2008-07-15 16:04:00
NEW YORK–(EMWNews)–Fitch Ratings has downgraded to ‘BB-‘ from ‘BB+’ the rating on
$74,510,000 Kentucky Economic Development Finance Authority refunding
and improvement revenue bonds (Appalachian Regional Healthcare, Inc.),
series 1997. The Rating Outlook is Stable.
The downgrade to ‘BB-‘ reflects the effect of two strikes at Appalachian
Regional Healthcare (ARH) by two separate unions within the past 15
months. The second strike, a nurses strike that lasted from October 2007
through December 2007, resulted in more than $20 million in costs, and,
as a result, ARH’s operating margin for the 11 months ending May 31,
2008 was a negative 3.9% on losses of $18.5 million. Bottom line losses
after including investment income totaled $14.9 million. The losses in
fiscal 2008 will further weaken ARH’s already light liquidity position.
Management indicated that ARH will begin fiscal 2009 with approximately
$38 million in cash which translates to a weak 31.2 days cash on hand
(DCOH), a 2.7 times (x) cushion ratio and 37.3% cash to debt, all of
which are all below Fitch’s non-investment-grade median. Furthermore,
Fitch is concerned that given the 31.2 DCOH is significantly below the
reported days in accounts receivable of 57.6 days for the 11-month
interim period, the organization does not have enough liquidity relative
to expenses to cover its revenue cycle.
ARH’s negative volume trends continued through fiscal 2008 and reflect
the challenges of ARH’s service area. The majority of ARH’s facilities
are located in rural communities in Kentucky and West Virginia and have
below-average socioeconomic and demographic wealth indicators, resulting
in a very high governmental payor mix (Medicare and Medicaid made up a
combined 63.2% of gross revenues in fiscal 2007). An additional negative
credit factor is the challenge that ARH faces in meeting the capital
needs of its system given its financial performance and limited
liquidity. ARH capital spending, on average, has been roughly equal to
its depreciation expense each year. Management acknowledged that capital
spending will slow due to ongoing operating and liquidity pressures,
which Fitch views negatively.
The Stable Outlook reflects positive monthly operating results in each
of the five months since the strike ended. This has helped reduce the
operating losses from $23 million when the strike ended in December 2007
to $18.5 million as of May 31, 2008. Supporting the positive operations
are improvements to physician recruitment and efforts to improve ARH’s
revenue cycle. For fiscal 2009, ARH has budgeted for a 1.4% positive
operating margin, with operating income of $7.5 million. A key rating
driver for ARH will be meeting its budget numbers in fiscal 2009.
ARH is headquartered in Lexington and comprises nine acute care
hospitals, psychiatric services, 12 outpatient clinics, and other
related health care businesses located throughout eastern Kentucky and
West Virginia. ARH covenants to disclose only annual financial
information and utilization statistics to the Nationally Recognized
Municipal Securities Information Repositories (NRMSIRs). However, ARH
has excellent disclosure practices providing thorough and timely
disclosure, including quarterly disclosure of income statements, balance
sheets, statements of cash flows and utilization statistics, to
bondholders through NRMSIRs and on its web site, www.arh.org/financials.
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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Fitch Ratings, New York Tain, +1-212-908-0259 Relations) |
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