OREANDA-NEWS. Fitch Ratings has downgraded the rating on the following Pulaski County Public Facilities Board health facilities revenue bonds issued on behalf of the Central Arkansas Radiation Therapy Institute (d/b/a CARTI):

--$49 million series 2013 to 'BBB-' from 'BBB+'.

The Rating Outlook remains Negative.

SECURITY

The bonds are secured by a pledge of gross revenues, a first-mortgage lien, and a debt service reserve fund.

KEY RATING DRIVERS

OPERATING CHALLENGES; MISSED COVENANT: The downgrade to 'BBB-' is prompted by CARTI's third consecutive year of missed operating targets in fiscal 2016 (unaudited, June 30), which is expected to result in a missed debt service coverage covenant. CARTI produced a -4.2% operating loss and weak -0.2% operating EBITDA loss, versus the 0.7% operating EBITDA margin in fiscal 2015. Losses were driven in part by clinical volume volatility, operating costs in the new facility, and challenges with payor contracts.

BALANCE SHEET LOW POINT: As expected, CARTI's $40 million total equity contribution to its cancer center project resulted in balance sheet erosion. At unaudited fiscal year end June 30, 2016, CARTI had $36.6 million in unrestricted liquidity, equal to 83.4 days cash on hand (DCOH), 10.7x cushion ratio, and 73.2% cash to debt. Improved operating performance and significantly lower capital expenses should allow for incremental replenishment over the near to medium term.

CAPITAL PROJECT COMPLETE: CARTI opened its $90 million cancer center project in November 2015, largely on time and within budget. Future capital needs are expected to be minimal over the near term now that CARTI is operating in its brand new stand-alone center. However, full interest and depreciation expenses will necessitate operating improvements in light of CARTI's now full debt service payment requirements in fiscal 2016 and beyond.

SOLID MARKET FOOTPRINT: Additional rating pressure is currently precluded given CARTI's leadership in outpatient cancer services within the Little Rock and surrounding market. Still, CARTI's relatively small operating revenue base of $158 million in fiscal 2016 (unaudited) means it remains vulnerable to changes in its clinical staff and payor arrangements, as evidenced by its operating losses in fiscal 2016.

RATING SENSITIVITIES

IMPROVED OPERATING PERFORMANCE: Additional rating pressure is possible should Central Arkansas Radiation Therapy Institute (CARTI) not reverse its downward trend in profitability, which is expected in light of CARTI's fiscal 2017 budget. Failure to preserve liquidity and produce better than 1.5x coverage of maximum annual debt service (MADS) per its covenant calculation in fiscal 2017 would likely result in a rating downgrade.

CREDIT PROFILE

CARTI is a freestanding outpatient cancer care provider, serving the Little Rock area and central Arkansas region with radiation, medical, surgical, and other cancer treatment services. Total revenues were $148 million in fiscal unaudited 2016 (year end June 30).

MISSED COVENANT EXPECTED

CARTI is expected to miss its fiscal 2016 debt service covenant requirement of 1.2x, projecting 0.69x coverage for fiscal 2016. CARTI took steps in early calendar 2016, retaining a consultant which is expected to grant it a pass on its 2016 and 2017 debt service covenant requirements. However, should CARTI fail to produce at least 1.0x coverage in fiscal 2017, it will be an event of default.

This is the third consecutive year of below-budgeted results. Based on unaudited interim financial statements, CARTI produced an operating loss of $7.8 million (-4.9%) versus a budgeted $2.3 million in operating income. Performance in fiscal 2016 was impacted by various items, resulting in the loss of clinical volumes due to physician staff issues, and some slowdown associated with the move into the new facility in November 2015. In addition, payor contract issues with Blue Cross and with Caremark have hindered the revenue growth associated with new services in the new facility as well.

While several initiatives are well underway to reverse the operating losses, CARTI's budget for near breakeven in fiscal 2017 will require significant improvements. Fitch plans to review forthcoming recommendations from the retained consultant, expected along with second quarter (Dec. 31) disclosure in early 2017, and may take rating action as appropriate.

PROJECT COMPLETE

CARTI has now completed its single-site multidisciplinary cancer treatment center in Little Rock, which they moved into in November 2015. This is a bit behind the original plan which projected the opening on Oct. 17, 2015. Still, the project finished just under the $90 million budget, including nearly $2.5 million in added scope, and they found approximately $8 million in value engineered savings. As expected, CARTI spent approximately $40 million total (approximately $25 million in fiscal year 2016 [FY16]) in equity contributions to the project. The associated capital campaign was successful, raising over $11 million against its $10 million initial goal.

DEBT PROFILE

As of unaudited June 30, 2015, CARTI had $49 million in long-term debt outstanding, which was all fixed rate series 2013 bonds. MADS is measured at $3.4 million, and debt service is level. CARTI has no swaps/derivatives, nor does it have a defined benefit pension obligation. No additional debt is planned.

DISCLOSURE

CARTI provides quarterly disclosure within 60 days of quarter end and annual disclosure within 150 days of fiscal year end (June 30) to the Municipal Securities Rulemaking Board's EMMA system. Disclosure includes balance sheet, statement of operations, changes in net assets, and cash flows.