NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns its 'AA' long-term rating to Trinity Health Credit Group's (Trinity) revenue and revenue refunding bonds issued through the following conduit issuers:
--Approximately $136.2 million Michigan State Hospital Finance Authority (s/b Michigan Finance Authority) series 2010A;
--Approximately $65.3 million Indiana Finance Authority series 2010B;
--Approximately $25.5 million County of Franklin (OH) series 2010C;
--Approximately $27.9 million Idaho Health Facilities Authority series 2010D;
--Approximately $20.8 million City of Ontario (OR) Health Facilities Authority (s/b Ontarion Hospital Facility Authority) series 2010E.
The series 2010 bonds are expected to be fixed rate and will price the week of Oct. 11, 2010 through negotiation. Bond proceeds will be used to reimburse Trinity for prior capital expenditures, fund new capital projects, refund approximately $159.6 million of bonds outstanding, repay $70 million of commercial paper for prior capital expenditures and pay associated costs of issuance. Total outstanding debt after this issuance is approximately $2.7 billion, which is 74% fixed rate and 26% variable rate, after the effect of swaps.
In addition, Fitch affirms its 'AA' long-term rating on the remaining outstanding bonds as well as its 'F1+' short-term rating on approximately $1.1 billion of bonds outstanding and a $400 million commercial paper program supported by Trinity's own liquidity.
The Rating Outlook is Stable.
RATING RATIONALE:
--The breadth and scale of Trinity's care delivery system, which includes 47 acute care hospitals located in eight states from Maryland to California, moderates the system's overall operating risk from adverse economic, demographic or operational changes in any one of its markets.
--Trinity continues to use its scale to drive greater efficiencies (i.e. lower per unit cost) in administrative / corporate services, revenue cycle, supply chain and information technology. Moreover, development of and exportation of clinical best practices reduces the variability of care, reducing waste and improving outcomes.
--Trinity's substantial liquidity position provides a high level of protection from changes in reimbursement, service area demographics and payor mix.
--While Trinity's operating profitability has experienced a slight deterioration from the effects of the recession, operating and operating EBITDA margins remain solid and consistent with its 'AA' peer group.
--Fitch views the organization's 'Genesis' information technology system as a credit strength, providing healthcare reform readiness, among other things.
KEY RATING DRIVERS:
--Most of Trinity's acute care facilities are located in highly competitive markets such Southeast Michigan, Central Ohio, and Central California, forcing management to focus on sustaining competitive advantages that may result in accelerated capital outlays.
--Rising Medicaid volumes combined with increasing charity care and bad debt expense may weigh on system profitability.
--Effects of federal health reform efforts portend a lower reimbursement environment.
SECURITY:
The bonds are secured by a pledge of revenues (including receivables), but not a mortgage pledge.
CREDIT SUMMARY:
Headquartered in Novi, Michigan, Trinity Health owns or operates 47 acute care hospitals across eight states with an aggregate of 8,185 staffed beds. In addition, Trinity operates residential facilities for the elderly (including nursing and assisted living care), home health, outpatient surgery, dental clinics, occupational health, mobile health care services, school-based health clinics and managed care organizations. In fiscal 2010, Trinity had total revenues of approximately $7 billion.
The 'AA' rating reflects the benefits that accrue from Trinity's size, scale as well the geographic diversity of its operations. Trinity continues to realize improved economies of scale through consolidation of various administrative services as well standardization of certain operational, clinical and managerial practices. For example, through improved revenue cycle management days in account receivable has improved to 42.2 days in fiscal 2010 from 48.9 days in fiscal 2008. Moreover, Fitch views the geographic diversity of Trinity's operations favorably as it serves to insulate the system from the attendant business / reimbursement risk in any region.
Other credit factors supporting the 'AA' rating are Trinity's strong liquidity indicators, solid operating performance and moderate debt burden. At June 30, 2010, Trinity had $4.1 billion in unrestricted cash and investments, which is up $564 million or 16% from June 30, 2009. Trinity's liquidity indicators are strong at fiscal year-end 2010 with days cash on hand of 242.6, a 22.4 times (x) cushion ratio (based on pro forma maximum annual debt service; MADS) and 159% of long-term debt; all of which exceed the respective 2010 'AA' category medians of 214.7, 19.6x and 149.9%. Besides insulating the corporation against operating risk, Trinity's liquidity position affords the organization the ability to make strategic investments or acquisitions quickly. While Trinity's operating profitability has experienced slight erosion over the last two fiscal years reflecting the effects of the recession, it remains solid and consistent with its 'AA' peer group. In fiscal 2010, Trinity generated operating and operating EBITDA margins (before nonrecurring one time items) of 3% and 10.1%, respectively, in spite of an approximate 12% increase in bad debt expense. Trinity's debt burden is moderate as indicated by MADS being 2.6% of fiscal 2010 revenues. Coverage of MADS by operating EBITDA has been very consistent at 4.2x, 3.9x and 4.0x in fiscal 2008, 2009 and 2010, respectively. Trinity expects to issue $125 million of additional debt in spring 2011, which is not expected to impact the rating.
Key rating drivers that cause some concern for downside risk relate to Trinity's facilities being located in highly competitive markets such as Southeast Michigan, Central Ohio, and Central California. Additionally, rising Medicaid volumes combined with growing charity care and bad debt expense may weigh on system profitability.
The 'F1+' rating reflects the adequacy of Trinity's eligible cash, investments, and dedicated lines of credit to pay the maximum put exposure in any given week. At Aug. 31, 2010, Trinity had a total of $2.2 billion of highly liquid, unrestricted cash and fixed income available to fund any unremarked bonds or commercial paper. Furthermore, Trinity has secured a $916 million dedicated credit facility from a consortium of 10 banks to provide liquidity on its outstanding variable rate demand bonds and its commercial paper program, in addition to an approximately $103 million facility to support the series 2000C bonds. Combining the corporation's eligible cash and investment position with amounts recognized by Fitch under the dedicated credit facility, Trinity has total funding sources available to meet the maximum one-week tender exposure well in excess of Fitch's 'F1+' threshold of 1.25x. Fitch has received a written internal procedures letter from Trinity which outlines internal policies to meet any funding requirements. Fitch receives monthly investment reports which are used to monitor Trinity's cash and investment position relative to its liquidity coverage.
The Rating Outlook is Stable. Fitch views Trinity as among the strongest credits in Fitch's 'AA' non-profit health care portfolio due to its consistent operating profitability, strong balance sheet, and the breadth and depth of services spread over multiple facilities in multiple states. Fitch believes Trinity's efficiency improvements have offset the negative affect of rising bad debt and weaker payor mix, enabling the corporation to maintain consistent operating profitability.
DISCLOSURE:
Trinity disseminates annual audited financial statements and quarterly unaudited financial information to the MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the report 'Revenue-Supported Rating Criteria', this action was additionally informed by information from the Underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Aug. 16, 2010;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009;
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', dated Dec. 29, 2009.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493176
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KEYWORDS: United States North America Michigan New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance
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