Fitch Rates Bexar County Hospital District 2016 Bonds 'AA+'; Outlook Stable

Friday, July 29, 2016

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'AA+' Long-Term Issuer Default Rating (IDR) to Bexar County Hospital District (BCHD) and assigned a 'AA+' rating to following BCHD bonds:

--$190.4 million BCHD Limited Tax Refunding Bonds, series 2016.

In addition, Fitch has downgraded the following BCHD debt:

--$695.6 million aggregate COs, series 2008, 2009 A, 2009 B, and 2010 B to 'AA+' from 'AAA.'

The Rating Outlook is Stable.

The series 2016 limited tax refunding bonds are expected to sell the week of August 8th and close the week of September 8th. The bond proceeds are expected to be used to refund most of the outstanding 2008 COs and to pay costs of issuance.

SECURITY

The 2016 bonds are payable from a limited property tax levy, while the 2008, 2009 A&B, and 2010B COs also have a lien on the surplus revenues of the District's hospital system. The district's property tax rate is limited to a maximum rate of $0.75 per $100 of taxable assessed valuation (TAV) for all purposes.

KEY RATING DRIVERS

CRITERIA DRIVEN DOWNGRADE: The downgrade of the limited tax bond rating reflects Fitch's application of U.S. Nonprofit Hospitals and Health Systems Rating Criteria to tax-supported hospital enterprises. A variation to this criteria includes an enhanced analysis of the strength of the tax revenues available to support operations that's part of Fitch's new U.S. Tax-Supported Rating Criteria dated April 21, 2016.

TAX PROVIDES REVENUE FLEXIBILITY: The 'AA+' IDR and CO rating reflects the district's strong tax revenue base, well diversified and stable economy and sound financial profile, which substantially offsets the operational risks associated with the hospital. The 'AA+' rating on the bonds/COs reflects the IDR, incorporating the security's exposure to the hospital's operational risks.

AMPLE TAX MARGIN: The 'AA+' rating on the 2016 bonds reflects the district's broad tax support as the district has the ability to levy up to $0.75 per $100 TAV and currently only levies approximately $0.28, of which $0.04 is used directly for debt service payments. Room in the tax margin would allow for up to a 194% increase in the tax revenues which provides the District with a significant amount of revenue flexibility.

SOLID LOCAL ECONOMY: BCHD is coterminous with Bexar County which Fitch rates 'AAA' with a Stable Outlook. The local economy continues to expand rapidly with continued sector development in high technology, medical and healthcare, higher education, financial services and others providing diversity beyond the military, which remains a major economic factor.

HIGH DEBT BURDEN: Although diminishing, the district has a high debt burden as evidenced by pro forma MADS equating to 4.5% of total fiscal 2015 operating revenues. Concerns over the district's high debt burden are mitigated by the breadth of its tax base and limited future capital needs given its relatively new facilities.

PAYOR MIX EXPOSURE: Like many district hospitals, BCHD's is vulnerable to changes in governmental funding programs. However, BCHD has higher level of Medicare and commercial payors (50%) which lessens the dependence on tax revenues to supplement operations.

RATING SENSITIVITIES

CHANGES TO SUPPLEMENTAL FUNDING PROGRAMS: Given Bexar County Hospital District's (BCHD) exposure to supplemental funding programs, any negative changes to these programs could require an increase to tax revenues to maintain operating and coverage ratios. Unexpected erosion in BCHD's financial profile would put downward pressure on the current rating.

CREDIT PROFILE

BCHD was created in 1955 and is governed by a seven-member board selected by the Bexar County commissioners to serve two-year staggered terms. The district's facilities include University Hospital (a 716 -bed acute care facility), six outpatient primary/specialty care clinics, four dialysis centers and five preventive health clinics. The district's primary service area is Bexar County, while its secondary service area encompasses the surrounding seven counties. University Hospital serves as a level-one trauma center for 22 counties in south and central Texas. Additionally, since 1968, the district has been affiliated with the University of Texas Health Science Center (UT), whereby the district's facilities serve as the major teaching sites for many of the UT health care programs, including the graduate medical education program. The affiliation with the University of Texas (revenue financing system bonds rated 'AAA') is viewed as a positive credit factor.

