Fitch Affirms Hurley Medical Center's (MI) Revs at 'BB+'; Outlook Stable

Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued on behalf of Hurley Medical Center (HMC) by Flint Hospital Building Authority (MI):

--$1,880,000 revenue refunding bonds, series 1998A;

--$1,905,000 revenue rental bonds, series 1998B;

--$7,510,000 hospital revenue and refunding bonds, series 2003;

--$34,215,000 revenue rental bonds, series 2010;

--$21,940,000 revenue rental bonds, series 2013A;

--$36,590,000 revenue refunding bonds, series 2013B.

HMC has approximately $4.1 million outstanding on its series 2011 direct placement, which Fitch does not rate.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by cash rentals (net revenues of HMC) made to the authority, acting through its Board of Hospital Managers, on behalf of HMC as agreed under the eighth amended and restated contract of lease dated Feb. 1, 2013. In addition, bondholders will benefit from a fully funded debt service reserve fund.

KEY RATING DRIVERS

CONTINUED DECLINE IN LIQUIDITY: Hurley Medical Center's (HMC) liquidity position further declined since Fitch's last review to $57 million at Sept 30, 2013 from $64.3 million at Dec. 31, 2012. The deterioration in liquidity is due largely to high capital spending and an IT implementation that caused growth in accounts receivable. Negative rating action is precluded at this time as Fitch believes HMC will stabilize and begin to improve its balance sheet now that the IT conversion is completed and HMC begins to works through its accounts receivable.

FOCUS ON POPULATION HEALTH: As an essential provider in the service area, HMC is working to transform health in the surrounding communities and has partnered with local organizations to improve health literacy and screening. Additionally, HMC has converted the former emergency department (ED) to an urgent care center, which is a lower-cost alternative to the ED.

CHALLENGING PAYOR MIX: Located in Flint, MI, HMC operates in a competitive service area with below-average socioeconomic indicators, subjecting the hospital to elevated levels of government payors, with Medicaid at a very high 39.7% of gross revenues in fiscal 2013.

ADEQUATE DEBT SERVICE COVERAGE AND MANAGEABLE DEBT BURDEN: HMC's debt profile is manageable with all fixed-rate debt and maximum annual debt service (MADS) at 3% of fiscal 2013 revenue. MADS coverage by EBITDA was adequate at 1.8x in fiscal 2013 and has remained consistently at or about 1.6x over the last five years. Through the three-month interim period ended Sept. 31, 2013 MADS declined to 1.4x but Fitch expects this to return to historical norms prior by year-end.

RATING SENSITIVITIES

IMPROVEMENT IN LIQUIDITY EXPECTED: Fitch expects HMC to reduce its accounts receivable over the next one to two years, which should improve liquidity. Failure to improve liquidity or deterioration in profitability or debt service coverage will likely result in negative rating pressure.

CREDIT PROFILE

HMC is a 443-bed acute care teaching hospital with safety-net provider status located in Flint, MI. HMC had approximately $372 million of total revenue in fiscal 2013. A safety-net teaching hospital, HMC is the only provider in the region of Level I Trauma, Level II Pediatric Trauma and Level III Neonatal Intensive care, among other services. HMC has an active outreach effort with many community organizations and is focusing on improving community health.

CONTINUED DECLINE IN LIQUIDITY

The balance sheet further weakened since Fitch's last review in February 2013. At Sept. 30, 2013, unrestricted cash and investments was approximately $57 million, which is down from $60.1 million at FYE 2013 and $70.6 million at FYE 2012. At Sept. 30, days cash on hand was a very light 56.7 days, cushion ratio was 5.1x and cash to debt was 55.4%. Management attributes the softening of liquidity to higher capital spending and a growth in accounts receivables due to a billing system conversion associated with its new electronic medical record system. At Sept. 30, days in accounts receivable was a high 65.9 days compared to 58.1 days at FYE 2013 and 49.9 days at FYE 2012. While HMC's liquidity metric may be inconsistent with the 'BB+' rating, negative rating action is precluded due to Fitch's expectation that liquidity will stabilize and begin to improve as accounts receivable normalize. However, further deterioration to liquidity position and metrics would likely result in a rating downgrade.

RELATIVELY STABLE OPERATIONS

HMC's operating performance has been relatively stable over the last three fiscal years and showed signs of improvement in fiscal 2013 from a decline in fiscal 2012, which was caused by several one-time expenses including EPIC training and costs associated with the opening of the ED. Operating margin and operating EBITDA margin were negative 0.9% and 4.9%, respectively, in fiscal 2013, compared to negative 1.3% and 3.6%, in fiscal 2012. Through Sept. 30, 2013 (three-month interim), operating profitability declined to negative 1.9% and operating EBITDA was 3.9%, but inpatient volumes have remained strong and management expects to meet its budget of 1% operating margin (including interest as an expense). HMC recently completed collective bargaining negotiations which are expected to generate roughly $10 million-$12 million in annual benefit savings. Management is also actively managing expenses including the implementation of a more efficient purchasing process and overtime reduction.

MANAGEABLE DEBT BURDEN AND STABLE COVERAGE

HMC's debt profile is manageable with all fixed-rate debt and MADS equating to 3% of fiscal 2013 total revenue. MADS coverage by EBITDA was 1.8x in fiscal 2013 but consistent with the prior years' results of 1.7x in fiscal 2012 and 1.6x in fiscal 2011. Coverage by operating EBITDA improved in fiscal 2013 to 1.6x from 1.2x in fiscal 2012. Through the three-month interim period ended Sept. 30, 2013, MADS coverage by EBITDA declined to 1.4x. Fitch expects coverage to return to more historical norms in the near term as profitability is expected to improve. Since HMC is a governmental entity, its investment portfolio is very conservative as investments are restricted to government-issued fixed-income securities.

HMC has been heavily investing in its plant, with capital expenditures averaging a high 246% of depreciation expense from 2010 - 2012. HMC's most recent large capital project was the expansion of its ED to account for high volumes that could not be accommodated in its former space. This project was successful and the expansion and redesign have allowed for improved patient flow, operating efficiencies and improved patient care. Capital expenditures have normalized in fiscal 2013 at 104.9% of depreciation and 89.9% at Sept. 30, 2013. HMC has budgeted for $14 million in routine capital spending in fiscal 2014 or 86% of depreciation, which Fitch believes is manageable.

CHALLENGING ECONOMIC ENVIRONMENT AND DEPENDENCE ON SUPPLEMENTAL FUNDING

Located in Flint, Michigan, HMC operates in an economically distressed service area with a challenging payor mix. A high 39.7% of gross revenues were derived from Medicaid and 28% from Medicare in fiscal 2013. In fiscal 2013, HMC received approximately $14 million in Medicare DSH funding and about $4.5 million in Medicaid DSH funding which may be increased by an additional $500,000 in fiscal 2014. Thus, any reduction in DSH payments represents a potential credit risk.

DISCLOSURE

HMC covenants to provide annual and quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA system.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Raymond James, the Underwriter and Kaufman Hall, the Financial Advisor.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 2013).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814365

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