AFFIRMATION AFFECTS TOTAL OF $16 MILLION OF RATED DEBT OUTSTANDING
North Carolina Medical Care Commission
NEW YORK, Aug 11, 2011 -- Moody's Investors Service has affirmed the Ba3 rating assigned to
Halifax Regional Medical Center's bonds (see RATED DEBT). The outlook
The affirmation of the Ba3 rating reflects the progress management has made in
improving operating performance at Halifax over the last several years. The
maintenance of the negative outlook reflects declining patient volumes, which
resulted in slightly negative revenue growth in FY 2010, high exposure to
Medicare and Medicaid, and the issuance of $6.5 million in additional debt to
fund renovations at the hospital.
*Cash position has remained good over the last few years, although this is due
in part to low capital spending which has averaged only 0.5 times depreciation
expense over the last five years
*Operating performance appears to have stabilized over the last few years,
despite lower operating profitability through nine months 2011
*Other debt including notes and operating leases was paid down over the past
year, somewhat mitigating the impact of the new loan to fund renovations
*Patient volumes have declined the last two years with combined admissions and
observation stays declining 0.4% in FY 2009 and 3.2% in FY 2010; admissions are
also down through nine months FY 2011, but positively, ED Visits, outpatient
visits, and surgeries are flat in the interim period
*Small absolute size of the hospital makes it susceptible to
physician departures, which have contributed to the variation in
operating performance and patient volume fluctuations
*High exposure to Medicare and Medicaid, comprising a combined 72% of patient
volume in FY 2010
*North Carolina is reducing Medicaid rates by 7.3%; NC also passed provider
assessment legislation which is expected to partially offset the decrease in
Medicaid rates although provider fee program has not yet been approved by CMS
*New debt issuance of $6.5 million (40% increase) to fund renovations to the
outpatient surgery area, parking lot, and other areas
DETAILED CREDIT DISCUSSION
LEGAL SECURITY: Bonds secured by a gross revenue pledge and negative mortgage
INTEREST RATE DERIVATIVES: None
Operating performance in FY 2010 was good with a 2.8% operating margin and 7.3%
operating cash flow margin, resulting in good leverage metrics of 1.9 times debt
to cash flow and Moody's adjusted MADS coverage of 2.5 times. However, we
remain concerned about the sustainability of this performance and maintenance of
the metrics in light of weakening patient volumes and an increase in debt.
Through nine months FY 2011 ending June 30, 2011 operating profitability is
lower than the prior year with an operating margin of 0.2% and weak operating
cash flow margin of 4.1%. The downturn is due to a drop in patient volumes with
inpatient admissions falling a material 7.6% and higher expenses. We
note, positively, that other volume indicators including surgeries and emergency
department visits are flat.
Operating revenue in FY 2010 was essentially flat with a 0.1% decline caused by
a decline in patient volumes throughout the hospital. Combined admissions and
observation stays were down 3.2% following a 0.5% decline in FY 2009 and other
indicators including emergency department visits, total surgeries,
and outpatient visits all showed declines of 5.2% to 11.2%. Although the volume
declines mirror declines throughout the country, the losses are more acute at
Halifax given its small size. The volume declines are due to a variety of
factors including continued economic weakness in this part of North Carolina and
physician turnover challenges that have impacted certain specialties and
required the use of more expensive locum physicians. Management reports that
many key vacancies have been filled with some recruited physicians having
already started and others under contract to start over the next few months.
However, the challenges of recruiting and retaining physicians have been an
ongoing challenge for Halifax and are not uncommon for hospitals of this
size and location in a rural area.
Halifax is adding $6.5 million of debt to fund renovations to the surgical
suites, registration area, parking lot, and other renovations. The debt is being
placed with BB&T and is interest only for the first two years and must be
refinanced after seven years, in FY 2018. Halifax currently has a very low debt
load at only 15.2% of revenue and maintains a strong balance sheet for the
rating at 77 days cash on hand and 140% cash to debt through six months FY 2011.
Investments do include a 35% allocation to equities suggesting that liquidity
balances may decline if broader financial markets continue to lose value. The
new debt lowers the cash-to-debt ratio to 99% at six months FY 2011.
Unrestricted cash and investment balances have steadily increased over the last
three years as a result of low capital spending, which has averaged just 0.5
times since FY 2006. Capital spending not supported by the $6.5 million debt
issuance is expected to remain at about $2 million- $3 million annually, which
will help maintain balance sheet strength so long as operating performance
The maintenance of the negative outlook reflects the challenges facing the
organization including maintaining an adequate medical staff and
stable operating margins over a multi-year time horizon.
WHAT COULD MAKE THE RATING GO UP
Stable or increasing patient volumes; stable operating performance over several
years; stable and consistent revenue growth
WHAT COULD MAKE THE RATING GO DOWN
Sustained operating losses or low levels of cash flow; patient volume declines;
decrease in operating revenue; weakening of balance sheet position
Assumptions & Adjustments:
-Based on financial statements for Halifax Regional Medical Center, Inc.,
Clinics and Foundation
-First number reflects audit year ended September 30, 2009
-Second number reflects audit year ended September 30, 2010
-Debt in FY 2010 increased by $6.5 million
-MADS in FY 2010 increased $490,000 to reflect pro-forma debt service for $6.5
million of new debt
-Interest expense "grossed up" by $319,000 to reflect pro-forma
interest expense on new debt
-Investment returns normalized at 6% unless otherwise noted
*Inpatient admissions: 7,915; 7,441
*Total operating revenues: $104.8 million; $104.7 million
*Moody's-adjusted net revenue available for debt service: $5.3 million; $9.1
*Total debt outstanding: $16.9 million; $22.4 million
*Maximum annual debt service (MADS): $3.5 million; $4.0 million
*MADS Coverage with reported investment income: 1.3 times; 2.0 times
*Moody's-adjusted MADS Coverage with normalized investment income: 2.6 times;
*Debt-to-cash flow: 3.8 times; 2.8 times
*Days cash on hand: 63 days; 85 days
*Cash-to-debt: 103%; 102%
*Operating margin: (0.9%); 2.8%
*Operating cash flow margin: 4.1%; 7.3%
RATED DEBT (debt outstanding as of September 30, 2010)
-Series 1998; fixed rate ($15.9 million outstanding) rated Ba3
Obligor: Sherry Jensen, Chief Financial Officer, (252) 535-8005
The last rating action with respect to Halifax Regional Medical Center was on
August 17, 2010 when the Ba3 rating was affirmed with a negative outlook.
The principal methodology used in this rating was Not-for-Profit Hospitals and
Health Systems published in January 2008.
Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S AFFIRMS HALIFAX REGIONAL MEDICAL CENTER'S (NC) Ba3 DEBT RATING; OUTLOOK REMAINS NEGATIVE
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007