Affirmation affects $102.1 million of rated debt outstanding
New York, July 03, 2012 -- Moody's Investors Service has affirmed NCH Healthcare System's (NCH)
A2 bond rating on $102.1 million of outstanding debt issued
through the Collier County Industrial Development Authority. The
outlook remains stable.
SUMMARY RATING RATIONALE
The affirmation of the A2 debt rating and stable outlook reflect NCH's
leading and growing market position as a full service tertiary provider
in a demographically favorable primary service area; improving financial
performance and growth in unrestricted cash and investments over the last
several years. A long standing history of successful fundraising
in Naples, FL also supports the rating. These attributes
are mitigated by its modest absolute liquidity growth, high Medicare
exposure (approximately 60%), seasonal volume trends and
a local for-profit competitor with two inpatient facilities.
STRENGTHS
*Leading and growing market share (to 74% in 2011 from 72%
in 2010) in the primary service area of Collier County characterized by
median household incomes well above the state and national levels and
improving unemployment rates
*Full tertiary service array with a high Medicare case mix index of
1.61, a large open heart program and a nationally recognized
hip and knee replacement program
*Strong inpatient admission growth in fiscal year (FY) 2011 aided
by the addition of 67 employed physicians contributed to strong 11.5%
growth in total net patient revenue over FY 2010
*Consistent financial performance in FY 2011 and through the first
half of FY 2012 continues improved performance that began in FY 2009 and
represents a departure from two years of operating losses in fiscal years
2008 and 2007; financial turnaround led by a relatively new management
team initiating expense controls given NCH's challenging payer mix
and seasonal community; future performance will largely depend on
continuation of expense controls and process improvement initiatives
*Eliminated debt structure risk by refinancing Series 2002 and 2004
VDRBs and the variable rate debt at Bonita Community Health Center of
which half is guaranteed by NCH; debt structure is now 100%
fixed rate
*Strong fundraising capabilities given the system's location
in Naples, FL; successful past capital campaigns and annual
fundraising of $10 million since 2000; new campaign developed
to raise $100 million over the next three to five years
CHALLENGES
*High exposure to Medicare at 59% in FY 2011 (compared to the
national median of 43%) is a primary credit challenge as Medicare
rates will continue to be under pressure given health reform; management
embarked on a strategy to improve the current Medicare deficit,
successfully reducing it by over $30 million since FY 2008,
largely through expense reductions and process improvements
*Some competition from two hospitals (201 beds in total) in Naples
owned by for-profit HMA offering a more limited service array than
NCH and capturing 21% market share which has declined over the
last year; some efforts by Lee Memorial Health System (1,400
bed facility) north of NCH in Lee County to increase market share with
more aggressive advertising in Collier County
*Heavy reliance on winter months for profitability due to the area's
seasonal retirement population as the system reports losses in the summer
months (we note improvement in losses during the off season with efforts
to manage staff to the lower volumes)
*Despite improved financial performance, margins remain below
the A2 median level in FY 2011 with 8.5% operating cash
flow margin compared to the A2 median of 9.9%
*Slight decline in unrestricted cash and investments to $180.3
million (135 days cash on hand; includes expenses associated with
the newly consolidated employed physician group) at FYE 2011 from $182.4
million (153 days cash on hand) at FYE 2010 and unfavorable to the FY
2011 budget which anticipated $208.3 million in cash and
investments; cash-to-debt of 94% in FY 2011
remains below the A2 median of 132%
Outlook
The stable outlook reflects our expectation that with management's
strategies to manage its seasonality and high Medicare exposure and to
align and employ physicians, volume growth should continue and financial
performance will be consistent or show improvement from current levels.
Furthermore, with the majority of capital spending behind the system
after FY 2012, balance sheet metrics should improve. Management's
ability to manage the expenses at the employed physician group and the
coming Medicare rate pressure will indicate longer term performance.
WHAT COULD MAKE THE RATING GO UP
Sustained improvement in financial performance and volumes; continued
improved liquidity and debt ratios; no loss in market share or change
in the competitive environment
WHAT COULD MAKE THE RATING GO DOWN
Decline in operating performance from current levels; material decline
in volumes and increase in competition; decline in liquidity;
increase in leverage
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was Not-For-Profit
Healthcare Rating Methodology March 2012. Please see the Credit
Policy page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
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this announcement provides relevant regulatory disclosures in relation
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this announcement provides relevant regulatory disclosures in relation
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Jennifer Ewing
Associate Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Lisa Goldstein
Associate Managing Director
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
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Moody's affirms NCH Healthcare System's (FL) A2 bond rating; outlook remains stable
