Fitch Affirms Heritage Valley Health System's (PA) Revs at 'A+'; Outlook Stable

Monday, November 30, 2015

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A+' rating on the following bonds issued by The Hospital Authority of the County of Beaver on behalf of Heritage Valley Health System, Inc. (HVHS):

--$60.9 million of series 2012 revenue bonds.

The Rating Outlook is stable.

SECURITY

The bonds are secured by a pledge of gross revenues of the obligated group (OG). The OG includes the parent and hospitals, which accounted for 82% of total revenue and 79% of total assets of the consolidated system in fiscal 2015 (June 30 year end). Fitch's analysis is based on the consolidated entity.

KEY RATING DRIVERS

IMPROVED OPERATING PERFORMANCE: HVHS's 2.8% operating margin in FY 2015 was much improved from negative 1.5% in FY 2013. The improvement is attributed to the implementation of a turnaround plan in 2013 which resulted in stronger volumes, a higher acuity case mix index, and successful cost reduction strategies.

ROBUST LIQUIDITY POSITION: HVHS's liquidity position remains a primary credit strength. The system's $ 282.2 million in unrestricted cash and investments at FYE 2015 equated to 255.4 days cash on hand (DCOH), 42.2x cushion ratio and 463.8% cash to debt, all well above Fitch's 'A' medians of 205.3 days, 18.5x and 143.7%, respectively.

LIGHT LEVERAGE: HVHS's debt burden is light, as evidenced by maximum annual debt service (MADS) equating to only 1.5% of FY 2015 revenues, favorable to Fitch's median of 2.8%. Additionally, HVHS's debt service coverage has been strong over the last four fiscal years despite weaker operating performance and was 8.7x in FY 2015, comfortably above the 4.2x median.

GOOD MARKET POSITION: HVHS has 60% market share in its primary service area, with its closest competitor holding a 6.6% share. Fitch believes that the system's sizeable employed physician group, six outpatient medical neighborhoods, and a number of outpatient joint ventures position it favorably in the market place.

RATING SENSITIVITIES

OPERATING STABILITY EXPECTED: Fitch expects Heritage Valley Health System to continue implementing its turnaround plan and to produce more consistent operating results. Fitch notes that the system has room for weaker operating performance at the current rating level, given its robust liquidity position and light leverage.

CREDIT PROFILE

Located in Beaver and Sewickley, PA (about 40 and 20 miles, respectively, from Pittsburgh), HVHS operates 520 staffed beds (547 licensed) at two hospitals. Total operating revenue in fiscal 2015 was approximately $446 million.

IMPROVED PROFITABILITY BUT VOLATILE PERFORMANCE

HVHS's operating performance has improved significantly in FY 2015 from FY 2013 levels. Historical profitability has been volatile with 0.1% operating margin in fiscal 2014, negative 1.5% in fiscal 2013 and 1.2% in fiscal 2012. Negative performance in FY 2013 was characterized by drops in inpatient admissions and surgeries, as well as increased physician expenses. Management has implemented a turnaround plan in 2013 which incorporated revenue growth through improved volumes and higher acuity case mix index, as well as cost reduction through FTE management and right-sizing of physician contracts. As a result, HVHS's operating EBITDA and EBITDA margins of 10.1% and 12.7%, respectively, in FY 2015 were both in line with Fitch's 'A' medians of 10.3% and 12.4%, and much improved from FY 2013.

Fitch expects HVHS to continue implementing its turnaround plan in 2016 and for operations to stabilize at levels more consistent with fiscal 2015 performance. The fiscal 2016 operating margin budget is 3.1%.

LIGHT DEBT BURDEN

HVHS's MADS of $6.7 million is level through maturity and represents a very light 1.5% of total FY 2015 revenues, comparing well to Fitch's 'A' median of 2.8%. Additionally, MADS coverage by EBITDA has averaged a very strong 7.0x over the last four fiscal years and was 8.7x in FY 2015.

HVHS's capital expenditures have averaged 97% of depreciation over the last four fiscal years, resulting in a favorable age of plant of 10.4 years as of FY 2015. HVHS's capital budget anticipates an average capital spend of $35 million annually over the next five years, approximately 115% of depreciation expense, which is in line with Fitch's 'A' median. In addition to facilities construction and improvement, the capital plan incorporates continued investment in information technology and the diagnostic imaging service line. HVHS has historically funded all capital expenditures through a combination of cash flow and philanthropy, and no additional debt is expected at this time.

DEBT PROFILE

The 2012 fixed-rate bonds are the only long-term debt that HVHS has outstanding. Additionally, HVHS currently has a $10 million line of credit, of which $8.5 million was outstanding as of June 30, 2015. HVHS uses the line of credit to fund the state provider tax. Fitch did not adjust HVHS's unrestricted cash or long term debt figures to reflect the short term debt.

DISCLOSURE

HVHS posts audited and quarterly financial statements to the Municipal Securities Rulemaking Board's EMMA system.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807

Additional Disclosures

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Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995573

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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