCUSSION
LEGAL SECURITY: The bonds are secured by a gross revenue pledge of the obligated
group, as defined in the bond documents. The obligated group includes Renown
Regional Medical Center (formerly Washoe Medical Center), Renown South Meadows
Medical Center (formerly Washoe Medical Center South Meadows), and Renown
Network Services (formerly Washoe Health System Services), and represents
approximately 93% of system revenues. The bonds are also secured by a mortgage
lien on the real property constituting Renown's main campus. The current Master
Trust Indenture contains provisions for a substitution of notes with bond
insurer approval.
INTEREST RATE DERIVATIVES: Renown has a number of fixed-payer, LIBOR-based swaps
which altogether total $190 million notional. This is approximately $48 million
greater than Renown's total current exposure to variable rate debt. The swap
counterparties are Merrill Lynch and Deutsche Bank. As of FYE 2010, the mark to
market value of Renown's swap portfolio was a liability of $38.3 million,
against which Renown was required to post $4.1 million in collateral.
RECENT RESULTS/DEVELOPMENTS
Moody's views Renown Regional Medical Center's leading position in the Reno
market as a key credit strength. Renown Health is comprised of several entities,
including: a renovated and expanded 808-licensed bed acute care hospital in
northeast Reno (Renown Regional Medical Center); a 76-bed community hospital in
south Reno (Renown South Meadows Medical Center); a health plan with
approximately 100,000 members (Hometown Health); a number of physician practices
employing 155 providers; a network of imaging centers; a rehabilitation
center; and other ancillary businesses. This strategy of vertical
integration combined with a broad regional presence has historically served
Renown well, traditionally driving strong volumes and providing for a high level
of profitability.
Reno is served by three hospital organizations, two of which (Renown and St.
Mary's) make up 92% of admissions. Renown is the market leader with 64% market
share in its primary service area (PSA) of Washoe County. St. Mary's, with
27% of the market and 380 licensed beds, has a similar business
integration model, with a health plan, an increasing number of
employed physicians, and clinics throughout the community. In 2006, St. Mary's
was acquired by the large multi-state system Catholic Healthcare West (CHW;
bonds rated A2). Many payers in the Reno market are exclusive, which creates
another factor in the competition between Renown and St. Mary's. Upon
CHW entering the market, several payers switched their primary
hospital contract.
FY 2010 represented the fourth consecutive year of declining absolute levels of
operating cashflow. Through nine months of FY 2011 (ended March 31, based on
unaudited interim financial statements), operating cashflow increased year over
year, but nevertheless, current cashflow production still represents a level of
profitability that is below the organization's historical average. Renown
achieved operating cashflow margins of 9.0% and 9.4% in FY 2010 and YTD FY 2011
respectively. This compares to an average of 12.4% achieved from FY 2004 through
FY 2009. The $77.6 million of operating cashflow achieved in FY 2010 is the
lowest level reached in at least seven years.
The primary factors contributing to Renown's decreased profitability in the last
two years all essentially relate to the economy in Nevada and Reno. Unemployment
in the state of Nevada is the highest in the country and the State is running
significant deficits. In June of 2009, Moody's assigned a negative outlook to
the GO rating of the city of Reno, sighting state budgetary challenges,
the collapsed housing market, and cuts in the leisure/hospitality industry. With
respect to Renown Health, Renown's exposure to Medicaid and county funding
jumped to 18.7% of gross revenues in FY 2010, compared to 14.1% in 2008, and
9.4% in 2006. The cost of charity care reached $334 million in FY 2010, compared
to $220 million in FY 2008, and $147 million in 2006. Most recently, bad debt
expense has also increased, reaching $127 million in FY 2010, from $95 million
in 2009. At the same time that reimbursement has been challenged, overall
volumes have also been weak, with combined admissions and observation stays
dropping nearly 2% in FY 2010. (YTD volumes appear again to be growing, with an
improvement of 5% year over year) Overall, patient revenue growth has been
modest, reaching just 2% in FY 2010, and little more than 1% year to date.
