Fitch Rates $342.62MM Jefferson Health System's (PA) Ser 2010A&B Revs 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns its 'AA' long-term rating to the following revenue bonds to be issued on behalf of Jefferson Health System (JHS):

--$160.93 million Chester County Health and Education Facilities Authority, series 2010A;
--$181.69 million The Hospitals and Higher Education Facilities Authority of Philadelphia, series 2010B.

The series 2010A&B bonds are expected to price at the end of June through a negotiated sale. Proceeds will be used to refinance JHS's existing 1997A, 1997B, 2004A, and 2004B bonds, provide $34 million of new money for capital expenditures and pay costs of issuance. The series 2010A&B bonds will be fixed rate. In addition, Fitch affirms the 'AA' ratings on JHS's outstanding debt issued through various authorities in Pennsylvania. Total outstanding debt after this issuance will be approximately $550 million with 70% fixed rate and 30% variable rate. After the refinancing, JHS's outstanding debt will include the series 2010A&B, series 2005A, series 2007A&B, and $40 million of other debt (mainly capital leases and a bank loan). The series 2007A&B bonds are separate obligations of Main Line Health (MLH) and Thomas Jefferson University Hospital System (TJUH), respectively, and are not rated by Fitch but included in our analysis. The bonds have a put date in August 2012 and management expects to refinance the bonds as part of JHS at that time.

The Rating Outlook is Stable.

RATING RATIONALE:

--Strong and sizeable delivery system in the Philadelphia region that comprises two main member systems: TJUH, which includes a leading academic medical center and MLH, which includes four acute care hospitals in the greater Philadelphia area.
--Consistent and solid generation of operating cash flow with operating EBITDA margins of 12.7%, 11% and 10.1% for fiscal 2007-2009, respectively, and 9.5% for the nine months ended March 31, 2010 (interim period).
--Very low debt burden as JHS generally funds capital expenditures from cash flow. MADS as a percentage of revenue was only 1.1% for fiscal 2009 and debt service coverage by operating EBITDA was strong at 8.8 times (x) and 8.4x through the interim period.
--Good and stable liquidity with days cash on hand generally above 200 days over the last three years and 205 days at March 31, 2010.
--Competitive market, with several other systems in the region, most notably, University of Pennsylvania Health System (UPenn), however, JHS has maintained a leading market share of 17.9% compared to UPenn at 12.7%.

KEY RATING DRIVERS:

--JHS's ability to sustain strong operating cash flow in an environment of rising pressure on reimbursement.
--Liquidity growth is expected to be limited given robust capital spending plans.

SECURITY:

General unsecured debt obligations of JHS. Under contribution agreements entered into by JHS and certain of its member institutions (TJUH and MLH), the member institutions have agreed to pay, loan or transfer amounts necessary to JHS to pay debt service. Fitch does not view the legal structure as a credit concern at the current rating level; however, bondholders' recourse is limited given the unsecured general obligation of the system.

CREDIT SUMMARY:

The 'AA' rating reflects JHS's strong position in a competitive market with a leading market share and an overall solid financial profile. JHS maintains a leading market share of 17.9% in 2009 compared to UPenn's 12.7% despite the departure of Albert Einstein Health Network [AEHN] and Frankford Health Care System (now known as Aria Health [Aria]) from the system in 2008. Fitch views the composition of the system as a credit strength given the geographic coverage and depth and breadth of services offered. The system includes TJUH, an academic medical center and several acute care hospitals located in favorable service areas in the suburbs of Philadelphia. JHS continues to grow its presence in the service area mainly through clinical affiliations with other community providers and leveraging the TJUH relationship. The service area is also dominated by two dominant managed care payors, Blue Cross and Aetna, which could pressure managed care rate increases going forward.

JHS has a solid overall financial profile with strong operating cash flow, low debt burden and good liquidity. JHS's operating EBITDA has averaged an annual $280 million over the last three years with an average operating EBITDA margin of 11.3% compared to Fitch's 'AA' category median of 9.8%. Through the nine months ended March 31, 2010, operating EBITDA margin was 9.5% compared to 9.2% the same prior year period. Management has historically funded the majority of its capital projects from cash flow and since 2007 was $608 million or 82% of total capital spending. Major recent projects include the expansion and modernization of the ED and ICU at TJUH and an expansion and renovation at Paoli Hospital. Future capital needs include a $530 million expansion and renovation project at Lankenau, which is expected to be funded mainly through cash flow and support from its foundation ($90-$100 million). Given continued robust capital spending, liquidity growth is expected to be limited. Liquidity has remained stable over the last three years and was 205 days as of March 31, 2010 with cash to debt at 2.6x.

One of JHS's main credit strengths is its low debt burden. The system has been fairly conservative in issuing debt for capital projects. MADS as a percentage of revenue was only 1.1% through the nine months ended March 31, 2010 and debt service coverage is strong at 8.4x by operating EBITDA compared to Fitch's AA category medians of 2.8% and 3.8x, respectively. The members recently renewed its system affiliation agreement and any member may voluntarily withdraw from the system after July 1, 2022, however, any debt must be repaid before the withdrawal.

The Stable Outlook reflects the expectation that JHS will maintain its strong financial profile due to its market position, geographic coverage, and physician alignment. However, with the rising pressure on reimbursement, JHS's profitability levels could be compressed over the mid-term.

JHS is composed of three members: Thomas Jefferson University Hospital System (TJUH), Main Line Health (MLH) and Magee Rehabilitation Hospital (Magee). TJUH includes 609-bed Thomas Jefferson University Hospital. MLH includes four acute care hospitals: Bryn Mawr Hospital, Paoli Hospital, Lankenau Hospital, and Riddle Memorial Hospital, which had a total of 1,132 beds. Magee has 96 beds. Total operating revenue in fiscal 2009 was $2.6 billion. All numbers reflect the exclusion of AEHN and Aria. JHS posts annual audited financial statements and quarterly unaudited financial statements to the NRMSIRs. Quarterly information includes balance sheet, income statement, and utilization statistics.

Applicable criteria available on Fitch's website at 'www.fitchratings.com':

--'Revenue-Supported Rating Criteria', dated Dec. 29, 2009;
--'Non-Profit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.



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KEYWORDS:   United States  North America  New York  Pennsylvania

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