NEW YORK - (Business Wire) Fitch Ratings has upgraded the $110,305,000 outstanding Health Care Facilities Authority of Sayre (Pennsylvania) revenue bonds (Guthrie Health Issue) series 2007 and $45,965,000 series 2002A to 'A+' from 'A'. The Rating Outlook is Stable. The upgrade to 'A+' reflects Guthrie Health's (Guthrie) substantial reduction in debt service requirements due to a buyback of outstanding debt at favorable terms, combined with continued strong operating performance, robust liquidity, and a leading market position. The integrated nature of Guthrie's organization, which includes the Guthrie Clinic (the Clinic) and a wide network of Clinic locations throughout the Twin Tier Region straddling the Pennsylvania and New York border, positions the organization well for proposed health care reform and contributes significantly to Guthrie's market strength, quality indicators, and low cost position.
Owing to strong operating cash flow, which averaged $71.8 million over the last four years, Guthrie's liquidity is excellent. While affected by last year's market performance, Guthrie's liquidity is a primary credit strength, with days cash on hand (DCOH) (306 days), cushion ratio (28.3 times (x)) and cash-to-debt (244%) substantially exceeding Fitch's 'A' category medians of 171 days, 13.3x and 133%, respectively. In 2009, Guthrie reduced its moderate debt level by repurchasing and retiring $69.1 million of its outstanding series 2007 bonds at a substantial discount, which reduced maximum annual debt service (MADS) to $13.3 million from $16.4 million, equal to a very manageable 2.6% of revenues. MADS coverage by EBITDA in fiscal 2009, based on Fitch's calculation, which excludes the effect of the $30.9 million gain on the early retirement of debt, was -0.1x as a result of realized investment losses, but coverage of MADS by operating EBITDA was a very solid 3.7x. Coverage of MADS per Guthrie's bond documents, which includes the gain on retirement of debt, was reported at 2.2x for fiscal 2009.
Investment policy is conservative, with close to 70% in cash and fixed income and no alternative investments. Guthrie has one floating- to fixed-rate swap related to the series 2007 variable-rate bonds with a notional amount of $187.5 million, which was not adjusted for the retirement of a portion of the series 2007 bonds. The mark-to-market for the swap at Sept. 30, 2009 was -$20.2 million; to date, Guthrie has not had to post collateral.
Guthrie's operating performance has been very strong. Operating margin averaged 5.3% between fiscal 2006 and 2008 and operating EBITDA margin averaged 12.2%, both at the high end of Fitch's 'A' rating category medians. Despite higher costs and negative impact on Clinic physicians' productivity during the recent final stages of implementation of the ambulatory Electronic Health Record (EHR) throughout the organization, including all physician offices, financial performance in fiscal 2009 was only marginally affected and continued to be well within the 'A' category medians. Operating margin was 3.0% and the operating EBITDA margin was 9.4% (excluding the gain on retirement of debt), as compared to the 'A' category medians of 2.7% and 9.2%. Because of its commitment to and substantial investment in information technology, Guthrie is one of the top health care organizations in terms of EHR deployment, and its flagship, Robert Packer Hospital, has been named as the 'Most Wired - Small and Rural Hospital' for the last two years by Hospitals & Health Networks. The Guthrie Clinic, with 236 employed physicians and 116 mid-level practitioners staffing 24 locations throughout the service area, is a key component of Guthrie's success in maintaining a leading market share position, and provides a vehicle for strongly aligning physician and hospital incentives.
The potential $120 million expenditure related to replacing Guthrie's Corning Hospital facility is Fitch's sole credit concern at this time. However, the project is still several years off, appears to be well within Guthrie's debt capacity, and could be funded from Guthrie's substantial internal sources. Fitch's previously stated concern regarding Guthrie's possible merger with St. Joseph's Health System, located in Elmira, New York, which would have required a significant capital commitment, is no longer relevant, as the affiliation letter of intent was recently terminated.
The Stable Outlook is based on Fitch's expectation that Guthrie will continue to record strong operating performance, as indicated by the 4.9% operating margin for the three-month interim period ended Sept. 30, which is well ahead of the operating margin budget for fiscal 2010 of 2.4%. Furthermore, Guthrie's integrated delivery system combined with a low cost structure provides a strong platform to succeed as elements of health care reform are implemented.
Guthrie Health is an integrated delivery system consisting of Robert Packer Hospital in Sayre, PA, Corning Hospital in Corning, NY, Troy Community Hospital in Troy, PA, with a total of 362 licensed beds, and Guthrie Clinic, with its main campus adjacent to Robert Packer Hospital. Guthrie reported revenues of $553 million in fiscal 2009. The system covenants to disclose annual and quarterly information to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Quarterly disclosure has been very good, and includes management's discussion and analysis, balance sheet, income statement, and utilization statistics.
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Fitch Ratings
Eva Thein, +1-212-908-0674
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Jeff Schaub, +212-908-0680 (New York)
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