OREANDA-NEWS. Fitch Ratings has affirmed its 'BB+' rating on the following North Carolina Medical Care Commission bonds issued on behalf of Halifax Regional Medical Center (HRMC):

--$11.5 million hospital revenue bonds, series 1998.

HRMC has an additional $6.1 million in series 2011 direct placement bonds that are not rated by Fitch.

The Rating Outlook remains Positive.

SECURITY

The bonds are secured by a pledge of gross receipts, a negative mortgage lien, and a debt service reserve.

KEY RATING DRIVERS

IMPROVED PROFITABILITY: Maintenance of the Positive Outlook, as well as the upgrade to 'BB+' during the last review cycle, reflects HRMC's continued profitability improvement in fiscal 2015 (year ended Sept. 30) and through the nine-month interim (ended June 30, 2016). HRMC's 4.5% operating and 9.7% operating EBITDA margins through the interim were sustained from fiscal 2015 and improved over fiscal 2014 results. Fitch notes that fiscal 2015 and interim results were bolstered by several supplemental funding programs for which the reimbursement is not certain over the medium term. Although HRMC's operating profile continues to improve, Fitch notes that its small revenue base, heavy reliance on a small medical staff and vulnerability to future reimbursement remain credit concerns at this time.

GROWING LIQUIDITY POSITION: Improved profitability and modest capital spending over the last three years has helped HRMC grow its liquidity position to 156.3 days cash on hand (DCOH), 76.5x cushion ratio and 156.1% cash to debt, all of which were above Fitch's below investment grade (BIG) medians. Fitch notes that HRMC's average age of plant is somewhat elevated at 12.7 years and may be indicative of deferred capital spending, which may impact HRMC's ability to continue growing liquidity over the longer term.

LOW DEBT BURDEN: HRMC's debt burden remains light with maximum annual debt service (MADS) at 2.8% of fiscal 2015 revenues, ahead of the BIG median of 4.4%. Additionally, debt service coverage has improved to 4.0x in fiscal 2015 due to the improved operating performance.

MIXED SERVICE AREA CHARACTERISTICS: HRMC has maintained its leading market share (57% in fiscal 2015) and status as a sole community provider, which enables it to receive enhanced reimbursement. However, HRMC's service area has a generally unfavorable socioeconomic profile and HRMC's payor mix has high exposure to governmental payors (52.7% Medicare and 18.6% Medicaid) and self-pay (8.7%).

NOVANT RELATIONSHIP: HRMC has had a management agreement with Novant Health (rated 'AA-'/Stable Outlook) since 2014, after a full merger was called off. The management agreement has been extended to March 1, 2017. Fitch believes that the management agreement gives HRMC access to expertise and resources not typically available to organizations of similar size.

RATING SENSITIVITIES

SUSTAINED FINANCIAL PERFORMANCE: Fitch expects Halifax Regional Medical Center to produce solid operating results which support good debt service coverage, in the absence of one-time items. Continued strong operating performance and further liquidity growth may lead to an upgrade.

CREDIT PROFILE

HRMC is a 204 licensed-bed (133 operated-bed) community medical center providing primary and secondary care services. The medical center is located in Roanoke Rapids, approximately 75 miles northeast of Raleigh. The system also includes a medical group and a foundation. In fiscal 2015 (Sept. 30 year-end) HRMC had $92.1 million in total operating revenue.

Fitch uses the consolidated financial data in its analysis. The obligated group includes the medical center, which makes up substantially all assets and 95.1% of total revenues in fiscal 2015.

IMPROVED FINANCIAL PROFILE

HRMC's operating margin has improved to 4.5% through the nine-month interim period of 2016 from a negative 1.4% operating margin in fiscal 2013. Operating EBITDA margin has improved to 9.7% from 4.3% over the same time period. The improvement is attributed to robust cost controls and incremental revenue growth. In addition, profitability in fiscal 2015 and through the fiscal 2016 interim has been supplemented by several non-recurring items. One-time payments included Meaningful Use funds of $2.3 million, as well as a $1.4 million payment under the Medicare Low-Volume program. Performance through the interim has been bolstered by approximately $1.4 million from a Medicare Cost Report settlement. HRMC is expecting additional Meaningful Use and Low-Volume payments in fiscal 2016, but the long-term availability of these supplemental payments remains uncertain.

HMRC's $38.4 million in unrestricted liquidity at June 30, 2016 has grown from $19 million at Sept. 30, 2013. HMRC's 156.3 days cash on hand (DCOH), 76.5x cushion ratio and 156.1% cash to debt, all compared well to Fitch's BIG medians. Liquidity growth has been supported by stronger operating performance and tempered capital spending over the last three years, which has averaged 69% of annual depreciation expense. HMRC's average age of plant of 12.7 years is indicative of some deferred capital spending and may necessitate increased capital spending over the longer term.

HRMC's leverage is low with MADS representing just 2.8% of fiscal 2015 revenues, favorable to Fitch's BIG median of 4.4%. Debt service coverage has averaged 2.6x over the last four fiscal years and improved to 4.1x through the interim period due to better operating performance.

DEBT PROFILE

Total debt equaled $18.9 million at fiscal 2015, including $1.3 million in capital leases and notes payable. HRMC's debt profile is manageable and conservative, with 100% fixed-rate debt and no swaps/derivatives. Including approximately $500,000 in capital lease payments, maximum annual debt service equals $2.6 million.

HRMC is contemplating a refinancing of its currently outstanding bonds for interest rate savings. Total savings are currently estimated at $2.7 million, which is likely to be used to fund a portion of a $6 million generator and boiler replacement project over the medium term.

DISLCOSURE

Disclosure to Fitch has been adequate including annual (within 120 days) and quarterly disclosure, although only audited annual disclosure is required in the bond documents. HRMC does provide quarterly disclosure upon request to other third parties. Fitch notes that quarterly disclosure includes a balance sheet and income statements; however, a statement of cash flows and management discussion and analysis is not provided.