Primary Credit Analyst:
Patrick Zagar, Dallas (1) 214-765-5883; patrick.zagar@spglobal.com
Secondary Contact:
Kevin K Holloran, Dallas (1) 214-871-1412; kevin.holloran@spglobal.com
DALLAS (S&P Global Ratings) Feb. 24, 2017– S&P Global Ratings revised its outlook to positive from stable and affirmed its ‘BBB+’ long-term rating on the Kerrville Health Facilities Development Corp., Texas’ series 2015 fixed-rate hospital revenue refunding bonds issued for Peterson Regional Medical Center (PRMC).
“The outlook revision is based on PRMC’s improving financial profile and favorable market position,” said S&P Global Ratings credit analyst Patrick Zagar. The revision reflects the hospital’s growing liquidity in relation to long-term debt and solid financial performance through the first six months of fiscal 2017–rebounding from a weaker fiscal 2016. We also considered PRMC’s continuing net patient revenue growth and days’ cash on hand strength.
We assessed PRMC’s enterprise profile as adequate, characterized by a dominant market position within a primary service area (PSA) with a relatively small population but strong growth projections. The assessment is also based on the hospital’s steady patient volumes and well-qualified management team.
Concurrently, we assessed PRMC’s financial profile as strong due in part to robust day’s cash on hand, improving debt metrics, and maximum annual debt service (MADS) coverage generally near 4x. The hospital’s weakened performance in fiscal 2016–which generated coverage of just 2.7x–was largely due to increased contract nursing expenses, which we believe management has adequately addressed. We consider PRMC to be a small hospital (as defined by net patient revenue of less than $125 million); however this threshold will likely be surpassed in fiscal 2017.
The positive outlook reflects PRMC’s robust financial profile–which compares favorably with ‘A-‘ rated providers–as well as its favorable volumes and market position. Despite the hospital’s smaller size and PSA population, we believe PRMC’s falling debt and strong balance sheet adequately compensate for these risks and provide the hospital with some flexibility to respond to potential operational challenges.
Given the unexpected loss in fiscal 2016, we believe PRMC needs to establish a multi-year trend of positive operating performance prior to a rating upgrade. We would consider a higher rating if PRMC achieves its budgeted targets and also sees continued balance sheet accretion in the form of stable to improving liquidity and no additional debt. Furthermore, we would expect the hospital to at a minimum maintain its current enterprise profile strengths.
We could revise the outlook to stable if operations tighten such that MADS coverage falls below 3.5x or margins are no longer commensurate with an ‘A-‘ rating. We would view such variability in performance as a credit characteristic more appropriate for the current rating. Moreover, any decline in balance sheet metrics could result in a revision of the outlook to stable.
PRMC owns and operates a 124-bed (98 acute-care beds and 26 rehabilitation beds in service) facility in Kerrville, about 65 miles northwest of San Antonio.
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings’ public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
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