CHICAGO--(BUSINESS WIRE)-- As part of ongoing surveillance efforts, Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued on behalf of Resurrection Health Care Obligated Group (RHC), IL:
--Approximately $101,040,000 Illinois Finance Authority revenue refunding bonds series 2009;
--Approximately $119,140,000 Illinois Finance Authority variable-rate demand revenue bonds series 2005B*;
--Approximately $119,775,000 Illinois Finance Authority variable-rate demand revenue bonds series 2005C*;
--Approximately $31,350,000 Illinois Health Facilities Authority revenue bonds series 1997B;
--Approximately $104,400,000 Illinois Health Facilities Authority revenue bonds series 1999A**;
--Approximately $104,400,000 Illinois Health Facilities Authority revenue bonds series 1999B**.
*Underlying rating. These bonds are supported by a direct-pay letter of credit provided by JPMorgan Chase Bank, N.A. (Issuer Default Rating of 'AA-/F1+' by Fitch). **Bonds are insured by Assured Guaranty Municipal Corp., whose insurer financial strength is not rated by Fitch.
The Rating Outlook is Stable.
--The affirmation at 'BBB+' reflects the continued improvement in operating profitability resulting from the successful divestiture of West Suburban and Westlake Hospitals and system-wide cost control initiatives.
--RHC's continues to be challenged by declining volume trends and an erosion in payor mix.
--RHC's liquidity position provides a solid financial cushion as management continues to execute its strategic plan.
--Funding of RHC's pension plan is expected to depress the improvement in corporation's financial profile over the near term.
KEY RATING DRIVERS:
--Fitch believes RHC's physician alignment strategy is vital to stabilize patient volume trends.
--Continued execution of system-wide cost management and revenue enhancement program to generate improved operating profitability measures that meet or exceed Fitch 'BBB' medians.
--On Feb. 3, 2011, RHC entered into a non-binding letter of intent (LOI) with Provena Health to explore the potential merger of the two systems. While this rating action does not factor in the possible impacts from a potential merger, Fitch will monitor the situation as it develops and take rating action as necessary.
The bonds are secured by an interest in the pledged revenues of the obligated group, a mortgage, and a debt service reserve fund.
The affirmation at 'BBB+' reflects the continued improvement in operating profitability resulting both from the successful divestiture of West Suburban and Westlake Hospitals in August 2010, and from system-wide cost control initiatives which have improved profitability on a same-store basis. Excluding the operations of West Suburban and Westlake Hospitals, RHC's profitability improved sharply in fiscal year (FY) 2010 generating $4 million of operating income compared (0.3% operating margin) to a $36.2 loss from operations (-2.6% operating margin) in FY 2009. While operating EBITDA margin in fiscal 2010 improved to 6.6% from 4.2% in fiscal 2009, it remains modest as compared to the 'BBB' category median of 8.7%. Through the six month interim period ended Dec. 31, 2010, RHC reported operating EBITDA of $77.1 million on total revenues of $728.7 million or a 10.6% operating EBITDA margin. RHC has experienced declining inpatient volumes and market share erosion since 2007 with inpatient admissions falling from 84,287 in fiscal 2008 to 73,089 in fiscal 2010. While overall inpatient admissions in the service area are down due to the recession, RHC has been negatively impacted outmigration and changing admissions patterns by independent physicians. Improving physician relationships, growing active medical staff and implementation of certain alignment strategies is a key strategic initiative going forward.
RHC's liquidity metrics exceed Fitch's 'BBB' medians with days cash on hand (DCOH) of 264, cushion ratio of 19.3 times (x) and 152.5% cash to debt. RHC's unrestricted cash and investment position improved to $873.3 million at Dec. 31, 2010 from $814.4 million at Sept. 30, 2009 due, in part, to improved revenue cycle efforts as reflected in the improvement in days in account to 39.8 at fiscal year end (FYE) 2010 from 46.2 and 49.6 at FYE 2009 and 2008, respectively, However, RHC does not restrict a portion of its investment portfolio for its self-insurance liabilities, as is more typical with many providers, which has the affect of inflating its liquidity ratios. Fitch believes that RHC's balance sheet strength and conservative investment program provide adequate bondholder protection as the system continues on its operational improvement efforts.
In spite of a $62 million contribution to the defined benefit plan in 2010, RHC's pension funding status was just 40% of the accumulated benefit obligation as compared to the 35% funding status at June 30, 2009. A drop in the discount rate to 5% in 2010 from 6.5% in the year earlier period largely offset the substantial employer contribution. As a church-sponsored plan RHC is not subject to ERISA funding requirements. However, management's stated intention to make annual contributions to reduce the pension liability is expected to limit liquidity growth over the near term.
Although RHC has made substantial improvement in its operating profile and profitability over the last two years, an Outlook revision to Positive is precluded at this time. Fitch would like to see further sustainment of recent profitability trends and execution on certain strategic initiatives, particularly physician integration and alignment. The recent announced LOI with Provena Health has not been incorporated into the rating or outlook. Fitch will continue to monitor the situation as it develops and take rating action as necessary.
As of Sept. 30, Resurrection Health Care consisted of six hospitals (1,973 staffed beds), 12 long-term care facilities and other related health care entities. In fiscal 2010, RHC had total operating revenues of $1.4 billion. Under a Continuing Disclosure Agreement, RHC is expected to disclose quarterly unaudited for the first three fiscal quarters within 60 days of each quarter-end and annual audited financial statements within 180 days of each fiscal year-end to the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Financial Advisor and the Underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
James LeBuhn, +1-312-368-2059
70 W. Madison Street
Chicago, IL 60602
Emily E. Wadhwani, +1-312-368-3347
Cindy Stoller, New York, +1-212-908-0526
KEYWORDS: United States North America Illinois New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance