Pharmacy News EU

NEW YORK(BUSINESS WIRE) Fitch Ratings takes the following rating action on University Health Systems of Eastern Carolina (NC) as part of its continuous surveillance effort:
$8,115,000 North Carolina Medical Care Commission (NC) (Pitt County Memorial Hospital) hospital revenue bonds series 1998A affirmed at ‘AA-’;
$4,910,000 North Carolina Medical Care Commission (NC) (Pitt County Memorial Hospital) hospital revenue bonds series 1998B affirmed at ‘AA-’;
$112,065,000 North Carolina Medical Care Commission (NC) (University Health Systems of Eastern Carolina) variable-rate health care facilities revenue bonds series 2008A-1 and A-2, underlying rating affirmed at ‘AA-’ (variable-rate demand bonds supported by letter of credit from Bank of America);
$123,065,000 North Carolina Medical Care Commission (NC) (University Health Systems of Eastern Carolina) variable-rate health care facilities revenue bonds series 2008B-1 and B-2, underlying rating affirmed at ‘AA-’ (variable-rate demand bonds supported by letter of credit from Branch Banking & Trust Company);
$74,150,000 North Carolina Medical Care Commission (NC) (University Health Systems of Eastern Carolina) health care facilities revenue refunding bonds series 2008C affirmed at ‘AA-’;
$119,715,000 North Carolina Medical Care Commission (NC) (University Health Systems of Eastern Carolina) health care facilities revenue refunding bonds series 2008D affirmed at ‘AA-’;
$22,425,000 North Carolina Medical Care Commission (NC) (University Health Systems of Eastern Carolina) health care facilities revenue refunding bonds series 2008E-1 affirmed at ‘AA-’;
$55,340,000 North Carolina Medical Care Commission (NC) (University Health Systems of Eastern Carolina) health care facilities revenue refunding bonds series 2008E-2 affirmed at ‘AA-’.
The Rating Outlook is Stable.
RATING RATIONALE:
Strong market position in its primary service area with 79.4% market share that has steadily increased over the last two years and good geographic coverage by the system with Pitt County Memorial Hospital (PCMH), an academic medical center and five regional community hospitals.
Consistent and solid generation of operating cash flow with operating EBITDA margins of 9.9%, 9.8% and 10.4% for fiscal 2008, 2009 and the six months ended March 31, 2010 (interim period), respectively.
Sustained volume growth through the current economic climate at PCMH and assisted by the opening of a new bed tower in January 2009. Inpatient discharges were up 5.5% for the six months ended March 31, 2010 compared to the same prior year period.
Light liquidity for its rating category with only 123 days cash on hand and 73% cash to debt as of March 31, 2010 but has remained stable from 129 days and 70% as of fiscal year end 2008 (Sept. 30).
Moderate debt burden with MADS coverage by operating EBITDA of 3.2 times (x) for fiscal 2009 and 3.6x for the interim period compared with the ‘AA’ category median of 3.8x.
Challenging payor mix with almost 20% of its revenues derived from Medicaid. However, UHSEC receives favorable Medicaid reimbursement for PCMH under state legislation.
RATING DRIVERS:
Since UHSEC’s liquidity is low for the rating category, Fitch expects UHSEC to build liquidity in line with its projections despite its robust capital spending plans.
Maintenance of strong operating performance due to its market position.
SECURITY:
General obligation of the obligated group, which includes the parent company and PCMH.
