Fitch Ratings assigns a 'BBB-' rating to the following City of Rochester, Minnesota health care facilities revenue bonds:
--$20.9 million series 2010 revenue bonds (Olmsted Medical Center Project).
The bonds are expected to price the week of April 28, 2010 via negotiation, and proceeds will be used primarily to construct a new clinic in the northwest section of Rochester, MN.
In addition, Fitch affirms the following ratings:
--$2,332,192 series 2006 City of Chatfield, MN, health care facilities revenue bonds;
--$6,375,000 Series 2004 City of Chatfield, MN health care facilities revenue bonds;
--$1,180,000 series 2001 City of Pine Island, MN, health care facilities revenue bonds;
--$5,535,000 Series 1998 Olmsted County, MN, health care facilities revenue bonds.
The Rating Outlook remains Positive.
RATING RATIONALE:
--Olmsted Medical Center's (OMC) role as an important community niche provider of primary care in the Rochester, MN service area, and its successful hospital-clinic model are key positive rating considerations.
--Strong profitability and pro forma debt service coverage indicators that compare favorably to 'BBB' rated median levels.
--Improved liquidity, to 112.4 days of cash on hand (DCOH) and an 8.1 times (x) historical pro forma cushion ratio at fiscal 2009 from 85.3 DCOH and 5.8x historical pro forma cushion ratio at fiscal 2008.
--OMC's relatively small revenue size ($143.5 million in 2009) and the concentration among top physician producers are key elements of an overall credit risk commensurate with the 'BBB' category.
--Presumably, the existence of Mayo Clinic presents a major competitive threat to OMC. However, Mayo's distinction and operational focus as a referral center for complex care, the long-standing complementary relationship between Mayo and OMC, and the demonstrably strong community support for OMC, all combine to offset any material competitive threat from Mayo Clinic.
WHAT COULD TRIGGER AN UPGRADE?
--The rating may be upgraded if OMC sustains its improved operating performance over the next 12-18 months, which results in continued strong cash flow generation and also strengthens its balance sheet position.
SECURITY:
The bonds will be secured by OMC's gross revenues and gross receipts, and a fully funded debt service reserve fund.
CREDIT SUMMARY:
The rationale for affirming the 'BBB-' rating reflects improved operating profitability coupled with improved liquidity, due in large part to strong revenue generation from the expansion in its scope of services and management's continued diligence to ensure costs are properly matched with activity. Credit concerns include OMC's small revenue base, its concentration among top physician producers, and the effects of the increase in debt.
The continuation of the Positive Outlook is indicative of Fitch's expectation that OMC's operating performance and resultant improvement to its balance sheet will continue over the near term. The rating may be upgraded if OMC sustains its improved operating performance over the next 12-18 months, specifically as it pertains to strong cash flow generation that also strengthens its balance sheet position.
OMC's profitability continues to be strong with a 7.9% operating margin and 11.0% operating EBITDA margin booked in 2009, respectively, compared to the 7.4% and 10.7% recorded in 2008. Operating performance has improved through successful growth in revenue-generating service lines and successful physician recruitment. Commensurate with strong operating results, OMC's liquidity position has improved to 112.4 DCOH and 213.6% cash-to-debt in 2009, better than the 85.3 DCOH and 173.9% cash-to-debt in 2008. OMC's improved operations are derived in part by a strategic expansion of profitable service lines, including orthopedics and ophthalmology. OMC is positioned as the community provider of primary and secondary services. The other inpatient acute health provider in the area is Mayo Clinic. Although the Mayo Clinic does provide primary care services in the area, its main focus is on tertiary and quaternary services, which dampens any competitive impact.
Credit concerns related to its small revenue size and the effects of the debt issuance are sufficiently mitigated by OMC's successful hospital-clinic model, which has netted historically strong profitability and solid debt service coverage. With the issuance of $20.9 million, OMC will be more leveraged. Proceeds will be used to construct a new clinic in the northwest section of Rochester, which Fitch views as a credit positive as it strengthens OMC's reach within its market. Metrics do indicate more leverage, with pro forma cash-to-debt at 96.8% and pro forma maximum annual debt service (MADS) of 3.2% of revenue in 2009. While OMC's leverage will increase, Fitch anticipates OMC will continue to generate strong profitability from operations, and cover MADS at levels well within Fitch 'BBB' rated medians.
OMC is located in Rochester, MN, and currently employs 112 physicians. The facilities include a 61-licensed bed hospital, an 88,000 square foot medical office building housing most of the physician offices and administrative functions, two FastCare clinics, 10 branch clinics throughout southeast Minnesota, and a wellness center. OMC covenants to provide continuing disclosure on an annual basis, no later than 120 days after the end of fiscal year. Annual and quarterly disclosure is posted to the Municipal Securities Rulemaking Board's EMMA system, and includes audited financial statements and utilization statistics. Total revenues for 2009 were $143.5 million.
Applicable criteria available on Fitch's website at www.fitchratings.com include:
--'Nonprofit Hospitals and Health Systems Rating Criteria, dated Dec. 29, 2009.
--'Revenue-Supported Rating Criteria', dated Dec. 29, 2009.
SOURCE Fitch Ratings
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