To date, Renown has avoided a downgrade due in significant measure to the
capable and proactive stance management has taken towards cashflow management.
Over the past two years, management - which has a strong and stable history with
the organization - undertook a number of cost cutting and revenue enhancing
measures which prevented operating performance from declining more than it did.
Actions to improve operating performance included across the board cuts in
labor expense (without, however, having to resort to significant reductions in
FTEs), improved efficiency (reducing the reliance on professional fees and
purchased services), more aggressive revenue cycle management, and improved
supplies management. Management plans to continue to aggressively manage
expenses, improve revenues, and grow current levels of operating cash flow. Due
to Renown's high amount of debt, the organization is particularly vulnerable to
variability of its operating measures, as the organization has historically been
highly reliant on very strong operating cashflow generation in order to achieve
adequate levels of debt service coverage.
An important countervailing factor to Renown's recent operating challenges is
its improving balance sheet. Renown's unrestricted cash balances have increased
materially over the last two years, improving from $339 million at FYE 2009 to
$372 at FYE 2010 and improving further to $430 million as of March 31, 2011 (per
unaudited interim financial statements). This equates to a jump in days cash on
hand from 157 days at FYE 2008 to 191 days as of March 31. While debt measures
remain stressed at the current rating level (as discussed in further detail
below), we believe this improvement in cash provides increased stability for the
organization during this period of operational transition, and helps provide
needed additional support of the organization's sizable debt service liability.
The primary drivers of the improvement in cash during this time period were a
very material decrease in capital spending (which was equal to just 0.3 times
deprecation the last two years), an improvement in investment returns, and a
material reduction in days accounts receivable.
Due to significant debt issuances in fiscal years 2004, 2005, 2006 and 2007
resulting in the tripling of debt over four years, Renown's debt measures are
fairly weak for the A3 rating category. At fiscal year end (FYE) 2010 (ended
June 30), cash-to-debt was a low 66% (compared to the A3 median of 97%)
debt-to-cash flow was an unfavorably high 9.0 times (compared to the A3
median of 4.0 times), and maximum annual debt service (MADS)
coverage (normalizing investment income at 6%), was 2.8 times (A3 median: 4.0
times). Measures have improved during the current fiscal year (per unaudited
nine-month interim financial statements) but still remain below the medians,
with cash to debt measuring 76%, debt to cash flow measuring 7.2 times, and MADS
coverage reaching 3.0 times.
Renown currently has exposure to demand debt on approximately 26% of its debt
portfolio. The ratio of cash to demand debt is good, at 2.1 times. Also, Renown
has sufficient headroom on its letter of credit (LOC) covenants, which include a
maximum debt to capitalization of 65%, minimum debt service coverage of 1.25
times, and minimum cash on hand requirements ranging from 90 to 105 days. The
agreements include term outs for bank bonds ranging from 2 to 5 years, and
expire in 2012 and 2013. Renown currently is counter party on fixed payer swap
contracts on a total notional amount that is greater than its total variable
rate debt ($190 million notional, versus $149 million total variable rate debt).
At FYE 2010, the mark to market on the swap portfolio was negative $38.3
million, for which Renown was required to post $4.1 million in collateral.
Outlook
The maintenance of the negative outlook is largely the result of
ongoing regional economic pressures, which are reflected in Renown's
growing exposure to Medicaid, flat revenue and admissions' growth, and
increasing exposure to charity care and bad debt expense. While renown has
improved its operating performance over the last year, failure to further
improve operating performance measures in support of better debt service
coverage levels would likely result in a downgrade.