CREDIT SUMMARY:
The rating affirmation is supported by UHSEC’s strong market position and geographic coverage, solid operating performance and moderate debt burden. UHSEC’s main credit strength is its dominant market position in its primary service area with 79.4% market share that has increased from 78.6% in 2007. The system is anchored by the academic medical center, PCMH, with five regional hospitals that serve as feeders to the tertiary facility. Management indicated that it continues to evaluate growth opportunities for the system. PCMH has been at capacity and recently opened a 120-bed patient tower in January 2009, on time and under budget. Volume growth has been strong at PCMH increasing 5.5% for the interim period compared to the same prior year period versus the five regional facilities, which suffered an 8.5% drop in discharges over the same time period. The regional facilities are located in rural areas and have been more impacted by the recession. Given current economic conditions, UHSEC implemented several cost saving initiatives that resulted in over $10 million of savings in fiscal 2009. UHSEC has consistently generated strong operating EBITDA margins of 9.9%, 9.8% and 10.4% for fiscal 2008, 2009 and the six months ended March 31, 2010, respectively. Operating margin declined in fiscal 2009 due to increased depreciation and interest expense related to the new bed tower. Operating income was $27.5 million (2.2% margin) in fiscal 2009 compared to $38.2 million (3.3% margin) in fiscal 2008 and was $15.4 million (2.3% margin) for the interim period. Other revenue growth opportunities that should further support UHSEC’s solid operating cash flow include additional physician recruitment, additional operating room capacity, favorable managed care rate increases, and an enhanced relationship with the Brody School of Medicine at East Carolina University. Although UHSEC’s payor mix is challenging with almost 20% of revenue from Medicaid, under state legislation PCMH receives full cost reimbursement for Medicaid.
The main credit concern is UHSEC’s low liquidity relative to its rating category. Although Fitch believes UHSEC’s market position and solid operating performance somewhat offsets this concern, Fitch expects UHSEC to steadily improve its liquidity over the next three to four years despite its capital spending plans. Days cash on hand was 123 days at March 31, 2010 ($367 million unrestricted cash) and 130 days at fiscal year end Sept. 30, 2009 ($372 million unrestricted cash). Cash to debt was weak at 73% at March 31, 2010 compared to the ‘AA’ category median of 144%. UHSEC’s unrestricted cash projections are $423 million for fiscal 2011, $478 million for fiscal 2012, $546 million for fiscal 2013, and $623 million for fiscal 2014.
UHSEC has $520 million of debt outstanding with 40% fixed-rate, 45% variable-rate demand bonds (VRDBs), and 15% long-term put bonds ($22.4 million puttable Dec. 1, 2013 and $55.3 million puttable Dec. 1, 2014). The exposure to VRDBs is mitigated by UHSEC’s solid cash to puttable debt of 155% in fiscal 2009. In addition, management recently revised its investment policy to enhance the liquidity and accessibility of funds.
UHSEC’s capital spending plan is fairly robust at approximately $100 million a year for fiscal 2010-2014 compared to its operating EBITDA that has averaged $116 million a year over the last three years. Management indicated that there are no additional debt plans and the majority of the spending is for strategic initiatives, including information technology investments. Fitch will monitor UHSEC’s ability to grow its liquidity while balancing strategic capital spending needs.
The Stable Outlook reflects the expectation of continued solid operating performance, driven by its excellent market position and steady improvement in its liquidity position. The failure to meet projected balance sheet growth over the next two to three years could place downward pressure on the rating.
UHSEC is a 1,208-bed hospital system operating six hospitals and several other related health care entities throughout Eastern North Carolina. UHSEC includes PCMH, an academic medical center affiliated with the Brody School of Medicine at East Carolina University, Roanoke-Chowan Hospital, Heritage Hospital, Chowan Hospital, Bertie Memorial Hospital, and The Outer Bank Hospital. UHSEC had total operating revenue of $1.2 billion in fiscal 2009. UHSEC covenants to provide annual audited financials and quarterly disclosure (which includes balance sheet, income statement, cash flow statement and utilization statistics) to the NRMSIRs.
Applicable criteria available on Fitch’s website at ‘www.fitchratings.com’ include:
‘Revenue-Supported Rating Criteria’, dated Dec. 29, 2009.
‘Rating Guidelines for Nonprofit Hospitals and Health Systems Rating Criteria’, dated Dec. 29, 2009.
Additional information is available at ‘www.fitchratings.com’.
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Fitch Ratings, New YorkEmily Wong, 212-908-0651Jonathan Mandel, 212-908-0230orMedia Relations:Cindy Stoller, 212-908-0526Email: cindy.stoller@fitchratings.com

Source: Fitch Ratings
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