Standard & Poor's Ratings Services said it has revised its outlook to stable from positive and affirmed its A underlying ratings (SPURs) on North Broward Hospital District (doing business as Broward Health), Fla.'s series 2005A, 2007, and 2008A variable-rate demand hospital revenue bonds.
Standard & Poor's also affirmed its AAA/A-1 ratings on the bonds based on the application of its low-correlation joint criteria.
"The outlook revision reflects our assessment of Broward Health's recent declines in operating margins and cash flow," said Standard & Poor's credit analyst Martin Arrick. "Also, overall unrestricted resources have decreased slightly in fiscal 2012 although we still consider them strong for the rating," said Arrick.
The A SPUR reflects an overall financial profile that Standard & Poor's considers sound, but it remains highly dependent on tax revenue and disproportionate share funding to support its large community benefits cost, which stems from its role as a safety net provider. Also supporting the rating is Standard & Poor's opinion of Broward Health's strong balance sheet and good business position. Broader industry risks in the health care sector create challenges for the organization as well, including state efforts to contain Medicaid costs, and the expectation that there will be increasing pressures on overall reimbursement.
Though Standard & Poor's considers Broward Health's balance sheet particularly strong for the rating, the ratings service is not considering a higher rating at this time because operating and cash flow margins are more consistent with the current rating. In addition, the decreased inpatient admissions highlight the competitive nature of the service area and growth in observation cases, and, over time, could pressure profitability more.
Finally, the rating incorporates the potential for a moderate increase in debt over the medium to long term although management is considering funding two moderate size capital projects of roughly $100 million to $150 million in total out of cash flow during the next five to seven years.
The stable outlook reflects Standard & Poor's expectation that Broward Health will be able to absorb a moderate amount of additional debt while maintaining the solid financial cushions currently available. Standard & Poor's could consider a higher rating or positive outlook if Broward Health reports improved operating and cash flow margins at levels consistent with a higher rating. While not expected, Standard & Poor's could consider a lower rating based on sharply weaker financial results and business prospects.
Broward Health is a special state-taxing district created under Florida law that operates four hospitals with 1,378-staffed beds in the northern two-thirds of Broward County.