OREANDA-NEWS. Fitch Ratings has removed the rating on the following Cape Girardeau County Industrial Development Authority bonds issued on behalf of Southeast Missouri Hospital Association (d/b/a SoutheastHealth) from Rating Watch Evolving and upgraded it to 'BB+' from 'B':

--$90.5 million hospital revenue bonds, series 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge and assignment of the unrestricted receivables of the Obligated Group and a mortgage lien on Obligated Group property. Further security is provided by a debt service reserve fund on the series 2017 and 2016 bonds.

KEY RATING DRIVERS

Sustained Improvements: The upgrade to 'BB+' from 'B' reflects the sharp improvement in operating profitability and cash flow generation in 2015 and through the three-month interim period ended March 31, 2016, following a $55.7 million loss from operations for 2014 due to billing and revenue cycle issues. SoutheastHealth generated a 10.2% operating EBITDA margin and 3.7x coverage of maximum annual debt service (MADS), with steady operating results budgeted for 2016. Cash flow has bolstered liquidity, reaching $64.2 million at March 31, 2016, up from $54.6 million at fiscal year-end (FYE) 2014.

Successful Refinancing: The removal from Rating Watch reflects the successful refinancing of SoutheastHealth's series 2013 bank-placed debt in March 2016, effectively resolving the debt service coverage covenant violation and ending the threat of cross-default and acceleration on the series 2007 bonds.

Revenue Cycle Improvements: SoutheastHealth has corrected the revenue cycle issues, which were a major contributing factor to the operating loss in 2014. Days in accounts receivable at March 31 was a manageable 43.9. The improved profitability and revenue cycle has led to liquidity growth to $64.2 million at March 31, 2016 from $54.6 million at FYE 2014 equating to 75 days cash on hand (DCOH) and 43.3% cash-to-debt by Fitch calculations. Excluding the Medicaid Provider Tax expense per the bond covenant calculation brings SoutheastHealth's DCOH to 79 at March 31.

Modest Capital Needs: With a low eight-year average age of plant in 2015 and no major capital needs, SoutheastHealth should generate sufficient cash flow to support expenditures as well as bolster liquidity. No additional debt is currently planned.

Mixed Market Profile: Weaker inpatient volume in 2015 was offset by some ambulatory growth, and SoutheastHealth's market position remains stable. Still, the service area has relatively low growth and modest income levels, which is reflected in a 16% Medicaid and self-pay payor mix in 2015, and may limit future growth in clinical activity.

RATING SENSITIVITIES

Incremental Improvements Expected: Fitch anticipates SoutheastHealth will maintain its recent operating profitability and that incremental balance sheet growth will continue through the medium term. Upward rating movement requires material improvement in liquidity to levels more consistent with the 'BBB' category medians, fueled by sustained operating cash flow.

CREDIT PROFILE

Located in Cape Girardeau (approximately 100 miles south of St. Louis), SoutheastHealth is a nonprofit health system that operates a network of more than 50 care locations in 14 communities. The system includes three acute care hospitals with 232 staffed beds, and primary and specialty care clinics serving patients across a four-state region. Total revenues were $345.6 million in 2015 (FYE Dec. 31).

DEBT REFINANCING

On March 15, 2016, SoutheastHealth issued $21.9 million of series 2016A refunding bonds and $16.9 million of series 2016B refunding bonds. The bonds were used in part to refund existing 2013A/B bonds held by Regions Bank, thus avoiding an event of default and potential acceleration due to its debt service covenant violation in 2014. The bonds were placed among the existing bondholders, with covenants and remedies that are consistent with the existing indenture.

Post issuance, SoutheastHealth had $148.3 million in total long-term debt outstanding at March 31, 2016, all of which is fixed rate. Debt service is level, with MADS measured at $9.6 million.

SUSTAINED IMPROVEMENTS

Through 2015 and into the first quarter ended March 31, 2016, SoutheastHealth generated significant improvement in operating profitability. Through March, SoutheastHealth produced a 15% EBITDA margin, up from 10.3% in 2015 and following negative EBITDA in 2013 and 2014. Fitch anticipates these results will continue in 2016, as SoutheastHealth is tracking well ahead of its budgeted $35 million in EBITDA (10.2%).

Solid cash flow coupled with modest capital needs is expected to support liquidity growth, aided by better revenue cycle efforts. With a substantially replaced internal finance and accounting team, SoutheastHealth reported a manageable 43.9 days in accounts receivable through March. Unrestricted cash growth will be necessary to support further positive rating movement to levels more consistent with Fitch's investment-grade medians.

DISCLOSURE

SoutheastHealth covenants to provide annual disclosure within 150 days of year end and quarterly disclosure within 45 days of quarter end (for the first three quarters), to the Municipal Securities Rulemaking Board's EMMA system.