CHICAGO--(BUSINESS WIRE)-- Fitch Ratings takes the following rating action on Silver Cross Hospital and Medical Centers, Illinois, as part of its continuous surveillance effort:
--Approximately $260,000,000 of outstanding Illinois Finance Authority (Silver Cross Hospital and Medical Centers), revenue bonds, series 2009, affirmed at 'BBB+'.
--Approximately $86,000,000 of outstanding Illinois Finance Authority (Silver Cross Hospital and Medical Centers), revenue refunding bonds, series 2008A, affirmed at 'BBB+'.
--Approximately $20,000,000 Illinois Finance Authority (Silver Cross Hospital and Medical Centers), revenue bonds, series 2005A, affirmed at 'BBB+'.
--Approximately $19,500,000 Illinois Finance Authority (Silver Cross Hospital and Medical Centers), revenue bonds, series 2005C, affirmed at 'BBB+'.
--Approximately $7,000,000 Illinois Health Facilities Authority (Silver Cross Hospital and Medical Centers), revenue bonds, series 1999, affirmed at 'BBB+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The rating encompasses the risks associated with Silver Cross' construction of a replacement hospital facility and the resultant stress on certain liquidity and capital related ratios, which are balanced by strong cash flow generation, and the long-term strategic benefits expected to be realized upon completion of the new hospital campus.
--As of June 30, 2010 construction of the replacement hospital in New Lenox (approximately 3.5 miles from its current campus in Joliet, IL) is about 50% complete with approximately $180 million expended to date, which is on time and within budget.
--Excluding the negative impact of accelerated depreciation on Silver Cross' existing hospital facilities, operating profitability has remained consistent with historical performance. Operating cash flow has remained strong with operating EBITDA margin of 12.6% and 12.0%, for fiscal 2009 and through the eight months ended May 31, 2010 (interim period), respectively, which exceeded Fitch's 2010 'BBB' category medians of 8.7%.
--Silver Cross has a leading market share of 31.4% in its primary service area (as of Dec. 31, 2009), up from 25.2% in 2000 and projected to increase further once the new facility is complete. This increase is expected to be enhanced due to partnership agreements with University of Chicago Medical Center and the Rehabilitation Institute of Chicago.
--Silver Cross' debt burden is substantial with maximum annual debt service (MADS) of $29 million equating to 11.3% of fiscal 2009 revenues, as compared to the 'BBB' median of 3.5%. Cushion and cash to debt ratios at May 31, 2010 of 4.5 times (x) and 34.4% are very weak relative to the 'BBB' category medians of 8.5x and 75.9%.
--Liquidity relative to expenses is sound with 206 days cash on hand (DCOH) at May 31, 2010 ($131.5 million of unrestricted cash and investments), which compares favorably to the 'BBB' category median of 122 days.
KEY RATING DRIVERS:
--Ability to complete the project on time and within budget with a smooth transition to the new facility. Any cost overruns or delay in opening that would cause negative variance of actual results from projections will result in downward pressure on the rating.
--Ability to continue generating strong cash flow to fund the equity portion of the project and service its large debt load.
SECURITY:
The bonds are secured by gross revenues and a mortgage on the property.
CREDIT SUMMARY:
The affirmation at 'BBB+' reflects Silver Cross' current progress on the construction of the replacement facility, strong cash flow, good liquidity relative to expenses, and solid market position. In 2007, the decision was made to build a replacement hospital in New Lenox, IL to meet the service needs of Will County (GO bonds rated 'AA+', with a Stable Outlook by Fitch), one of the fastest growing counties in the United States. As of June 30, 2010, construction is on time and within budget. Actual construction costs total about $360 million and the sources of funding include about $185 million from the series 2009 bond proceeds, $15 million from land sales, $10 million from fundraising and about $150 million from existing cash and future cash flow. Construction spending is averaging about $11 million per month and as of June 30, 2010, Silver Cross has spent about half of the bond proceeds. Based on this schedule, Silver Cross will finance the equity portion of the project starting in the spring of 2011 and the new facility is expected to open in February 2012. Partnerships with leading health care providers, including a formalized partnership with Rehabilitation Institute of Chicago, a top-ranking facility in the country, and a joint-venture with University of Chicago for cancer services, are expected to further generate new revenue at the replacement facility.
Despite reduced volume in 2009, operating margin was still in line with management's projections due to controlled expenses, successful physician recruitment, and a higher acuity of cases. Excluding the impact of accelerated depreciation on the existing hospital facility, operating performance in fiscal 2009 and through the interim period has been strong with an operating margin of 4.0%. Including the accelerated depreciation, operating margin was 0.1% and 0.3% for the respective periods.
The main credit concerns include Silver Cross' substantial debt burden, expected equity contribution for the project, and the competitive market. Although MADS coverage is light, Fitch notes that interest expense on the series 2009 bonds is capitalized through January 2012 and that coverage of actual debt service by EBITDA was 2.45x in fiscal 2009. Silver Cross' liquidity position is expected to begin to decline in fiscal 2011 when the equity portion of project funding commences and reach a low in fiscal 2012. Management projects DCOH, cushion ratio and cash to debt to decline to a very light, 108, 3.0x and 24.3%, respectively, at 2012 fiscal year-end with improvement in the ratios through 2015. Although Silver Cross maintains a leading market share of 31.4% in its primary service area (PSA), it faces strong competition from Provena Saint Joseph Medical Center (PSJ), its primary competitor. PSJ is located just five miles west of Silver Cross and controls 29.9% of the market share. Additional market pressure comes from increased competitive activity from Chicago health care providers in Silver Cross' secondary service area looking to expand into Will County.
The Stable Rating Outlook is based on Silver Cross performing in line with its plan and the expectation that it will complete the replacement facility on time and within budget. Fitch views the replacement hospital project favorably as it should position Silver Cross to capture additional market share. However, given its large debt load, the failure to meet cash flow and liquidity projections will place downward pressure on the rating.
Silver Cross is an acute care facility with 246 staffed beds located in Joliet, IL, 37 miles southwest of downtown Chicago. Silver Cross had total operating revenues of $258.5 million in fiscal 2009. Silver Cross currently covenants to provide annual audited financial statements and utilization statistics within 120 days of each fiscal year end and quarterly unaudited financial statements including a balance sheet, income and cash flow statements, and utilization statistics for the first three fiscal quarters within 60 days of each quarter-end.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com':
--'Nonprofit Hospitals and Health Systems Rating Criteria, dated Dec. 29, 2009.
--'Revenue-Supported Rating Criteria', dated Dec. 29, 2009.
Additional information is available at 'www.fitchratings.com'.
Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493154
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KEYWORDS: United States North America Illinois New York
INDUSTRY KEYWORDS: Health Hospitals
MEDIA: