Fitch Affirms Deaconess Hospital Obligated Group (IN) Revenue Bonds at 'A+'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- As part of its ongoing surveillance review process, Fitch Ratings has affirmed the 'A+' ratings on the following revenue bonds issued on behalf of Deaconess Hospital Obligated Group:

--$40,000,000 Indiana Finance Authority, series 2009B*;

--$57,340,000 Indiana Finance Authority, series 2009A;

--$54,765,000 Indiana Health Facilities Financing Authority, series 2004**;

--$20,910,000 Indiana Health Facilities Financing Authority, series 1999A;

--$13,950,000 Indiana Health Facilities Financing Authority, series 1993.

*These bonds are supported by a letter of credit from Bank of America Merrill Lynch. Fitch was not asked to provide a rating based on the LOC support.

**Bonds are insured by Ambac Assurance Corp, which is not rated by Fitch.

The Rating Outlook is Stable.

RATING RATIONALE:

--The rating affirmation is based on Deaconess Hospital Obligated Group's (Deaconess) strong historical operating performance and benefits from its physician alignment platform.

--Deaconess maintains a strong market position in its primary service area, capturing 60.3% of inpatient admissions in 2010.

--Deaconess' debt burden is moderate with solid historical coverage of maximum annual debt service.

--Although improved since 2008, Deaconess' liquidity metrics are light relative to Fitch's 'A' category medians.

KEY RATING DRIVERS:

--Maintain current levels of operating profitability;

--Improve liquidity metrics, which should occur since capital needs are manageable.

SECURITY:

Debt payments are secured by a pledge of the gross revenues of the obligated group.

CREDIT SUMMARY:

The 'A+' rating affirmation reflects Deaconess' ability to consistently generate strong operating profitability, a strong market share position and solid debt service coverage. Over the last four fiscal years, Deaconess' operating and operating EBITDA margins have been strong, averaging 4.4% and 11.9%, respectively, well ahead of Fitch's 'A' category medians of 3% and 10%. Through the six months ended March 31, 2011 (interim period), operating performance remains solid with a 5% operating margin and an operating EBITDA margin of 12.3%. Solid operating performance reflects management's focus on cost control, growth in acute care services, benefits from its integrated physician platform and expanded ambulatory strategy. Deaconess has developed a strong referral network through its growing employed physician base, (expanded in 2008 with the purchase of Welborn Clinic) which totaled 185 physicians at Dec. 31, 2010. Deaconess has maintained its strong market share position, capturing about 60.3% of the inpatient admissions in the primary service area (PSA) in 2010, compared to its primary competitor, St. Mary's Medical Center (owned by Ascension Health, whose revenue bonds are rated 'AA+' by Fitch) at 33.8%.

Deaconess' debt burden is manageable, with maximum annual debt service (MADS) of $18.3 million equating to 3.0% of fiscal 2010 revenues. Coverage of MADS by EBITDA of 4.0 times (x) and 3.8x in fiscal 2009 and 2010, respectively, exceeds the 'A' category median of 3.3x. Through the six-month interim period ended March 31, 2011, MADS coverage by EBITDA was a strong 4.7x. Total outstanding debt is about $227 million and although 43% are variable-rate demand bonds (VRDBs), Deaconess extended its letters of credit (LOC) with JPMorgan Chase through 2013 and with Bank of America Merrill Lynch through 2014, alleviating renewal risk in the near term. In addition, cash to putable debt is strong at 1.2x. Deaconess is counter-party to a total return swap with a notional amount of about $11.1 million. As of June 14, 2011, the mark-to-market on the swap was negative $1 million, requiring Deaconess to post $800,000 in collateral.

Deaconess' liquidity position is light for the rating level; however, it has improved since 2009. At March 31, 2011, Deaconess' unrestricted cash and investments totaled $226 million, which equated to 151.8 days cash on hand, below the 'A' category median of 183.8 days, but an improvement from the prior year. Cushion ratio and cash to debt of 12.3x and 99.6%, respectively, are weaker than the respective 'A' category medians of 14.4x and 105.5%, but also an improvement from 2009 results. Capital spending has been high at 2.1x depreciation expense in fiscal 2010 and 1.7x in the interim period, with bond proceeds from its series 2009 issue funding a portion of the capital spend. Deaconess' capital budget for fiscal 2011 totals $55.5 million, which will be funded with $34.7 million from cash flow and $20.8 million from bond proceeds. Major capital projects include equipment for the Gateway Hospital Tower 2 which commenced operations in October 2010, infrastructure and renovations on the main campus, and information technology. Fitch expects liquidity metrics to improve over the near term due to its manageable capital spending from cash flow.

The Stable Outlook is based on Fitch's belief that Deaconess will maintain operating performance consistent with historical results. Moreover, solid cash flow generation should improve Deaconess' liquidity position and metrics.

Headquartered in Evansville, IN, Deaconess is an acute care provider, which serves a 25-county, tri-state area. Deaconess operates a total of 560 operational beds over its three campuses. Fitch analyzed the financial performance of Deaconess Health System. The obligated group comprised 96% of total revenue and substantially all of total assets of the system. In fiscal 2010, Deaconess had $619.8 million in total operating revenue. Deaconess' disclosure, including quarterly and annual financial statements with operating statistics, is posted to EMMA on a regular and timely basis.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 08, 2010;

-- 'Nonprofit Hospitals and Health Systems Rating Criteria', Dec. 29, 2009.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186

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CONTACT:

Fitch Ratings
Primary Analyst:
Dana N. Sodikoff, +1-312-368-3215
Associate Director
Fitch, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst:
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Committee Chairperson:
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Senior Director
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Media Relations:
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[email protected]

KEYWORDS:   United States  North America  Illinois  New York

INDUSTRY KEYWORDS:   Health  Hospitals

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