Fitch Ratings has affirmed the outstanding series 2016 revenue bonds issued by the
Fitch has also affirmed MHG's Issuer Default Rating at 'BBB-'.
The Rating Outlook is revised to Stable from Negative.
SECURITY
The bonds are secured by a pledge of net revenues of the obligated group.
ANALYTICAL CONCLUSION
The Outlook revision to stable and rating affirmation reflects management's turnaround initiatives and prior year disproportionate share (DSH) settlements that Fitch expects to materially reduce MHG's fiscal 2022 operating loss and restore the hospital to profitable operations in fiscal 2023.
In fiscal 2021 MHG experienced a
MHG expects to realize about
MHG's 'bb' operating risk and financial profiles suggest a rating lower than 'BBB-', but Fitch expects the hospital's turnaround initiatives to bear fruit in fiscal 2022 and restore it to positive operations in fiscal 2023, along with a corresponding improvement to the balance sheet.
Fitch also believes that MHG's leading market position with limited competition and its essentiality as a safety net provider offset its high dependence on government payors and the comparatively more modest demographics of the service area.
Fitch downgraded MHG's rating in 2021 and revised its Outlook to Negative following significant deterioration in operating margins due to pandemic-related disruptions. MHG was affected by high COVID-19 censuses and staffing pressures, which led to high agency nursing costs and revenue shortfalls. Those pressures led to significant operating losses and diminished balance sheet resources that strained the hospital's financial flexibility and resulted in a violation of its 1.15x minimum debt service coverage covenant. The covenant violation required MHG to engage an outside consultant. Management and Fitch expect MHG to be compliant with the debt service coverage covenant in fiscal 2022.
KEY RATING DRIVERS
Revenue Defensibility: 'bbb'
Leading Market Position in a Challenging Market
Revenue defensibility is well supported by its leading market position with a 74% primary service area market share. In 2019 and 2020 MHG expanded its footprint with a number of acquisitions including
MHG's position as safety net provider in the service area provides a level of revenue dependability despite somewhat challenging service area demographics and reliance on governmental payors including substantial disproportionate share payments. MHG's payor mix remains midrange, with self-pay and Medicaid totaling 17%, but Medicare remains somewhat high at 54%.
Operating Risk: 'bb'
Turnaround Underway Following Sizable Losses
Revenue interruption and pandemic-related expenses, with high agency nursing costs and staffing pressures over the past two years depleted MHG's balance sheet resources and was the primary driver of the rating downgrade last year. While MHG has made progress in alleviating staffing pressures, it still faces significant constraints related to staffing.
Going forward, Fitch expects that new revenue streams and synergistic opportunities from the Merit affiliation and previous acquisitions, along with its turnaround initiatives, will serve as a catalyst for operating performance improvement; however, the hospital will continue to face considerable near-term operating pressure until post pandemic-related disruptions and inflationary pressures subside.
After achieving modest operating income in fiscal 2020 (as calculated by Fitch), supported by
MHG's revenue base grew in 2021 with the rebound of patient volumes, particularly from through the
Operating results through the six months ended
No major projects or debt issuances are expected during the Outlook period while management focuses its efforts on turnaround initiatives. Capital spending is expected to be minimal for the next few years and will most likely be limited to addressing repairs and maintenance needs.
Financial Profile: 'bb'
Weakened Financial Profile
Operating losses have weakened MHG's financial profile with unrestricted cash and investments declining to just under
If these funds are not received as expected and MHG's turnaround initiatives fall short of expectations, its balance sheet will remain under significant pressure, which could result in a negative rating action. Due to a very conservative asset allocation consisting of only cash and fixed income, a low debt burden, and the expectation for operational improvement, MHG is expected to restore its leverage ratios to a level consistent with the midrange category assessment in the out years of Fitch base and stress case scenarios.
Asymmetric Additional Risk Considerations
No asymmetric additional risk considerations were applied in this rating determination
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to achieve targeted turnaround initiatives or receipt of expected government funding where operating EBITDA margins are sustained below 5%;
Failure to improve balance sheet strength over the intermediate term, where cash-to-adjusted debt is sustained below 80%;
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Further positive rating action is unlikely during the outlook period, pending full realization of management's turnaround initiatives and stabilization of MHG's operating performance.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
CREDIT PROFILE
MHG is a 279 staffed-bed hospital located in
Asymmetric Additional Risk Considerations
There are no asymmetric risk considerations associated with MHG's rating. Debt Profile: Total bonded debt as of
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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