New York, November 26, 2012 -- Moody's Rating
Issue: Fixed Rate Revenue Bonds, Series 2012; Rating: A2; Sale Amount: $45,000,000; Expected Sale Date: 12/04/2012; Rating Description: Revenue: 501c3 Unsecured General Obligation
Moody's Investors Service has assigned an A2 rating to Mercy Medical Center's (MMC) $45.0 million of Series 2012 fixed rate revenue bonds to be issued through the Iowa Finance Authority. Concurrent with this action, we have affirmed MMC's A2 unenhanced parity ratings on bonds issued through the City of Cedar Rapids, IA. The outlook remains stable.
MMC is a 314 staffed-bed acute care hospital located in Cedar Rapids, IA. This analysis factors the financial performance of Mercycare Service Corporation and Related Organizations (System). In addition to MMC, the System includes Mercy Care Management, Inc. physician practices, and the Mercy Medical Center Foundation. MMC represents approximately 89% of System assets and 87% of System operating revenues.
SUMMARY RATING RATIONALE
The assignment and affirmation of the A2 rating and stable outlook reflect MMC's continued favorable operating performance in fiscal year (FY) 2012 and maintenance of good pro forma balance sheet and debt coverage ratios despite the issuance of new money debt.
*Tertiary hospital with broad market reach. MMC is located in demographically favorable Cedar Rapids (Linn County), IA.
*Track record of good operating results continued in FY 2012 (11.3% adjusted operating cash flow margin).
*Very good balance sheet ratios with 257 days cash on hand at fiscal year end (FYE) 2012 (285 days pro forma).
*Even factoring in the Series 2012 bonds, the System's pro forma Moody's adjusted debt coverage ratios remain good at the A2 rating level (pro forma adjusted 2.8 times debt-to-cash flow, 5.8 times maximum annual debt service coverage, 172% cash-to-direct debt, and 41% debt-to-total operating revenue).
*Good demographics in Linn County, IA (Aaa general obligation rating).
*Manageable capital spending plans in the coming years. The System's average age of plant measured a relatively low 8.6 years at FYE 2012 (A2 median is 10.3 years).
*Recent collaboration with the University of Iowa Health Alliance.
*Strong in-town competition from St. Luke's Hospital (a member of Aa3 rated Iowa Health System), which also is a tertiary hospital. According to MMC management, factoring observation patients, St. Luke's captured a leading approximately 51% market share in 2011, compared to 37% for MMC.
*With Medicare representing 50.5% of gross revenues in FY 2012, MMC may be particularly susceptible to revenue pressures resulting from likely future Medicare rate cuts (all ratings median is 43.7% Medicare). Management notes that Linn County is a low cost of care county, which may shield MMC from future Medicare rate pressures.
*The System's defined benefit pension plan is underfunded (63% pension funded ratio compared to a projected benefit obligation of $129 million at FYE 2012). The pension plan is a church plan, is closed to new participants, and existing participants are no longer accruing years of service credit.
The stable outlook reflects MMC's continued favorable operating performance and balance sheet position in FY 2012 and our expectation that operating margins will be maintained, which will help the System to absorb the new debt issuance.
WHAT COULD MAKE THE RATING GO UP
Materially elevated absolute revenue base and cash flow generation; maintenance of strong debt and balance sheet ratios; sustained material market share growth
WHAT COULD MAKE THE RATING GO DOWN
Sustained materially weaker operating margins leading to significantly thinner debt coverage and balance sheet ratios; material market share loss; greater than expected increase in debt without commensurate increase in cash flow generation
The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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