Fitch Upgrades Cape Regional Medical Center's (NJ) Bonds to 'A'; Outlook Stable
NEW YORK-- August 11, 2008 --Fitch Ratings has upgraded the $23.5 million outstanding New Jersey Health Care Facilities Financing Authority revenue bonds (Burdette Tomlin Memorial Hospital, Inc. Issue), series 1999 to 'A' from 'A-'. The Rating Outlook is Stable.
The rating upgrade to 'A' is based on Cape Regional Medical Center's (Cape Regional; formerly Burdette Tomlin Memorial Hospital, Inc.) excellent liquidity and light debt burden as well as improved operations over the last 3 1/2 fiscal years. At fiscal year end Dec. 31 2007, Cape Regional had days cash on hand (DCOH) of 273.1 days and cash to debt of 301.9%, both well above Fitch's 'A' category medians of 185.2 DCOH and 111.6% cash to debt. Additionally, Cape Regional defeased its 1991 series bonds in fiscal 2007.
Maximum annual debt service (MADS) on the remaining series 1999 bonds is $2.1 million, which is $1.2 million lower than previous MADS. Pro forma debt service coverage in fiscal 2007 was a strong 6.2 times (x), above Fitch's 'A' category median of 4x, and the cushion ratio was 33.3x, more than double Fitch's 'A' category median of 15.4x. Unaudited results for six months ended June 30, 2008 show MADS coverage of 5.5x and a cushion ratio of 31.4x.
In addition to Cape Regional's strong liquidity and light debt burden, operations over the last 3 1/2 fiscal years have continued to improve. Since fiscal 2005, Cape Regional has improved operations with positive operating margins two out of the last three years and positive excess margins in all three years. Cape Regional ended fiscal 2007 with a 0.6% positive operating margin and a 5% positive excess margin ($5.6 million in total excess income). Further indication of the operational turnaround has been the improvement to Cape Regional's operating EBITDA margin and EBITDA margins. Cape Regional's Operating EBITDA and EBITDA margins have averaged 7.5% and 11.2%, respectively, from 2005-2007 compared to 5.3% and 7.3% from 2002-2004.
The Stable Outlook is based on Cape Regional's continued market dominance, lighter debt burden, and Fitch's belief that Cape Regional will be able to sustain the current operating performance. Cape Regional enjoys a 72% market share in its primary service area as its nearest competitor is more than 20 miles away. This market dominance helps to offset concerns about Cape Regional's small revenue size for the rating category. Ongoing credit concerns include Cape Regional's rising bad debt expense and vulnerability of revenue stream given the seasonality of admissions.
Fitch does not anticipate Cape Regional issuing additional debt over the next few years. A prior credit concern of Fitch's had been the hospital's capital needs. Management has begun increasing capital spending, including a $2.2 million renovation of inpatient rooms. Capital expenditures as percentage of depreciation increased to 217.4% in fiscal 2007 from 66.2% in fiscal 2006; Fitch's 'A' category median is 155.8%. Given Cape Regional's operational turnaround, Fitch anticipates that over the medium term the hospital will be able to continue to fund capital projects from cash flow and philanthropy without the need to issue debt.
Fitch believes that Cape Regional will be able to sustain current levels of operations. Cape Regional has significantly lowered its length of stay over the past few years, from 4.9 days in fiscal 2004 to 4.3 days in fiscal 2007, started a hospitalists program, had strong physician recruitment, and established an affiliation with University of Penn Health System for oncology and cardiology, which has improved cardiology coverage at the hospital. These programs should help sustain operating margins over the medium term. While Cape Regional has a negative 0.8% margin for the first six months of fiscal 2008, it showed bottom line profitability with a 3% excess margin, and is ahead of budget heading into the busy tourist season. Management indicated that the volume numbers from the first two months of the season, June and July, have been strong.
Cape Regional is a 242-licensed (208 operated) bed facility located in Cape May County off exit 10 on the Garden State Parkway, approximately 45 miles south of Atlantic City. Cape Regional, with total revenue of $107.5 million in fiscal 2007, is part of the Cape Regional Health System, which includes a foundation, and Cape Regional Health Enterprises, which houses a small management services organization. Cape Regional covenants to provide annual and quarterly disclosure to bondholders. Disclosure to bondholders has been good, including quarterly income statement, balance sheet, cash flows, utilization, and management discussion and analysis.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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