SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA-' rating to the following revenue bonds to be issued for the benefit of Sisters of Charity of Leavenworth Health System (SCLHS):
--$327,000,000 Colorado Health Facilities Authority, series 2010A;
--$294,300,000 Colorado Health Facilities Authority, series 2010B;
--$202,800,000 Kansas Development Finance Authority, series 2010A;
--$217,900,000 Montana Facility Finance Authority, series 2010A.
The bonds are scheduled to price the week of May 3, 2010.
The series 2010 bonds are expected to be issued as unenhanced, fixed-rate bonds. Bond proceeds will be used to: (a) refund certain series of outstanding debt of SCLHS and its restricted affiliate, Exempla, Inc.; (b) refinance certain outstanding taxable debt; (c) fund certain past and future capital expenditures; and (d) pay costs of issuance.
The 'AA-' rating is also assigned to two series (2002B and 2009A) of Colorado Health Facilities Authority bonds issued for Exempla, Inc., which will become a restricted affiliate of the SCLHS obligated group with this transaction.
In addition, Fitch downgrades the long-term rating to 'AA-' from 'AA' on all outstanding parity debt.
The Rating Outlook is revised to Stable from Negative.
RATING RATIONALE
The one-notch downgrade reflects a moderate increase in SCLHS's risk profile, which is a function of lower liquidity and increased debt service requirements. While days cash on hand and cashflow margin remain near or above 'AA' category medians, the elevated debt service resulting from this issuance produces pro forma coverage levels that are inconsistent with the prior rating. Cushion and cash-to-debt ratios are similarly below category medians.
Management's focus on operational improvement boosted 2009 operating profitability following 2008's loss, but operating margin remains below prior year levels mainly due to the expense of significant additional facilities being placed into service. Operating cashflow displayed somewhat more stability but also remains below prior years' results.
The system's liquidity metrics in relation to expenses remain very strong, despite SCLHS's reliance on unrestricted cash to help fund capital projects and the large investment losses of late 2008 and early 2009. With major capital programs completed, gradual balance sheet strengthening is expected.
With the affiliation of Exempla, SCLHS has solidified its position in the Denver market and fostered the development of a strong, collaborative relationship with Kaiser Permanente, the area's dominant commercial payor. This acquisition has the potential to provide strong profitability improvement for the system over the medium term as Exempla operations are integrated into the system.
KEY RATING DRIVERS
The sustainability of operational improvements implemented in 2009, coupled with stable or improving liquidity, are key to maintaining the rating.
The acquisition and integration of Exempla has been a primary focus of management over the past several years, but solid operational achievements including a 5% increase in patient revenues stemming from successful contract renegotiation, a decrease in ALOS, and supply cost savings of more than $20 million indicate a renewed focus on core system operations, which may translate into enhanced profitability and liquidity over time.
SECURITY
The bonds are an unsecured obligation of the SCLHS corporate parent (the sole member of the obligated group) and will be issued on parity with existing debt pursuant to a master trust indenture, as amended and supplemented.
CREDIT SUMMARY
The downgrade to 'AA-' from 'AA' reflects a moderate but structural reduction in liquidity and profitability and an increase in debt service requirements for SCLHS. Although 2009's consolidation of the Exempla joint operating arrangement complicates certain year-over-year comparisons, SCLHS, while still a strong 'AA' category system, no longer displays a financial profile consistent with a 'AA' rating.
The Stable Outlook recognizes the operational improvements that have occurred at the system, stemming from its ongoing focus on strict expense control, reduced capital expenditures in the future, increased focus on philanthropy, strategic physician alignments in their markets and excellent reputation for quality.
SCLHS's financial profile is somewhat mixed. On a pro forma historical basis for the year ended Dec. 31, 2009, 288 days cash on hand compares favorably to the 'AA' category median of 209 days, and the cushion ratio at 18.0 times (x) and cash-to-debt of 131% are at or close to medians. On the other hand, maximum annual debt service (MADS) as a percentage of net revenues (3.8%) and MADS coverage by operating cashflow (2.6x) are well below medians. Operating margin is also below the median, but operating cashflow margin and excess margin show relative strength.
SCLHS's share of its various markets has remained relatively stable. The system's admissions fell slightly in fiscal year (FY) 2009 from FY2008 on a same store basis while outpatient statistics increased, indicating the continuing trend toward outpatient services. Two of the largest projects, the total replacement of Saint John's Medical Center in Santa Monica, and St. Mary's Hospital in Colorado, are virtually completed. Future capital expenditures are modest and are expected to be equivalent to the system's depreciation expense. Any excess cash flow will probably be used to enhance the system's long-term liquidity.
SCLHS has a strong, experienced management team but the system recently announced that the CEO will be retiring by next year and the CFO will be leaving for a new position by year end. The board is in the process of initiating a national search for their replacements. While the loss of both the CEO and CFO is a mild credit concern, it is mitigated by the system's excellent business practices, recent operational improvements and strong board characteristics.
SCLHS is a large, multi-state health care system operating 11 hospitals in Kansas, Montana, Colorado and California. In FY 2009, SCLHS reported total revenues of approximately $2.5 billion. SCLHS posts all financial (including management's discussion and analysis) and utilization statistics quarterly on the organization's web site, which Fitch views positively.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Revenue-Supported Rating Criteria', dated Dec. 29, 2009;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2008
Additional information is available at 'www.fitchratings.com'.
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KEYWORDS: United States North America Kansas New York
INDUSTRY KEYWORDS: Health Professional Services Finance General Health
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