ROBUST TAX REVENUES

The 'AA+' rating largely reflects BCHD's extensive tax base and the significant taxing margin that is available to support both operations of the hospital and debt service payments. The District has the ability to levy up to $0.75 per $100 TAV and currently levies just under $0.28 for operational support and debt service payments. This additional room in the tax margin would allow for up to a 194% increase in tax revenues which provides the District with a significant amount of revenue flexibility that is uncharacteristic of other hospitals in the sector.

Property tax revenue growth has benefited from a steady ramp up in AV, including a double-digit increase in fiscal 2016, aided by resurgent construction activity and reappraisal gains. Future growth in tax revenue is likely to be in line with historical performance - above the rate of inflation and national GDP growth - based on economic trends and the revenue streams' ability to capture that growth. Further, the ample margin in tax rate provides significant cushion against revenue pressure from other areas.

HIGH EXPOSURE TO SUPPLEMENTAL FUNDING

BCHD has a weak payor mix with Medicare, Medicaid, and self-pay making up approximately 73% of gross revenues in fiscal 2015. This weak payor mix results in BCHD having high exposure to supplemental revenues/funding and leaves the district highly susceptible to changes in this funding at the state and federal level. In fiscal 2015, BCHD received approximately $139 million in Uncompensated Care (UC) Medicaid supplemental revenues and DSRIP revenues via the Texas 1115 Waiver program. Additionally, BCHD received approximately $31 million in supplemental revenues from the DSH program.

The Texas 1115 Waiver program has been extended to December 2017 providing some concerns over the loss of funding in the short-term, however; funding under the program is uncertain beyond that. Additionally, the state of Texas remains unlikely to expand Medicaid. Concerns over the potential loss of this supplemental funding are mitigated by strength of BCHD's tax margin. However, a loss of this funding could impact BCHD's operating performance and result in an increased reliance on its tax revenues which could put downward pressure on the current rating.

STRONG SERVICE AREA

The district's primary service area is defined as Bexar County, while the surrounding seven counties comprise its secondary service area. Overall, the primary service area is viewed positively, as evidenced by Fitch's rating of 'AAA' and a Stable Outlook on Bexar County. The county has seen sound levels of population growth and has unemployment rates which compare favorably to both state and national averages.

The local economy continues to expand rapidly with sector development in high technology, medical and healthcare, higher education, and financial services. Additionally, the military has a strong presence in the county as Lackland AFB, Randolph AFB, and Fort Sam Houston account for approximately 90,000 military and civilian personnel. While these facilities have benefitted from very large investments and additions in the past, any reductions or realignments from future BRACs could put some negative pressure on the local economy.

DEBT PROFILE

The $190.4 million 2016 bonds are expected to be used to refund most of the District's outstanding 2008 bonds which should help ease the District's high debt burden. Pro forma MADS equates to high 4.5% of fiscal 2015 revenues which remains an improvement from fiscal 2011 when it represents 6.4%. Concerns over this high debt burden are mitigated by the District's strong tax revenue base and its limited future capital needs as the average age of its plant was only 6.4 years in fiscal 2015. Furthermore, pro forma MADS is expected to drop $11 million in 2018.

CONTINUING DISCLOSURE

BCHD covenants to provide annual financial and operating information via Municipal Securities Rulemaking Board's EMMA system.

VARIATION FROM PUBLISHED CRITERIA

The analysis supporting the 'AA+' Issuer Default Rating on BCHD includes a variation from the U.S. Nonprofit Hospitals and Health Systems Rating Criteria. Enhanced analysis under the variation relates to the evaluation of the strength of the tax revenues available to support operations. This evaluation is supported by Fitch's new U.S. Tax-Supported Rating Criteria dated April 21, 2016 that includes refinements to the analysis of both tax revenue volatility, through the new Fitch Analytical Sensitivity Tool (FAST), and the value of taxing capacity relative to the issuer's potential revenue stress in a downturn.

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

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009728

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009728

Endorsement Policy

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

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