WHAT COULD MAKE THE RATING GO UP
Significant improvement of debt measures; significant growth of market share and
improvement of the competitive environment
WHAT COULD MAKE THE RATING GO DOWN
Failure to improve operating performance to historical levels; a material
increase in debt without commensurate increase in cash flow or liquidity;
material loss of market share;
KEY INDICATORS
Assumptions & Adjustments:
-Based on financial statements for Renown Health and Subordinate Corporations
-First number reflects audit year ended June 30, 2010
- Second number reflects unaudited nine month interim results ended March 31,
2011, annualized
-Investment returns reclassified to non-operating from operating and normalized
at 6%
*Inpatient admissions: 29,441; 31,539
*Total operating revenues: $864 million; $876 million
*Moody's-adjusted net revenue available for debt service: $100.0 million; $108.1
million
*Total debt outstanding: $564.7 million; $563.8 million
*Maximum annual debt service (MADS): $36.1 million; $36.1 million
*MADS coverage with reported investment income: 2.5 times; 2.5 times
*Moody's-adjusted MADS coverage with normalized investment income: 2.8 times;
3.0 times
*Debt-to-cash flow: 8.0 times; 7.2 times
*Days cash on hand: 166 days; 191 days
*Cash-to-debt: 66%; 76%
*Operating margin: 0.1%; 0.8%
*Operating cash flow margin: 9.0%; 9.4%
RATED DEBT
Issuer: City of Reno, Nevada
-Series 2009A&B Variable Rate Demand Bonds ($63.3 million outstanding),
rated Aa1/VMIG1 based on two party pay analysis including an irrevocable direct
pay letter of credit from Wells Fargo (expires 1/15/2012); A3 underlying rating
-Series 2008A&B Variable Rate Demand Bonds ($86.0 million outstanding),
rated Aa3/VMIG1 based on two party pay analysis including an irrevocable direct
pay letter of credit from Union Bank of California (expires 6/25/2013); A3
underlying rating
-Series 2007A Fixed Rate Hospital Revenue Bonds ($122.5 million outstanding),
rated A3
-Series 2006C Fixed Rate Hospital Revenue Bonds ($0.8 million outstanding),
rated A3
-Series 2005A&B Fixed Rate Hospital Revenue Bonds ($95.6 million
outstanding), insured by Assured Guaranty Corp (formally FSA) currently rated
Aa3 with a negative outlook; A3 underlying rating
-Series 2004A Fixed Rate Hospital Revenue Bonds ($28.5 million outstanding),
rated A3 based on own rating; insured by Ambac
-Series 2004C Fixed Rate Hospital Revenue Bonds (converted from Auction Rate
Securities in 2010) ($48.0 million outstanding) insured by Assured Guaranty Corp
(formally FSA) currently rated Aa3 with a negative outlook; A3 underlying rating
-Series 2004C Fixed Rate Hospital Revenue Bonds (converted from Auction Rate
Securities in 2010) ($46.7 million outstanding), insured by Assured Guaranty
Corp (formally FSA) currently rated Aa3 with a negative outlook; A3 underlying
rating
Issuer: Washoe County, NV
-Series 2001A Fixed Rate Hospital Revenue Bonds ($33.4 million outstanding),
rated A3 based on own rating, insured by Ambac
Issuer: Washoe Professional Center, Inc.
-Series 1995 taxable guaranteed insured Notes ($33.0 million outstanding), rated
A3 based on own rating; insured by Ambac
CONTACTS
Obligor: Dawn Ahner, Chief Financial Officer, Renown Health (775) 982-4404
Financial Advisor: Therese Wareham, Partner, Kaufman Hall and Associates (847)
441-8780
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was Not-For-Profit Hospitals and
Health Systems, published in January 2008
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, public
information, confidential and proprietary Moody's Investors Service information,
and confidential and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of maintaining a credit rating.
Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Analysts
Brad E. Spielman
Analyst
Public Finance Group
Moody's Investors Service
Deepa Patel
Backup Analyst
Public Finance Group
Moody's Investors Service
Contacts
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA
MOODY'S AFFIRMS THE A3 LONG-TERM AND UNDERLYING RATINGS ON RENOWN HEALTH'S (NV) REVENUE BONDS; OUTLOOK REMAINS NEGATIVE
