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Rating Action:

Moody's revises NCH Healthcare System's (FL) outlook to negative; A2 affirmed

Global Credit Research - 05 Sep 2013

$102.1 million of rated debt affected

New York, September 05, 2013 -- 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 is revised to negative from stable due to the downturn in performance expected in fiscal year (FY) 2013 and the inability to meet the FY 2012 or FY 2011 budgets.

SUMMARY RATING RATIONALE

The affirmation of the A2 debt rating reflects NCH's leading and growing market position as a full service tertiary provider in a demographically favorable primary service area of Naples, FL and good growth in unrestricted cash and investments that support a moderate debt load and minimal future capital spending. A long standing history of successful fundraising also supports the rating. The revision of the outlook to negative reflects the system's downturn in performance through nine months of FY 2013 and management's expectation of a $3.7 million operating loss for the full year. Furthermore, while financial performance has shown improvement over the last three years, it has fallen short of budgeted expectations presented at the time of the initial rating assignment and remains modest for the rating category. In FY 2014, management expects financial performance to improve substantially; inability to reach these projected levels could result in a rating downgrade. The system is also challenged by its high Medicare exposure (58% in FY 2012), seasonal volume trends and competition from other not-for-profit and for-profit systems.

STRENGTHS

*NCH has distinctly leading market share (74%) in the primary service area of Collier County which is characterized by median household incomes well above the state and national levels and improving unemployment rates.

*NCH offers a full tertiary service array with a large open heart program and a nationally recognized hip and knee replacement program.

*Growth in unrestricted cash and investments to $207 million (172 days cash on hand) at FYE 2012 from $180 million (146 days; bad debt excluded from expenses for comparison) at FYE 2011. Cash has continued to grow as of June 30, 2013 to $244 million (201 days). Cash-to-debt was 132% at FYE 2012, similar to the A2 median of 140%.

*Strong fundraising capabilities given the system's location in Naples, FL, successful past capital campaigns and annual fundraising of $9 -10 million since 2000. A new campaign expected to raise $200 million over the next three to five years is showing good preliminary results.

*Management's ongoing plan to improve financial performance includes strategies to improve expense structure and grow revenue.

CHALLENGES

*Downturn in financial performance through nine months of FY 2013 with an operating margin of 1.2% and operating cash flow margin of 9.4% compared to 2.5% and 10.7%, respectively, recorded in FY 2011. Management expects to end the year with an operating loss of $3.7 million (-0.8% margin). FY 2013 will represent a departure from the improved financial performance recorded over the last three years when operating cash flow margins were 9.7%, 9.2% and 8.8% in fiscal years 2010, 2011 and 2012, respectively (calculated with bad debt as a revenue deduction). While better, this performance was still modest for the A2 rating level and did not reach budgeted levels.

*High exposure to Medicare at 58% in FY 2012 (compared to the national median of 44%) is a primary credit challenge as Medicare rates will continue to be under pressure given health reform and sequestration.

*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, according to management, has remained stable. Some efforts by Lee Memorial Health System (A2-rated 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. The system reports sizable losses in the summer months.

OUTLOOK

The revision of the outlook to negative reflects the operating loss anticipated for FY 2013, reversing a trend of modestly improving performance since FY 2010. Inability to show improvement over prior years' performance or a decline in the improved cash position may cause a rating downgrade.

WHAT COULD MAKE THE RATING GO UP

A rating upgrade in the near term is unlikely given the negative outlook, however an upgrade would be considered if financial performance is materially improved and sustained for several years leading to improved balance sheet and debt coverage ratios that are consistent with A1 medians.

WHAT COULD MAKE THE RATING GO DOWN

A rating downgrade will be considered if operating performance does not show improvement over prior years' performance and continues to be unfavorable to the rating category medians or if balance sheet ratios decline significantly from current levels. A material increase in competition could also trigger a downgrade as well as an increase in leverage.

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was Not-for-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jennifer Ewing
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

Sarah A Vennekotter
Asst Vice President - Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's revises NCH Healthcare System's (FL) outlook to negative; A2 affirmed
No Related Data.

 

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