AFFECTS APPROXIMATELY $188 MILLION OF RATED DEBT OUTSTANDING
Chatham County Hospital Authority, GA
NEW YORK, Sep 7, 2011 -- Moody's Investors Service has affirmed Memorial Health University
Medical Center's (MHUMC) Baa3 long-term bond rating. The action affects
approximately $188 million of rated debt issued through the Chatham County
Hospital Authority (see Rated Debt section). The rating outlook remains stable.
This analysis reflects the financial performance of Memorial Health, Inc. and
Affiliates (System). MHUMC represents approximately 88% of System assets and
87% of System operating revenues.
SUMMARY RATINGS RATIONALE: The affirmation of the Baa3 rating and stable rating
outlook reflect MHUMC's stabilized operating performance through six months
fiscal year (FY) 2011 (after very modest results in recent years) and continued
market presence over a broad service area.
*Large academic medical center (AMC) with a broad 12 county total service area
covering parts of two states.
*Generally good demographic characteristics in the broad service area.
*Virtually all debt is in fixed rate mode and MHUMC has a defined contribution
pension plan, which help to minimize balance sheet risk.
*Multi-year trend of weak operating performance continued through FY 2010 (1.3%
operating cash flow margin), although we note that results improved
significantly through six months FY 2011 (5.9% operating cash flow margin).
*Weak Moody's adjusted debt ratios in FY 2010 for the Baa3 rating level (46.3
times debt-to-cash flow, 0.8 times maximum annual debt service coverage).
*Continued modest liquidity ratios with 74 days cash on hand at fiscal year end
(FYE) 2010 (management notes, however, that cash on hand for the obligated group
based on a twelve month rolling basis measured 91 days at June 30, 2011, which
exceeds its covenant of 85 days cash on hand). We note that cash on hand
improved to 79 days at June 30, 2011 for the System. Cash-to-debt measured 58%
at FYE 2010 and 62% at June 30, 2011 for the System.
*According to management, Medicaid (including Medicaid managed care) represented
a high 18.4% of gross revenues in FY 2010 (the median for all rating categories
*Very modest capital spending in recent years as MHUMC's capital spending ratio
averaged a low 0.3 times between FY 2007 and FY 2010 resulting in a high average
age of plant of 16.1 years at FYE 2010. Management plans to ramp up capital
spending in the coming years.
*Reliance on special funding sources such as Indigent Care Trust Fund (ICTF,
Georgia's disproportionate share program); while these funding sources indicate
significant public policy support for MHUMC, we consider these revenues to be
at-risk and note that ICTF funding has been cut in recent years and is expected
to continue to decrease.
*Recent management turnover in the past three years, including the CEO and
multiple changes in the CFO post. While this indicates that the board is willing
and able to execute senior management changes in the face of challenging
operating performance, we believe this provides continued challenges for MHUMC.
MHUMC currently is recruiting for a full-time CFO. The current CEO has been with
the organization since 2004 and served as COO from 2005-2010.
DETAILED CREDIT DISCUSSION
LEGAL SECURITY: The bonds are secured by a revenue pledge of Memorial Health
Inc. (parent) and Memorial Health University Medical Center (the hospital), the
latter of which cannot exit the obligated group so long as bonds are
INTEREST RATE DERIVATIVES: None.
The affirmation of the Baa3 rating with a stable outlook reflects the System's
significantly improved operating results in interim FY 2011, after years of
operating challenges. Through six months FY 2011 (based on unaudited management
prepared financial statements), the System recorded operating income of $0.8
million (0.3% operating margin) and operating cash flow of $17.2 million (5.9%
operating cash flow margin), compared to a $13.5 million operating loss (-4.7%
margin) and operating cash flow of $6.0 million (2.1% margin) for the same
period FY 2010. In audited FY 2010 (December 31 year end), the System recorded
an operating loss of $28.9 million (-5.0% margin) and operating cash flow of
$7.6 million (1.3% margin). Between FY 2006 and FY 2010, the System recorded an
operating loss in every year and the System's operating cash flow margin ranged
between -2.7% and 3.7%.
Management attributes the improved operating results in interim FY 2011 to: (a)
reduced losses per physician, and management efforts to improve relations with
physicians; (b) a 7.2% increase in med/surg admissions through six months FY
2011 and 3.5% increase in inpatient surgeries, which help to offset a
0.6% decline in outpatient visits and 16.5% drop in outpatient surgeries (the
outpatient volume losses are due in part to eye doctors opening a competing
center in the area); (c) a drop in average length of stay from 5.65 days through
six months FY 2010 to 5.27 days through six months FY 2011; (d) divesting of the
ambulance service in February 2011, which management expects will result in
approximately $1.5 million in annualized savings; (e) a wage freeze that has
been in place for over three years (management expects to introduce a modest
wage increase in late 2011); (f) benefit savings, such as no matching to the
401(K) plan in 2011 that results in an estimated $1.6 million of savings
(management expects to resume contributions in 2012); (g) reduced supply costs
through a joint purchasing agreement with the System's in-town competitor, Baa1
rated St. Joseph's/Candler Health System (SJ/C); (h) improved managed
care contracts; and (g) focus on revenue cycle improvements.
Looking forward, management projects the System to maintain a 5.9% operating
cash flow margin through FY 2013, and for the operating cash flow margin to drop
by approximately one percentage point thereafter when healthcare reform is
implemented fully. Key improvement initiatives management is implementing
include: (a) approximately $15 million of annual revenue cycle improvements; (b)
continued focus on quality initiatives; (c) the aforementioned improvements in
managed care contracts and efforts to bolster relations with physicians; and (d)
efforts to reduce debt service costs and improve access to capital.
The System's Moody's adjusted debt ratios remain stressed. Based on FY 2010
results, the System's adjusted debt-to-cash flow measured a very high 46.3 times
(Baa3 median is 4.9 times) and adjusted maximum annual debt service (MADS)
coverage measured a thin 0.8 times (Baa3 median is 2.7 times).
Debt-to-total operating revenue is manageable at 35% (Baa3 median is 35%). Based
on annualizing six month FY 2011 results, adjusted debt-to-cash flow improves to
6.0 times and adjusted MADS coverage improves to 2.2 times.
The System's unrestricted cash and investment position has improved somewhat in
interim FY 2011. At unaudited June 30, 2011 the System's unrestricted cash and
investments improved to $121 million, compared to $117 million at audited FYE
2010 and $115 million at FYE 2009. As a result, cash on hand measured a more
adequate 79 days at June 30, 2011 compared to 74 days at FYE 2010 and 75 days at
FYE 2009 (Baa3 median is 97 days). Cash-to-debt measured a more adequate 62% at
June 30, 2011, up from 58% at FYE 2010 and 54% at FYE 2009 (Baa3 median is
84%). According to management, at FYE 2010 the System's unrestricted cash and
investments were allocated among approximately 58% cash and fixed income
securities, 24% equities, and 18% alternative and other assets, and
approximately 88% of unrestricted cash and investments could be liquidated
within one month. While management expects to maintain an improved operating
cash flow margin, cash on hand is expected to remain at approximately 90 days
through FYE 2014 as the System plans to increase capital spending, which
has been very modest in recent years.
The Savannah market remains competitive between Memorial and SJ/C. The primary
service area (PSA) covers Chatham, Bryan, and Effingham counties in Georgia.
Historically, MHUMC's and SJ/C have approximately split the PSA market share.
Based on data provided by Memorial management, MHUMC's PSA market share has
increased recently to 48.2% in FY 2010 (and 49.9% in the first quarter of FY
2011) from 47.1% in FY 2009, while SJ/C's share decreased to 46.6% in FY 2010
from 47.6% in FY 2009. Despite the competitive nature of the market, Moody's
believes the Savannah area can sustain two viable acute care healthcare systems.
According to the US Census Bureau, population growth in all three PSA counties
exceeds the national average (and has been particularly strong in Bryan and
Effingham counties), and the median household income levels in Bryan and
Effingham counties exceed the state and national averages.
The Memorial System's capital spending has been modest in recent years as
management has focused on improving operating performance. Capital spending
averaged 0.3 times depreciation expense between FY 2007 and FY 2010, which has
translated to a high average age of plant of 16.1 years at FYE 2010 (the median
for all rating categories is 10.3 years). Management expects to ramp up capital
spending over the next several years and is considering debt refinancing
The stable outlook reflects our expectation that the System will continue to
demonstrate improved operating margins more consistent with an investment grade
credit and maintain current liquidity and debt ratios.
WHAT COULD MAKE THE RATING GO UP
Sustained material operating improvement leading to significantly stronger debt
ratios; material market share gain; improved liquidity ratios
WHAT COULD MAKE THE RATING GO DOWN
Reversion to weaker operating margin leading to weak debt ratios; declining
patient volumes and market share loss; weaker liquidity ratios; unexpected
material increase in debt without commensurate increase in cash and cash flow
Assumptions & Adjustments:
-Based on Memorial Health, Inc. and Affiliates consolidated financial statements
-First number reflects audited FY 2009 for the year ended December 31, 2009
-Second number reflects audited FY 2010 for the year ended December 31, 2010
-Investment returns smoothed at 6%
*Inpatient admissions: 25,793; 26,301
*Total operating revenues: $563 million; $573 million
*Moody's-adjusted net revenues available for debt service: $24.8 million; $15.8
*Total debt outstanding: $212 million; $203 million
*Maximum annual debt service (MADS): $20.2 million; $20.2 million
*MADS Coverage with reported investment income: 1.14 times; 0.93 times
*Moody's-adjusted MADS Coverage with normalized investment income: 1.23 times;
*Debt-to-cash flow: 16.38 times; 46.30 times
*Days cash on hand: 75.3 days; 73.9 days
*Cash-to-debt: 54.3%; 57.6%
*Operating margin: -4.1%; -5.0%
*Operating cash flow margin: 2.9%; 1.3%
Issued by the Chatham County Hospital Authority, GA (debt outstanding as of
December 31, 2010):
-Series 1996A Fixed Rate Hospital Revenue Bonds ($94.6 million outstanding),
insured by Ambac, unenhanced rating of Baa3
-Series 2001A Fixed Rate Hospital Revenue Bonds ($43.9 million outstanding),
-Series 2004A Fixed Rate Hospital Revenue Bonds ($49.7 million outstanding),
Obligor: Maggie Gill, CEO, (912) 350-8518
Financial Advisor: Bill Hanlon, H2C Advisors, (858) 756-8580
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was Not-for-Profit Hospitals and
Health Systems published in January 2008. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
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 rating practices. For ratings issued
on a support provider, this announcement provides relevant regulatory
disclosures in relation to the rating action on the support provider and in
relation to each particular rating action for securities that derive their
credit ratings from the support provider's credit rating. For provisional
ratings, this announcement provides relevant regulatory disclosures in
relation to the provisional rating assigned, and in relation to a
definitive rating that may be assigned subsequent to the final issuance of the
debt, in each case where the transaction structure and terms have not
changed prior to the assignment of the definitive rating in a manner that
would have affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the 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 considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing a rating.
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 MEMORIAL HEALTH UNIVERSITY MEDICAL CENTER'S (GA) Baa3 LONG-TERM BOND RATING; OUTLOOK REMAINS STABLE
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007