CHICAGO–(BUSINESS WIRE)–Fitch Ratings has affirmed the ‘A’ rating on the series 2013 revenue
bonds issued by the Maryland Health and Higher Educational Facilities
Authority on behalf of Calvert Health System (CHS).
The Rating Outlook is revised to Stable from Positive.
The bonds are secured by a pledge of the receipts of the obligated group.
KEY RATING DRIVERS
LARGE CAPITAL PROJECT: The Outlook revision to Stable reflects the
combination CHS’s increased debt burden and execution risk associated
with the planned construction of a new hospital tower.
ROBUST LIQUIDITY METRICS: Liquidity metrics remain robust with 352.6
days cash on hand, 28.5x cushion ratio and 205.1% cash to debt at March
31, 2015, easily exceeding Fitch’s ‘A’ category medians of 205.3 days,
18.5x and 143.7%, respectively. However, liquidity metrics could be
materially impacted by the new tower project.
SOLID OPERATING PROFITABILITY: Operating profitability has been
consistently solid over the past five years with operating EBITDA
margins averaging 10.6% since fiscal 2011 and equal to 10% in fiscal
2016 and 9.4% in the nine-month interim period ending March, 31 2016.
MODERATE DEBT BURDEN: CHS’s debt burden increased with the issuance of
new debt in fiscal 2015 but remains moderate with maximum annual debt
service (MADS) equal to 3.2% of fiscal 2015 operating revenue. MADS
coverage by EBITDA remains solid at 4.0x in fiscal 2015 and 4.6x in the
STRONG MARKET POSITION: CHS holds a dominant market position in a
favorable primary service area (PSA). Additionally, CHS bolsters its
market position through partnerships with several tertiary providers in
certain service lines.
SUCCESSFUL EXECUTION OF CAPITAL PLANS: Fitch expects Calvert Health
System to successfully execute construction of the new patient tower.
While Fitch views the project favorably, a material compression of
liquidity metrics could result in negative rating pressure. However, an
immaterial impact on liquidity and an accretive impact on consolidated
profitability could result in positive rating movement.
CHS operates a general acute care hospital with 122 acute care beds (77
currently licensed) located in Prince Frederick, MD, and various
outpatient facilities. Operating revenue increased 4.1% year over year
to $148.7 million in fiscal 2015.
CHS is one of 10 Maryland hospitals participating in the Total Patient
Revenue (TPR) program. TPR was developed for Maryland’s sole community
hospitals and provides a fixed, fully-capitated, revenue stream which is
adjusted annually based upon historical volume and demographic trends.
Fitch views CHS’s participation in the TPR program positively as it
positions CHS well for the implementation of healthcare reform-related
initiatives. Additionally, TPR provides the system a measure of
operating stability with over 90% of operating revenues known in advance
allowing for operating expenses to be managed accordingly. The revenue
stability afforded by the TPR system mitigates Fitch’s concerns related
to the system’s small revenue base.
LARGE CAPITAL PROJECT
Capital spending increased in fiscal 2016 and is expected to increase
again in fiscals 2018 through 2020. The increase in fiscal 2016 is due
to implementation of a new IT system and renovation of the hospital’s
radiology department. The projected increase reflects CHS’s plans to
construct a new patient tower converting the hospital to 100% private
rooms. CHS expects to receive CON approval and the project is
anticipated to break ground in spring 2017 with a spring 2020 completion
date. The total cost will equal approximately $52 million and funding is
expected to be provided through cash and cash flows.
ROBUST LIQUIDITY METRICS
Unrestricted cash and investments increased markedly since fiscal 2013,
increasing 62% to $137 million at March 31, 2016 from $85 million at
June 30, 2013. The increase was primarily due to the sale of six medical
office buildings in fiscal 2014 plus solid cash flows and moderate
capital spending. With 352.6 days cash on hand, 28.5x cushion ratio and
205.1% cash-to-debt, liquidity metrics easily exceed Fitch’s respective
‘A’ category medians of 205.3 days, 18.5x and 143.7%. However, the new
patient tower project could compress liquidity metrics.
SOLID OPERATING PROFITABILITY
Operating profitability has been solid over the past five fiscal years
with operating EBITDA margin averaging 10.6% since fiscal 2011.
Operating EBITDA margin decreased from 11.3% in fiscal 2014 to 10% in
fiscal 2015 and 9.4% in the interim period. The decrease in fiscal 2015
was primarily due to increased losses in the system’s employed physician
group. The loss is expected to revert to historical averages in fiscal
2016. Interim period profitability is consistent with the prior year’s
results and management expects year-end results to be in line with
The consistent and solid operating profitability reflects the system’s
adjustment to operating within the TPR system and effective cost
management initiatives with emphasis on labor productivity, supply chain
management and reductions in clinical variability.
MODERATE DEBT BURDEN
Despite the issuance of an additional $21 million of bonds in September
2015, the system’s debt burden remains moderate. MADS increased to $4.8
million from $3.4 million, equating to 3.2% of fiscal 2015 operating
revenue relative to Fitch’s ‘A’ category median of 2.8%. Coverage
metrics remain solid with MADS coverage by EBITDA equal to 4x in fiscal
2015 and 4.6% in the interim period, comparing favorably with Fitch’s
‘A’ category median of 4.2x. The series 2015 bonds are privately placed
for a 10-year term and Fitch does not rate them.
STRONG MARKET POSITION
CHS holds a leading 60% market share in its PSA which accounts for
approximately 80% of discharges. Market share has decreased in recent
years primarily due to the system’s successful TPR-related initiatives
to decrease inpatient utilization. The service area is characterized by
low unemployment and above-average wealth levels relative to both
Maryland and national levels. CHS benefits from limited competition with
its closest competitor being 26 miles away. However, given CHS’s
proximity to Baltimore and Washington, D.C., outmigration is a credit
concern. CHS bolsters its market position and mitigates concerns related
to outmigration through service line affiliations with several
hospitals, including Johns Hopkins Hospital, Georgetown University
Medical Center, Anne Arundel and Mercy Medical Center of Baltimore.
CHS had approximately $66.7 million of total debt outstanding at March
31, 2016, 100% of which is fixed-rate. In addition to the rated series
2013 bonds and the series 2015 privately placed bonds, CHS has
approximately $15 million of series 2012 bonds outstanding which are
privately placed through 2022 and are not rated by Fitch. The system is
not counterparty to any swap agreements. Fitch views the conservative
debt profile favorably.
CHS covenants to provide quarterly and annual disclosure. Disclosure is
provided through the Municipal Securities Rulemaking Board’s EMMA system.
Additional information is available at ‘www.fitchratings.com‘.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun
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