CHICAGO--(BUSINESS WIRE)-- As part of its ongoing surveillance review process, Fitch Ratings has affirmed the 'A-' rating on $49.5 million of the city of Shakopee, Minnesota's health care facilities revenue bonds (St. Francis Regional Medical Center), series 2004.
The Rating Outlook is Stable.
--The rating affirmation is based on St. Francis Regional Medical Center's (St. Francis) continued strong financial performance and good market position in a favorable service area.
--St. Francis benefits from its ownership structure, which is currently split evenly among three owners, Allina Health System (rated 'AA-'; Outlook Stable by Fitch), Park Nicollet Health Services, and Critical Access Group (fka Essentia Health, rated 'A-'; Outlook Stable by Fitch). In addition, Allina provides management services, which Fitch views favorably.
--St. Francis has consistently produced strong operating cash flow, which has led to good liquidity levels and good debt service coverage.
--Fitch's main credit concerns include St. Francis' small revenue base and its future capital needs.
--Future capital needs total $53.5 million from fiscal 2011-2016 and will most likely be funded from cash flow.
KEY RATING DRIVERS:
--Maintaining strong operating cash flow to support its capital needs without an impact to its liquidity.
--Continue realizing benefits related to its ownership structure including access to a broad physician network, electronic medical record platform, and investment management.
The bonds are secured by gross revenues of the obligated group.
St. Francis is jointly owned by Allina, Park Nicollet Health Services and Critical Access Group. Fitch views the benefits of St. Francis' relationship with the joint members as a credit positive. Allina is responsible for managing day-to-day operations, operating and capital budgeting, strategic planning, and cash management. Although one of Fitch's main credit concerns is St. Francis' small revenue base, this is partially mitigated by its ownership structure, which include benefits such as access to a strong physician network (43% of its physicians are employed by one if its owners), and ability to utilize Allina's electronic medical record platform as well as participate in Allina's treasury program.
St. Francis' operating performance has been consistently solid with operating EBITDA margins of 17.5% in fiscal 2010 and 16.9% in fiscal 2009 and was 16.3% for the three months ended March 31, 2011. Operating income was $11.5 million (9.6% operating margin) in fiscal 2010 compared to $9.9 million (8.4% operating margin) in fiscal 2009. Strong operating performance has been driven by continued standardization and focus on expense management. St. Francis' fiscal 2011 operating income budget is $7.6 million or 6.2% operating margin.
The service area, located just to the southwest of the Twin Cities, has favorable characteristics including population growth and above average median household income. Utilization growth has been pretty flat from 2009 to 2010; however, 60% of its revenue is from outpatient services. Physician recruitment has been successful with more than seven physicians added in 2010. There are 192 active physicians on St. Francis' staff and the hospital currently does not employ any physicians as 43% of its active medical staff is employed by Allina or Park Nicollet. St. Francis' maintains the leading market share in its service area at 37% (54% including owner's hospitals in the service area) compared to its next closest competitor, Fairview Health Services with 24.9%.
Fitch's main credit concern is St. Francis' capital needs, which total $23 million in fiscal 2011, $6 million in fiscal 2012, $4.6 million in fiscal 2013, $2 million in fiscal 2014, $5.3 million in fiscal 2015, and $12.5 million in fiscal 2016. The main projects in the fiscal 2011 capital budget include a surgery expansion and addition and expansion of several outpatient centers. Although management expects to fund the capital needs out of cash flow, additional debt could be an option dependent on market conditions. Fitch will evaluate the impact of the additional debt, if any, at the time of issuance. Fitch expects St. Francis to maintain its strong operating cash flow to support its growth plans without an impact on its liquidity. St. Francis' EBITDA totaled $18.8 million in fiscal 2010 and $16.8 million in fiscal 2009 (after $3 million distribution to members). The distribution to members is subordinate to debt service and is limited by certain financial targets.
Liquidity is solid with $63.3 million of unrestricted cash and investments as of March 31, 2011. This equated to 237.2 days cash on hand and 92.5% cash to debt compared to Fitch's 'A' category median of 183.8 and 105.5%, respectively. Of St. Francis' total investments, 54% is invested in highly liquid funds (cash and short-term fixed income securities) and 46% is invested in a long-term pool (part of Allina's investment pool).
Total outstanding debt was $53 million as of Dec. 31, 2010 and was 93% fixed rate and 7% variable rate demand bonds (VRDBs). The letter of credit (LOC) on the outstanding VRDBs was recently extended and expires on Jan. 1, 2012. Fitch does not view the risks related to the VRDBs as a concern given the manageable amount outstanding ($3.8 million) and management's success in the continual renewal of the LOC (1987 bonds). Maximum annual debt service (MADS) totals $4 million, and aggregate debt service is level. The debt and MADS figure exclude a $16 million medical office building (MOB) financing that is recorded on St. Francis' balance sheet. The MOB was financed through a joint venture that St. Francis is a part owner in and the debt service is paid through the lease income from the MOB. Allina and St. Francis have master leases on the MOB.
The Stable Outlook reflects the expectation that St. Francis will maintain its strong operating cash flow to support its capital plans without impacting its liquidity.
St. Francis operates an 86-bed acute care hospital in Shakopee, MN, approximately 23 miles southwest of downtown Minneapolis. Total revenues for fiscal 2010 were $119.5 million. St. Francis covenants to disclose annual and quarterly information to EMMA. Annual and quarterly financial statements can also be found through Digital Assurance Certification LLC (DAC) at 'www.dacbond.com'. Quarterly statements include a balance sheet, income statement, utilization statistics, cash flow statement and management discussion and analysis.
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
Nonprofit Hospitals and Health Systems Rating Criteria
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KEYWORDS: United States North America Minnesota New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance