SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A+' rating to St. Luke's Episcopal-Presbyterian Hospitals' (St. Luke's) expected issuance of approximately $45 million of series 2011 health facilities revenue bonds issued by the Missouri Health and Educational Facilities Authority. Fitch has also upgraded to 'A+' from 'A' the outstanding ratings on approximately $105 million of existing debt for the hospital. The Rating Outlook is Stable.
The series 2011 revenue bonds are expected to be issued as long-term fixed rate debt. The bonds are expected to price via negotiation during the week of Aug. 22, 2011. Bond proceeds, along with funds released from a debt service reserve fund, will be used to refund St. Luke's series 2001 revenue bonds and pay bond issuance expenses. Maximum annual debt service (MADS) will be reduced to approximately $8.3 million from $8.8 million post financing and total long-term debt will be reduced to approximately $95 million from $105 million.
SECURITY
The bonds are secured by a pledge of the gross revenues of the obligated group, consisting of the hospital and its parent, St. Luke's Health Corporation.
KEY RATING DRIVERS
Improved financial profile: The upgrade reflects St. Luke's demonstrated ability to generate profitability and coverage ratios that have consistently exceeded the medians for the rating category despite lower volume and a competitive market.
Strong Debt Service Coverage: St. Luke's sustained solid profitability and low debt burden has led to robust debt service coverage ratios.
Favorable Payor Mix: St Luke's location in the affluent western suburbs of St. Louis translates into less bad debt and charity care, sustained population growth, modest Medicaid exposure, and a relatively high percentage of revenues (54%) generated from commercial insurance contracts.
Competitive Market: There is formidable competition in the St. Louis metropolitan area with the presence to two large health systems, SSM Health Care and BJC Health Care. Management has strategically expanded its business lines in response to the evolving trends in its market, with a primary focus on outpatient services.
Declining Utilization Trend: St. Luke's overall utilization trends have steadily decreased over the past four years as its market continues to shift away from inpatient services towards regional non-acute outpatient care. Total admissions have fallen 9.2% since 2008.
CREDIT PROFILE
A focused strategy of expansion into outpatient and non acute care services results in an improved operating profile for St. Luke's. At June 30, 2011, St. Luke's had approximately $190 million in cash and unrestricted investments which translates into 177 days of cash on hand, a 23.1 times (x) cushion ratio and cash to debt ratio of 178.4%, which compares well to the medians for the rating category of 183.8, 14.4x and 105.5% and is also an improvement from the prior year when the hospital had 172.4 days of cash, a 21.3x cushion ratio and a 159.5% cash to debt ratio.
St. Luke's profitability ratios exceeded the medians for the rating category with an operating margin of 3.9% and an operating EBITDA margin of 10.6% in 2010 and margins of 4.4% and 10.9%, respectively, in 2011. Both margins compare favorably to the medians for the category of 3% and 10%.
This solid operating performance coupled with low debt burden has resulted in strong debt service coverage. MADS as a percentage of revenues was 2% in 2010 and 1.9% in 2011. MADS coverage by operating EBITDA was 5.3x in 2010 and 5.8x in 2011 compared to the median of 3.3x. St. Luke's debt to capitalization ratio of 29.1% in 2010 and 25.9%, in 2011, was low compared to the median of 42.1%.
Fitch's primary credit concern is the persistent decline in St. Luke's utilization trends and the competitive service area. While inpatient surgeries showed signs of some recovery increasing almost 2% between 2010 and 2011 (after falling 7.2% between 2008 and 2010), outpatient surgeries are down 5.6%, births have declined 7.3% since 2008, and emergency room visits have declined 4.3% over the same period. However, outpatient visits have increased 8.7% and the hospital's Medicare case mix index has increased to 1.60 in 2011 versus 1.56 in 2008.
St. Luke's has expanded its outpatient services, adding rehab services in 2008, home health in 2009 and women's health services and other outpatient business lines in 2010. In 2011, St. Luke's opened a cardiovascular step down unit, replaced its cardiac catherization lab, added a new linear accelerator and opened a cancer infusion center.
St. Luke's service area, consisting primarily of St. Louis County and St. Charles County, is competitive with several large competitors such as SSM Health Care and BJC Health System. St. Luke's market share has remained stable in its primary service area at 13.7% in 2010 compared to 13.8% in 2008.
Total pro forma outstanding debt is approximately $95 million and is 100% fixed rate. With the release of the series 2001 debt service reserve fund, St. Luke's is able to refund its outstanding series 2001 bonds with a lower par amount of series 2011 bonds. St. Luke's does not have any swap agreements and Fitch views St. Luke's conservative debt profile favorably.
St. Luke's Episcopal-Presbyterian Hospitals, staffed for 389 beds and with a licensed capacity of 493 beds, owns and operates an acute care general hospital, a skilled nursing facility with a residential care services, St. Luke's Rehabilitation Hospital (a joint venture) and related healthcare facilities in Chesterfield, Missouri, a suburb of St. Louis. For fiscal 2011, St. Luke's had $439 million in total revenues. St. Luke's covenants to provide annual (within 180 days of the end of the fiscal year) and quarterly (within 45 days following the end of each fiscal quarter) financial information, to be filed with the Municipal Securities Rulemaking Board, through EMMA.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' dated June 20, 2011.
--'Nonprofit Hospitals and Health Systems Rating Criteria', Dec. 29, 2009.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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Primary Analyst:
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Senior Director
Fitch, Inc.
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San Francisco, CA 94108
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Secondary Analyst
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Director
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Committee Chairperson:
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Senior Director
KEYWORDS: United States North America Missouri New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance
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