NEW YORK - Fitch Ratings said it downgraded to BBB-minus from BBB the rating on the approximate $16 million outstanding Valley View Hospital Authority, Okla., hospital revenue refunding bonds, series 1996 issued on behalf of Valley View Regional Hospital (VVRH).
The bonds remain on rating watch negative due to Fitch's concern with the prolonged delay of VVRH in providing audited financial statements.
Despite the sales tax debt service subsidy, the rating downgrade is due to VVRH's deteriorating profitability and balance sheet indicators that reflect declining utilization trends and has resulted in low debt service coverage. VVRH posted a negative 5.9% operating margin ($3.9 million loss from operations) in fiscal 2005 (unaudited), and a negative 6.4% operating margin through seven months ended April 30, 2006 ($2.5 million loss from operations).
In fiscal 2005, unaudited maximum annual debt service (MADS) coverage by EBITDA was low at 0.6 times (x); however, VVRH's sales tax debt service subsidy, which is placed in a sinking fund lock-box with the trustee, has exceeded MADS on the series 2006 bonds since fiscal 2001.
From fiscal 2003-2004, VVRH's operating margin declined to negative 3.9% from negative 2.4% and debt service coverage declined to 1.1x from 1.5x during the same period. The recent operating losses are primarily due to VVRH's employee health plan claims (totaling approximately $17.27 million since fiscal 2002), pension funding requirements (totaling approximately $7.48 million since fiscal 2001), and declining inpatient utilization trends. Continuing the negative inpatient utilization trend, admissions in fiscal 2005 were 5,753, down from 6,090 in 2004.
Other credit concerns include VVRH's declining liquidity position, reliance on governmental payors and unfavorable service area demographics. VVRH's liquidity position has eroded significantly due to continued operating losses. At April 30, VVRH had 48.1 days cash on hand (unaudited) and 42.1% cash to debt (unaudited), declining from 88.4 days and 67.2%, respectively, at fiscal year-end 2004.
In fiscal 2005, VVRH's payor mix by gross revenues included Medicare at 52.3% and Medicaid at 11.8%, demonstrating exposure to cost containment at the state and federal levels. VVRH's primary service area has limited opportunity for growth as the population has remained relatively flat, and wealth indicators are below state and national levels.
VVRH's key credit strengths remain its sales tax debt service subsidy and dominant market presence as a sole community provider. VVRH's debt service subsidy from the city of Ada's sales tax revenues, which has exceeded $2.6 million since fiscal 2001, cannot be repealed and will expire only with the final maturity of the series 1996 bonds in 2014. The subsidy has increased more than 34% since 1996.
VVRH's sales tax debt service subsidy provides a significant financial cushion as debt service coverage indicators are low. As a designated sole community provider, VVRH receives approximately $2 million in additional Medicare revenue annually. Unrelated to the subsidy and sole community provider reimbursement, VVRH expects to receive an increase in reimbursement from Medicaid of approximately $1.8 million in 2006 and $2.3 million in 2007 from Oklahoma.
In its primary service area, VVRH has maintained dominant market share, approximately 72.6% as of fiscal 2005, and the remaining share largely represents outmigration to the metro-Oklahoma City area, which is approximately 80 miles from VVRH, for services that VVRH does not provide.
VVRH is not compliant with bond documents that require disclosure of its fiscal 2005 audit (year ended Sept. 30) by March 31, 2006, which is similar to prior circumstances surrounding the audit for fiscal 2003.
On April 4, Fitch placed the series 1996 bonds on rating watch negative. Fitch notes that untimely delivery of financial information is not only a violation of VVRH's obligation to provide bondholders with continuing disclosure, but also may indicate financial distress or, at a minimum, poor management practices and weak financial controls.
The draft audit for 2005 was used in Fitch's analysis, and VVRH's management does not anticipate any material changes between the fiscal 2005 audit and draft audit. Fitch will evaluate VVRH's bond rating upon release of its fiscal 2005 audited financial statements and satisfactory review of VVRH's financial and operational results with management.
VVRH covenants to disclose only annual financial information and utilization statistics to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs), which Fitch views negatively. To date, VVRH has only provided annual statements for fiscal years 1994, 1995, and 2004 to the NRMSIRs, indicating very weak disclosure practices.
Located in Ada, Okla., Valley View is a community hospital with 167 licensed beds, including a 20-bed rehabilitation unit, which recently closed its 15-bed skilled nursing facility. Valley View's total operating revenue in fiscal 2005 was approximately $66 million (unaudited).
