OREANDA-NEWS. Fitch Ratings has upgraded the rating on $14,725,000 series 2007 fixed rate bonds issued by the Tulare Local Health Care District d/b/a Tulare Regional Medical Center (TRMC) to 'BB-' from 'B'.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of the gross revenues of Tulare Local Health Care District. A fully funded debt service reserve fund provides additional security for bondholders.

KEY RATING DRIVERS

STABILIZATION ACHIEVED: The upgrade to 'BB-' from 'B' reflects sustained evidence of operational and financial turnaround and stabilization. Following three years of large operating losses, TRMC posted positive monthly operating income since April 2014. Operating margin of 10.6% in fiscal 2015 (unaudited interim results; June 30 year-end) was supported by volume growth, improved payor mix, enhanced revenues, and expense control, the benefits of which are likely to be ongoing.

PROGRESS ON CONSTRUCTION PLANS: The Stable Outlook reflects Fitch's expectation that long-term financing will be secured to complete TRMC's current tower construction project. The hospital district board recently voted to have a $55 million public financing measure go to voters within the hospital district. Should the transaction be approved, TRMC should be able to complete its tower project without relying on the hospital's revenue stream. Also, progress has been made to the tower construction over the last year despite limited funding sources, and the building is now fully enclosed and sealed.

VERY HIGH GOVERNMENTAL PAYOR EXPOSURE: Medicare and MediCal accounted for 77.5% of gross revenues in 2015, nearly a 10% increase in just two years due to MediCal expansion. Supplemental funding receipts are also growing, and totaled $8.8 million in 2014 compared to $5.2 million in 2013. A total of $11.3 million is estimated for 2015 as management continues to leverage various available intergovernmental and supplemental funding programs. While supplemental funding dollars are expected to diminish nationally over the next few years, Fitch believes the immediate impact from participating in these programs is distinctly positive for TRMC.

IMPROVING LIQUIDITY: TRMC's cash and investments grew 70% over the last year, supported by stronger profitability and cash flows. Liquidity metrics of 97.3 days cash on hand, 6.1x cushion ratio, and 90.6% cash-to-debt are consistent with the 'BB-' rating.

RATING SENSITIVITIES

RESOLUTION OF LONG-TERM PROJECT FUNDING: Changes in the Tulare Regional Medical Center's rating will likely be driven by the resolution of its long-term funding requirements. Approval of the proposed public funding necessary to complete its tower construction project could lead to positive rating action. The effect of alternative outside funding arrangements would be evaluated, and TRMC's inability to address the uncertainties related to project funding sources over the next 1-2 years could lead to negative rating pressure.

OPERATIONAL STABILITY EXPECTED: In the meantime, Fitch expects TRMC to sustain its operational and financial improvements, and continue generating sufficient cash flows to produce satisfactory debt service coverage ratios. While not expected, reversal of the current positive trend would lead to negative rating pressure.

CREDIT PROFILE
Tulare Local Health Care District, d/b/a Tulare Regional Medical Center owns and operates a 112-bed hospital in the city of Tulare, California. Total operating revenue in FYE June 30, 2015 (unaudited interim results) was $80 million (exclusive of tax revenues related to GO bonds debt service). Since January 2014, TRMC has been managed by HealthCare Conglomerate Associates (HCCA). The current management agreement runs until 2029 with possible extensions.

Stabilizing Operational and Financial Performance
Under HCCA's leadership, operating and financial performance improved dramatically over the last 18 months. Since April 2014, TRMC has posted positive monthly operating income. In fiscal 2015, operating income was $8.5 million (10.6% operating margin) compared to a loss of $2.2 million (negative 3.2% operating margin) in 2014 and a loss of $9.9 million in 2012 (negative 13% operating margin). Similarly, operating EBITDA margin recovered to a strong 16.9% in 2015 compared to 4.4% the prior year.
Management attributes the turnaround to the integration of new leaders throughout the organization who have conducted meticulous review of operating efficiencies, supplemental revenue sources, and expense savings. The hospital workforce was completely privatized in November 2014, resulting in a staff reduction of approximately 10% and a resulting structure that allows for better staff management. Additionally, the expansion of MediCal has led to enhanced clinical volumes and a favorable shift in payor mix.
Now that operations have stabilized, management's goal is to leverage all available supplemental funding programs in the state and rebuild/expand its community network. Management is budgeting an operating income of $7 million (8.5% operating margin) for fiscal 2016, which Fitch believes is achievable given sustainable financial improvements put in place and limited competition in the service area.

Construction Plans Progressing
TRMC has a construction project in progress featuring a 24-bed emergency department, a new diagnostic department, a 16-bed obstetric unit, four surgery suites, and 27 new private patient rooms meeting seismic requirements. This new expansion tower was initially slated to open October 2012, but suffered disruptions due to concrete delamination issues and ensuing conflicts with contractors.

Since HCCA assumed overseeing the project in early 2014, TRMC was able to complete the exterior framing of the building after reaching an agreement with the previous contractors and reviewing/renegotiating other existing contracts. The original general obligation (GO) bond funds were exhausted in fall 2014, and improvements have since then been funded with internal equity.

The hospital district board voted unanimously to have a $55 million public financing measure go to a vote by the residents of the hospital district. The vote is expected to take place early 2016. Fitch views this development favorably, as the public financing measure, if approved, would provide sufficient funding to complete the construction project without affecting TRMC's cash flows. Fitch believes the 'BB-' rating is supported by TRMC's current financial and operating profile without taking into account the impact of additional public funding sources, but also assumes that the tower projects will not require TRMC to fund the project using its internal cash and investments.

Improving Liquidity
Unrestricted cash and investments totaled $18 million at June 30, 2015, up from $10.6 million one year prior. The improvement is primarily attributable to improved operating cash flows and measured capital spending related to the tower project. Liquidity metrics of 97.3 days cash on hand, 6.1x cushion ratio, and 90.6% cash-to-debt are markedly improved from prior years, and are consistent with the 'BB-' rating.

The TRMC board has approved the implementation of Cerner electronic medical record system, which will essentially replace core applications with a single system and is expected to cost around $3.3 million. Capital spending outside of the tower project and IT is expected to be minimal. Also, Fitch recognizes the somewhat less predictable timing of supplemental funding receipts in California, but believes TRMC now has a sufficient cash balance to endure a degree of timing discrepancy.

DEBT PROFILE
At June 30, 2015, Tulare's revenue supported debt burden totaled $19.8 million, consisting of $14.7 million in series 2007 bonds and capital leases. The debt is all fixed rate and produces a maximum annual debt service (MADS) of $2.9 million, which declines to $1.3 million in fiscal 2017 following the final payment on the capital lease. Debt burden is relatively low, as measured by debt-to-capitalization of 25.8% in 2015. Supported by improved cash flows, MADS coverage was a strong 5.3x in fiscal 2015, up from 1.2x in 2013 and 2014.
Not included in Fitch's calculation of TRMC's long-term debt are $85 million existing GO bonds, which are not rated by Fitch. Since TRMC's GO debt is separately secured by a special assessment on property taxes in the district, Fitch's calculation of financial ratios excludes the GO debt and related receipts.

DISCLOSURE
TRMC covenants to disclose annual financial statements within six months of year-end and quarterly unaudited financial statements within 30 days through the MSRB EMMA website.

Fitch notes that TRMC received an unmodified (clean) audit opinion in 2014, following two years of going-concern opinions. Additionally, TRMC is providing monthly financial statements to EMMA for a specified period of time. Current management has emphasized focus on better reporting practices and have provided consistent and timely disclosure since 2014, which is viewed positively.