CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A-' rating on approximately $517 million outstanding bonds issued on behalf of Essentia Health, Minnesota.
The Rating Outlook is revised to Positive from Stable.
SECURITY
The bonds are a joint and several obligation of the obligated group, secured by a pledge of unrestricted receivables, subject to permitted encumbrances and a debt service reserve fund.
KEY RATING DRIVERS
IMPROVED OPERATING PERFORMANCE: The Outlook revision to Positive is supported in part by Essentia's improved operating cash flow, which reflects healthy revenue growth and expense control. Through the six-month interim ended Dec. 31, 2011, Essentia generated a 3.5% operating margin, and 8.9% operating EBITDA margin, which is commensurate with Fitch's 'A' category median metrics of 2.6% and 9.4%, respectively. This improved performance has been sustained since fiscal year end June 30, 2010.
CONSISTENT COVERAGE METRICS: Healthy operating cash flow continues to drive solid coverage, with Essentia generating 3.8 times (x) coverage of maximum annual debt service (MADS) by EBITDA and 3.7x by operating EBITDA through the Dec. 31, 2011 interim period. Further, Essentia's overall debt burden is moderate, as evidenced by debt to operating EBITDA of 3.6x and debt to capitalization of 42.6%, against Fitch's 'A' category medians of 4.0x and 41.9%, respectively.
STRONG MARKET POSITION: Essentia's stable market position within an expansive service area in the upper Midwest has supported solid utilization and consistent revenue growth in 2011 and should continue to support robust operations going forward.
INTEGRATED DELIVERY SYSTEM: Essentia continues to expand and enhance its physician relationships and market presence, to a sizeable base of over 750 physicians across 61 clinics within its expansive service area in 2011. Fitch believes the physician alignment in addition to Essentia's EPIC information technology implementation should result in improved efficiencies and will position the organization well for healthcare reform.
ADEQUATE LIQUIDITY: Essentia's liquidity ratios remain weak for the rating category. At Dec. 31, 2011 Essentia had $471 million in unrestricted cash and investments (adjusted for a $28.7 million line of credit draw), equating to 118.5 days of cash on hand (DCOH), 90.2% cash to debt, and 12.1x cushion ratio, all below Fitch's 'A' category median ratios of 194.1 DCOH, 113.8% cash to debt, and 15.4x cushion ratio.
WHAT COULD TRIGGER A RATING ACTION
SUSTAINED IMPROVED PERFORMANCE: Positive rating pressure could result if Essentia improves its liquidity, which should occur due to continued solid operating performance and manageable capital needs.
CREDIT PROFILE
The Outlook revision to Positive reflects good operating performance through year to date fiscal 2012, and the 'A-' rating continues to be supported by Essentia's strong market position and wide geographic presence, and ongoing development of a highly-integrated physician clinic model. Through the six months ended Dec. 31, 2011, utilization trends were positive and Essentia sustained its improved operating performance over historical levels.
Essentia has reduced the risk in its debt profile since Fitch's last review, which is viewed positively. Total long-term debt at Dec. 31, 2011 was $522.4 million. Essentia converted its series 2008 variable rate demand bonds to fixed rate in 2010, and the only bank renewal risk remaining includes its $110 million series 2010 index floating bonds (due in 2014) and a $25 million direct bank loan (due in 2015). Essentia has several interest rate swaps outstanding; however, no collateral is currently being posted. Collateral posting is required above a $10 million threshold.
As of Dec. 31, 2011, Essentia has drawn $28.7 million from a line of credit to preserve its liquidity as it implements its EPIC platform. The line of credit is expected to be repaid from cash flow by the end of the fiscal year.
The Positive Outlook reflects Fitch's expectation that Essentia will continue to generate sufficient cash flow to support its near-term capital needs without depleting cash reserves or requiring additional debt. Fitch believes that liquidity growth over the next one to two years to levels more reflective of Fitch's 'A' category medians would likely result in positive rating movement.
Essentia is an integrated health care system with acute hospitals and physician clinics spread throughout Northern Minnesota, Eastern North Dakota, and Northwest Wisconsin. Its operations include 15 hospitals and 61 clinics across the region, and over 750 physicians, including the 450 physician multi-specialty Duluth Clinic. Essentia's total revenue in fiscal 2011 was approximately $1.6 billion. Essentia covenants to provide quarterly unaudited consolidated financial statements within 60 days of quarter end and annual audited financial statements and operating data with 120 days to the Municipal Securities Rulemaking Board's EMMA system. Disclosure to Fitch has been timely and thorough, with good access to management.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
This action was informed by the sources of information identified in Fitch's 'Revenue-Supported Rating Criteria'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
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KEYWORDS: United States North America Illinois Minnesota New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance
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