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Fitch Rates Hospital Sisters Services, Inc. (IL) Series 2014A Revs 'AA-' & Affirms Outstanding DebtCHICAGO --(Business Wire)-- Fitch Ratings has assigned an 'AA-' rating to the approximately $156.9 million Wisconsin Health and Educational Facilities Authority series 2014A revenue refunding bonds. In addition, Fitch has affirmed the 'AA-' long-term ratings on the following outstanding revenue bonds issued on behalf of Hospital Sisters Services, Inc. (HSSI): --$76.9 million Wisconsin Health and Educational Facilities Authority, series 2012B; --$68.8 million Illinois Finance Authority, series 2012C; --$61.1 million Wisconsin Health and Educational Facilities Authority, series 2012D*; --$41.6 million Wisconsin Health and Educational Facilities Authority, series 2012E*; --$31.6 million Illinois Finance Authority, series 2012F*; --$31.6 million Illinois Finance Authority, series 2012G*; --$72 million Illinois Finance Authority, series 2007A. *Underlying rating. The bonds are supported by an irrevocable direct pay letter of credit issued by the Bank of Montreal, N.A. In addition, Fitch has affirmed the 'AA-/F1+' ratings to the following variable-rate demand revenue bonds issued on behalf of HSSI. The 'F1+' is based on the sufficiency of the self-liquidity provided by HSSI: --$65.9 million Illinois Finance Authority, series 2012H; --$89.5 million Illinois Finance Authority, series 2012I; --$14.2 million Wisconsin Health and Educational Facilities Authority, series 2012J. The series 2014A bonds will be issued as fixed rate and will be used to refinance outstanding series 2012D, E, F & J bonds, partially refund series 2012A bonds and pay certain costs of issuance. MADS is estimated at $39.6 million. The bonds are expected to sell the week of Nov. 3 via negotiation. The Rating Outlook is Stable. SECURITY: Joint and severable liability of each member of the obligated group KEY RATING DRIVERS HEALTHY LIQUIDITY POSITION: HSSI's robust liquidity position provides a strong financial cushion, which mitigates the system's light but improving operating profitability. At 2014 fiscal year-end (June 30 year-end) unrestricted cash and investments equaled $1.8 billion, which translates to a very strong 344.8 days cash on hand and 269.5% cash to pro forma debt. Moreover, HSSI maintains ample cash and investments, which can be liquidated to fund any failed remarketing on approximately $155.3 million variable-rate demand bonds, exceeding Fitch's criteria for assignment of an 'F1+' short-term rating. SOLID DEBT SERVICE COVERAGE: Coverage of pro forma MADS by EBITDA was an excellent 7.7x in fiscal 2014 despite modest profitability, reflecting HSSI's light debt burden. Pro forma MADS coverage by operating EBITDA of 4.4x in fiscal 2014 is improved from 4.1x in fiscal 2013 and in line with the 'AA' category median of 4.4x. GROWING PHYSICIAN NETWORK: Physician alignment is a priority for HSSI and fully aligned physicians have grown significantly over the last few years with 824 in fiscal 2014, up from 588 in fiscal 2013 and 542 in fiscal 2012. Fitch believes this significant level of integration should position the system for continued pressures on reimbursement and clinical quality metrics. SUSTAINED IMPROVEMENT TO OPERATING PERFORMANCE: Despite continued significant investment in physician growth, HSSI exceeded 2014 budgeted operating performance. Operating EBITDA margin of 8.4% in fiscal 2014 remains light against the category median of 11% but improved from a low of 4.4% in fiscal 2011. CHALLENGING SERVICE AREAS: HSSI's location in mid-sized markets with stagnant growth, the concentration of system revenue at St. John's (the flagship hospital in Springfield), and its reliance on its five Wisconsin hospitals to cover losses at certain of its Illinois facilities continue to be credit concerns. RATING SENSITIVITIES UPCOMING CAPITAL PROJECT: With this financing, HSSI is reducing risk in its debt portfolio to position for potential financing for the replacement of St. Elizabeth Hospital, which will be built in O'Fallon, less than seven miles from its current location. Pending a successful certificate of need (CON) review, financing of the new hospital would likely occur in fiscal 2017. Fitch will review the impact of additional debt when the size and scope of the project is determined. SUSTAINED OPERATING PROFITABILITY: Fitch believes sustained improvement in operating performance combined with its strong liquidity position and light leverage provide ample financial cushion to absorb the corporation's continued physician alignment strategy as well as the transition to value based reimbursement models. CREDIT ROFILE HSSI is composed of 14 inpatient hospitals (including St. Clare Hospital, a critical access hospital in Oconto Falls, Wisconsin, acquired September 1, 2014 but not part of the obligated group), with eight facilities in Illinois and six facilities in Wisconsin. In fiscal 2014, the system had 1,951 beds in operation and total revenue of $2.1 billion. Fitch's analysis is based upon consolidated financial statements. In fiscal 2014 the obligated group generated 92.9% of total revenues and represented 90% of total assets of the consolidated entity. The 'AA-' rating reflects the benefits of HSSI's robust balance sheet, light debt burden and strong debt service coverage, which serve to mitigate HSSI's