Fitch Rates Summa Health System (Ohio) Ser 2010 'BBB+'; Downgrades Outstanding

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the following series of bonds issued on behalf of Summa Health System (Summa):

State of Ohio

--$175,000,000 fixed-rate hospital facilities revenue bonds, series 2010.

The bonds are expected to sell the week of April 26, 2010. Proceeds will partially fund various capital projects, reimburse Summa for prior capital expenditures, fund a debt service reserve account, pay off certain short-term bank notes, and pay related costs of issuance. Of further note, if market conditions warrant, Summa may issue up to an additional $24 million of bonds to current refund certain maturities of outstanding debt.

In addition, Fitch downgrades to 'BBB+' from 'A-' the following ratings:

Akron, Bath, and Copley Joint Township Hospital District, Ohio

--$39,210,000 revenue bonds Ser 1998-A;

--$46,930,000 fixed-rate hospital facilities revenue bonds Ser 2004A (insured: Radian Asset Assurance Inc.).

The Rating Outlook is revised to Stable from Negative.

RATING RATIONALE:

--The downgrade is based on Summa's increasing debt burden coupled with a slower than anticipated improvement in operating performance and liquidity position consistent with 'A' category providers. Although Summa's growth strategy is expected to generate increased volumes and improved profitability over the long term, Summa's current profile no longer reflects appropriate levels expected of 'A-' rated entities.

--Summa's ambitious capital plans are likely to limit liquidity growth and may further increase the debt burden.

--Despite Summa's increased debt load and depressed operating profitability, historical coverage of pro-forma MADS has been adequate which Fitch expects to continue at or above current levels going forward.

--Summa's growth (both through hospital acquisitions and physician alignment) has positioned it as the dominant market share leader, commanding nearly 58% of the primary service area inpatient market share. In time, this leading position should provide the necessary strength and stability for the system to assimilate its new scale and improve its financial standing.

--A robust integrated delivery platform through its physician alignment strategy and health plan lends additional strength, yet demands management rigor and discipline to ensure the benefits are fully realized, which Fitch believes is achievable.

--Upon closing of the series 2010 issue, Summa's capital structure will consist of roughly 73% fully committed fixed rate as compared to just 47% currently which is viewed positively by Fitch.

KEY RATING DRIVERS:

--Improved operating performance is a key element to the stability of the rating.

--Management's ability to leverage the benefits of Summa's scale over time to improve the organization's financial standing, especially the rebuilding of balance sheet strength, are critical components for an improved credit profile.

SECURITY:

Bondholders are secured by a gross revenues pledge, mortgage rights on certain properties, and a debt service reserve fund. Additional security is provided by certain tests and thresholds for expected financial performance.

CREDIT SUMMARY:

Located in Akron, OH, Summa has grown into an integrated delivery system anchored by Summa Akron City Hospital and Summa St. Thomas Hospital (which function as one hospital on two campuses), five satellite hospitals (two of the five are joint venture arrangements with aligned physicians and one is managed by Summa via an affiliation agreement) and SummaCare (its owned health plan). Summa's other major subsidiaries include Summa Physicians, Inc. and various ambulatory centers located throughout its markets. Total revenues in fiscal 2009 were approximately $1.31 billion (Fitch notes that the two joint venture hospitals are accounted for using the equity method and are not included in total system revenue).

The rating downgrade is precipitated by the increased operating and financial risks combined with the increased debt load associated with system's growth strategy, which Fitch believes limits Summa's financial flexibility. Furthermore, in aggregate, Summa's liquidity, operating, and capital metrics no longer reflect 'A' category levels. While Fitch believes the system's rapid growth heralds future strength, its new scale demands more robust operating metrics in order to offset its balance sheet standing.

The Outlook revision to Stable from Negative reflects Fitch's expectation that management should have adequate cushion at the 'BBB+' rating level to assimilate the organization and reap the benefits of scale and market position. Key to this assumption is improved operating performance that will serve to enhance the organization's flexibility, especially the rebuilding of the balance sheet, both critical elements for an improved credit profile.

Over the last few years, Summa has used short-term financing to fuel its growth and bring new facilities into the fold. Some of this conditional capital will be converted to a fixed rate, fully committed mode with this new debt issuance, affording management more time to fully align these assets into the system. Despite the relatively high debt load and lower level of operating performance, Summa has maintained adequate MADS coverage, which Fitch expects to continue at or above current levels going forward (pro forma MADS of $33.3 million [up from the current $24 million] is covered by Operating EBITDA at 2.3x at Dec. 31, 2009).

When comparing the pro-forma debt levels with Summa's fiscal 2009 performance, several capital ratios are more indicative of 'BBB' category medians than 'A' category medians ('A' medians shown in parenthesis): Debt to Operating EBITDA of 5.0x (versus 4.1x) and Debt to Capitalization of 52.2% (versus 40.3%). Furthermore, Summa's liquidity metrics remain weaker than 'A' medians; days cash on hand at 105.9 days (versus 171.2 days), cash-to-pro forma debt of 73.1% (versus 113.4%), and pro forma cushion ratio of 10.1x (versus 13.3x). While Fitch incorporates the dilutive effect of Summa's health plan on various ratios in its analysis, the impact does not fully offset Summa's variance to 'A' medians. A countervailing force combating a weaker balance sheet would be robust operating metrics. However, the pace and magnitude of its growth, the existence of its health plan, along with recessionary effects have combined to blunt Summa's operating performance over the last few years, which averaged below Fitch's 2009 'A' category medians. In the last three fiscal years (2009, 2008, 2007) Summa recorded operating margins of 0.6%, -1%, and 3.7%, respectively; compared to Fitch's 'A' median of 2.7%. Operating EBITDA margins were 5.6%, 4.1%, and 9.5%, respectively; against an 'A' median of 9.2%.

Summa's plans for growth remain ambitious and include additional capital outlays to fulfill commitments of constructing specialty facilities for aligned physicians. Although a portion of any future debt associated with these new facilities may be non-recourse to Summa, the potential remains for equity contributions and/or certain other working capital commitments. Additionally, branding synergies increases the 'moral obligation' risk that Summa would have to support these non-obligated entities in a time of distress.

DISCLOSURE:

Summa posts timely quarterly disclosure via the Municipal Securities Rulemaking Board's EMMA system with financial statements, operating statistics and management discussion and analysis.

Applicable criteria available at 'www.fitchratings.com' include:

--'Revenue-Supported Rating Criteria' (Dec. 29, 2009);

--'Nonprofit Hospitals and Health Systems Rating Criteria' (Dec. 29, 2009).

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

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