SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings assigns an a 'AA' rating to the following revenue bonds issued for the benefit of Catholic Health Initiatives:
--Montgomery County (OH) (Catholic Health Initiatives) revenue bonds series 2004B-1;
--St. Mary Hospital Authority (PA) (Catholic Health Initiatives) variable-rate demand revenue bonds series 2004B.
In addition, Fitch Ratings affirms the 'AA' long-term rating on approximately $4.1 billion of revenue bonds issued by various issuers for the benefit of Catholic Healthcare Initiatives and affirms its 'F1+' short-term rating on approximately $1.4 billion of short-term debt. For certain series, this is an underlying rating. The Rating Outlook is Stable.
RATING RATIONALE
--CHI's primary credit strength is the system's large and geographically diverse portfolio of hospitals and other health care related institutions which offer the full continuum of health care. CHI's large revenue base supported by acute care and critical care hospitals and long term care services, dispersed among 18 states in several regions of the country and CHI's other health care related businesses, provides a strong mitigant to the volatility of the health care industry.
--An additional positive credit factor is the continuing improvement in CHI's financial statistics in 2010 compared to 2009, driven by management's focus on revenue enhancement initiatives including top line revenue growth, strong expense control, and solid recovery in CHI's investment portfolio.
--CHI strategic realignment has been refined to reflect the changes stemming from the health care reform. Key elements, which Fitch views favorably, are an expanded physician alignment strategy, the development of alternative business lines focusing on non acute care services and a measured acquisition/divesture strategy, are primary factors in CHI's operational improvement.
--CHI has demonstrated sufficient liquidity to support the short term rating of 'F1+'. As of June 30, 2010, CHI's ratio of liquid assets to tender exposure was 165.5%, exceeding Fitch's threshold of 125%.
KEY RATING DRIVERS
Fitch expects CHI to sustain its operational improvements stemming from the implementation of CHI's strategic plan begun in 2008. CHI has refined its operational priorities, focusing on targeted service line growth and the development of profitability opportunities across service lines. As part of the overall operational improvement, profitability trends have stabilized and liquidity metrics have strengthened. Management expects to maintain a minimum operating margin of 3% through 2015 to achieve the operating level necessary to support CHI's capital needs, fund the system's pension liabilities and maintain sufficient liquidity necessary to support the system's variable rate program.
SECURITY
The bonds are an unsecured general obligation of the CHI Credit Group, as evidenced by the Capital Obligation Document which gives CHI the right and obligation to demand sufficient funds from each participant and designated affiliate as required to meet CHI's debt obligations.
CREDIT SUMMARY
The 'AA' rating reflects the fundamental credit strengths of a large integrated system with a broad geographic base in several regions of the country. An additional positive credit factor is CHI's business line diversity with 73 hospitals and other health care related components providing services across the full continuum of care. Fitch believes that CHI's consistency in producing financial metrics to support its operations is strong positive rating factor. Other positive rating factors are CHI's strong focus on best practices primarily through its Clinical Information Technology projects, its continued emphasis on quality initiatives throughout the system, and an expanded system strategy and implementation plan for physician engagement protocols for its market based organizations (MBOs).
CHI's profitability and liquidity ratios improved in fiscal year 2010, continuing the operational turnaround begun in 2009 after a disappointing financial performance in 2008. At fiscal year end June 30, 2010, CHI earned $342 million from operations (3.8% operating margin, 10.2% operating EBITDA margin). Historic pro forma MADS coverage by op EBITDA is very strong at 4.9 times (x) versus 2.9x coverage in 2009. MADS as a percentage of revenues is moderate at 3% on an historic pro forma basis. At year end June 30, CHI had 212.8 days cash on hand, a 16.2 times (x) cushion ratio and a cash to debt ratio of 138.5%, all of which are comparable to Fitch's medians for the category and are a solid improvement over the prior year.
CHI's swap portfolio, consisting of seven floating to fixed rate interest rate swaps with UBS, JPMorgan and BLB, has a notional value of $953.7 million at year end with a marked to market value of negative $143.5 million, net of cash collateral balances of $51.1 million.
Of concern is CHI's unfunded pension liability of $638 million increased from $600 million in 2009 primarily due to a decrease in the assumed discount rate which offset the solid investment performance that occurred in 2010. CHI contributed $154.8 million in fiscal year 2010 to meet its pension obligation and expects to contribute an additional $151.2 million in 2011.
An additional ongoing concern continues to be CHI's large capital plans. CHI is expecting to spend approximately $700 million over the next five-years to fund needed capital programs, including several replacement hospitals at its various MBOs and to fund the costs of its IT programs. Fitch believes the capital investment is necessary for CHI to maintain a competitive position in its markets, but the costs of the projected capital spend in combination with CHI's projected pension liabilities could hamper CHI's ability to improve its liquidity metrics over the near to medium term.
The 'F1+' rating reflects CHI's solid liquidity position and sound internal procedures that ensure timely access and transfer of funds in the event of a failed remarketing. Unrestricted cash at June 30, 2010 was approximately $4.4 billion. CHI provides self liquidity on $163.4 million of outstanding variable-rate debt.
The Stable Outlook is based on Fitch's expectation that CHI will continue its recent profitability improvement over the medium term, as a result of the successful implementation of a broad spectrum of revenue enhancement initiatives, strong expense control and the ongoing development of alternative non acute care revenue sources to enhance the system's future profitability.
CHI is the second largest not for profit integrated health care delivery system in the U.S. The system sponsors market-based organization (MBOs) in 18 states, with 73 acute care hospitals, including 21 critical access hospitals, 40 long-term care, assisted living and residential facilities, two community health service organizations and two accredited nursing colleges. The system produced $9 billion in total operating revenues in 2010. CHI covenants to provide quarterly and annual disclosure to bondholders. Disclosure has been excellent, including detailed statements with management discussion and analysis which are available on CHI's web site at 'www.catholichealthini.org'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Revenue-Supported Rating Criteria', dated Oct. 8, 2010.
--Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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KEYWORDS: United States North America New York
INDUSTRY KEYWORDS: Health Hospitals Other Health
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