historically light operating profitability for the rating category. STRONG LIQUIDITY / LIGHT DEBT BURDEN At 2014 fiscal year-end, HSSI's unrestricted cash and investments totaled $1.81 billion, which equates to 344.8 days cash on hand, 45.8x pro forma cushion ratio and 269.5% cash to pro forma debt, all above the respective 'AA' category medians of 277.1, 26.5x and 178.5%. Pro forma MADS of $39.6 million equates to a light 1.9% of fiscal 2014 total revenues and debt to capitalization of 21.4% compares favorably to the 'AA' category median of 31.1%. HSSI's modest debt burden results in very strong debt service coverage despite light but improving profitability. Coverage of pro forma MADS by EBITDA was very robust at 7.7x in fiscal 2014, up from 5.7x in fiscal 2013 and well above the 'AA' median of 5.4x. Coverage of pro forma MADS by operating EBITDA has improved to 4.4x and is now in line with the 'AA' category median of 4.4x. Further, capital spending has been strong, averaging 153.3% of depreciation expense over the last three years (2012-2014), reflecting surgery and patient tower renovations at St. John's-Springfield and the St. Joseph Highland replacement hospital, funded with series 2012 bond proceeds. LIGHT BUT IMPROVING PROFITABILITY HSSI continued to demonstrate stabilized operating results in fiscal 2014. HSSI posted $14.8 million income from operations (0.7% operating margin) in fiscal 2014, which exceeded the budget of $1.4 million and is consistent with fiscal 2013 results, and an improvement from a low of negative $44.8 million operating income in fiscal 2011. Fitch notes that 2014 results were enhanced by $9 million unbudgeted receipt of 'EHR Incentive Program' revenues in 2014 as well a $3.3 million enhanced provider payment. Excluding these one-time variances, operating income in fiscal 2014 was $2.9 million favorable to budget. HSSI continues to invest in physicians and as such, improved results of the system's hospital operations have been somewhat diluted by the losses from HSSI's physician alignment and employment strategy. GROWING ALIGNED PHYSICIAN BASE At fiscal 2014 year-end, the system employed a total 824 physicians and mid-level providers, a significant jump from 588 in fiscal 2013. Along with the acquisition of established physician practices, HSSI has many newly recruited physicians, which continue to have a negative impact on profitability but according to management, their practices are ramping up faster than expected. Growth in the employed physician group is expected to continue over the near to medium term, which will likely depress the rate of profitability improvement. SERVICE AREA CHALLENGES: Many of HSSI's hospitals are located in mid-sized markets with projected population growth between 0.5% and 3.6% and marginal demographics. Management is making progress in reducing losses at St. John's-Springfield, which accounted for about 22% of total system revenues in fiscal 2014, which is viewed positively. St. John's recently completed 16 surgical suites and the renovation of four patient floors (financed with the series 2012 proceeds), which is expected to improve the financial performance at the hospital. The operating loss at St. John's-Springfield was $12.2 million in fiscal 2014, slightly up from the $11 million loss in fiscal 2013, reflecting continued decline in volumes (down 8.7%), restructuring costs related to the reduction in force ($3 million) and reduced revenue associated with the two midnight rule because of the high exposure to cardiac care. Fitch believes improved financial performance at St. John's is critical to the overall operating success of the system. Fitch expects to see improved operating balance across the system as capital improvements and physician alignment strategies take hold. SELF LIQUIDITY The 'F1+' short-term rating reflects the sufficiency of HSSI's highly liquid cash and investments available to fund any failed re-marketing puts on approximately $155.3 million of series 2012 variable-rate demand bonds. At Sept. 30, 2014, after assigning appropriate discounts based on underlying ratings and maturity of its holdings, HSSI had eligible cash and fixed income investments available to fund any un-remarketed puts well in excess of the required threshold of 1.25x to achieve the 'F1+' short-term rating. The system has a written procedures letter outlining the liquidation procedures in place to ensure timely funding and provides Fitch monthly investment reports which are used to monitor its cash and investment position available for self-liquidity. DISCLOSURE HSSI covenants to provide bondholders with audited annual information within 120 days of fiscal year-end and unaudited quarterly statements within 45 days of quarter-end to EMMA. The content of HSSI's disclosure to-date has been excellent and includes a balance sheet, income statement, cash flow statement, utilization statistics, and management discussion and analysis. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30, 2014; --'Revenue-Supported Rating Criteria', dated June 16, 2014. Applicable Criteria and Related Research: U.S. Nonprofit Hospitals and Health Systems Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860 Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=904614 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 (News - Alert) 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
