Fitch Affirms Summa Health System's (OH) Revs at 'BBB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--As part of its ongoing surveillance efforts, Fitch Ratings has affirmed the 'BBB+' rating on the following approximately $258.7 million of debt issued for Summa Health System (Summa):

--Series 1998A revenue bonds, Akron, Bath & Copley Joint Township Hospital District (OH);

--Series 2004A revenue bonds, Akron, Bath & Copley Joint Township Hospital District (OH);

--Series 2010 revenue bonds, State of Ohio (OH).

The Rating Outlook is Stable.

RATING RATIONALE:

--The affirmation is based upon improved profitability, liquidity and coverage metrics in fiscal 2010.

--Summa's leading market share position should provide operating strength and stability for the system to further improve its financial profile.

--The integrated delivery system, including a large employed physician group and a health plan with capitation experience should provide a strong base for health care reform.

--Credit concerns include high exposure to government payors and associated budget cuts.

KEY RATING DRIVERS:

--Sustained operating performance consistent with levels achieved in fiscal 2010 is a key element to maintaining the rating.

SECURITY:

Debt payments are secured by a pledge of the accounts and general intangibles of the obligated group. The obligated group comprised 69% of total revenue and 89% of total assets of the system.

CREDIT SUMMARY:

The rating affirmation is based upon improved operating profitability, liquidity metrics and coverage since fiscal 2008. Operating margin rebounded from negative levels in fiscal 2008 to 2.4% in fiscal 2010 relative to Fitch's 'BBB' category median of 1.9%. Operating performance improvement was primarily driven by favorable medical claims expense to premiums and the overall operating results of the owned hospitals. System results are lower than obligated group performance due to losses at the non-obligated group within the employed physician base and lower relative profitability levels within the health plan. The health plan achieved profitability in fiscal 2010 relative to losses in fiscal 2009. The obligated group had $40 million in operating income (4.3% operating margin) in fiscal 2010 compared to the system's $32.4 million operating income (2.4% operating margin).

Liquidity has increased 39.7% from 2008 to 2010 with $385.7 million of unrestricted cash and investments equating to 118.8 days cash on hand. Improvements in liquidity reflect stronger investment returns and decreased levels of capital investment. However, days cash on hand remains light for the rating level, which is depressed due to the operating expenses of the health plan.

The debt burden is moderate with maximum annual debt service (MADS) comprising only 2.6% of total revenues. Strong profitability and cash flow improved MADS coverage to 3.2 times (x) relative to the 'BBB' median of 2.5x. Total debt outstanding was $398 million and is 71% fixed rate, 13% synthetic fixed rate and 16% variable rate.

Summa's leading market share lends stability to its operations and credit profile. Despite a decrease in utilization, Summa has maintained a strong primary service area market share of approximately 58% since fiscal 2007. The primary competitor is Akron General Health System, which has held a consistent market share of approximately 27%. No other competitor holds a market share of greater than 5%.

During Fitch's last rating review in April 2010, Summa had fairly aggressive capital plans. Summa is currently in the process of creating a new three-year strategic plan which is to be finalized in the fall of 2011. The new strategic plan will determine the system's long-range financial and capital plans. Any significant future capital needs could pressure the rating.

Credit concerns include high exposure to government payors as well as declining liquidity metrics in the interim period. Medicare and Medicaid comprise 47% and 15%, respectively, of Summa's gross patient revenue, creating vulnerability to government budget cuts. Management does not believe that changes to Medicaid reimbursement will materially affect Summa in fiscal 2011.

Summa is an integrated delivery system headquartered in Akron, OH, operating seven hospitals with 876 staffed beds, a multispecialty physician group, and a health plan. Four of the hospitals are wholly owned by Summa while two are joint ventures and one hospital is operated under a management agreement. Total revenues equaled $1.35 billion in fiscal 2010. Summa covenants to provide annual and quarterly disclosure. Disclosure filed on the Municipal Securities Rulemaking Board's EMMA System.

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

In addition to the sources of information identified in the U.S. Revenue-Supported Rating Criteria information was received from the underwriter.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

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

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

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