CHICAGO--()--Fitch Ratings has affirmed the 'AA-' rating on approximately $1.2 billion in debt issued on behalf of Sisters of Charity of Leavenworth Health System (SCLHS).
SCLHS also has approximately $112 million in direct placement debt and notes payable which are not rated by Fitch.
The Rating Outlook is Stable.
The bonds are an unsecured obligation of the SCLHS corporate parent (the sole member of the obligated group).
KEY RATING DRIVERS
EVIDENCE OF REBOUND IN OPERATING PERFORMANCE: Despite a decline in operating profitability in fiscal 2010 as a result of extensive capital facilities development and costs associated with the Exempla affiliation, SCLHS has stabilized its core operations and demonstrated improvement through the nine months ended Sept. 30, 2011 (interim period). December financials are not available (fiscal year end) and sustained improvement is expected in the 2011 audited results.
SUCCESSFUL DENVER INTEGRATION: Under a joint operating agreement through mid-2014, the integration of Exempla has resulted in incremental volume growth and expense savings associated with increased scale.
DIVERSE REVENUE BASE: A key credit strength is SCLHS' geographic diversity, with a portfolio of 11 hospitals in California, Colorado, Montana, and Kansas which are all cash flow positive. Further, SCLHS continues to transform the system by implementing an integrated strategy, which should reduce its dependence on its top performing hospitals as system-wide improvements are achieved.
HIGH DEBT BURDEN AND FUTURE CAPITAL NEEDS: SCLHS' debt increased in 2009 and 2010 as a result of the Exempla affiliation and funding of large capital projects, pushing related financial metrics to levels unfavorable against Fitch's 'AA' category medians. Although no additional debt is currently planned, SCLHS has sizeable capital plans of approximately $380 million a year for fiscal 2012-2014.
ADEQUATE UNRESTRICTED LIQUIDITY: Despite the impact of $45 million in realized losses through Sept. 30, 2011, unrestricted cash and investments remained adequate at $1.8 billion. This equates to 284.6 days of cash on hand (DCOH) and 130.8% cash to debt, against Fitch's 'AA' category medians of 240 DCOH and 159% cash to debt.
WHAT COULD TRIGGER A RATING ACTION
FAILURE TO SUSTAIN IMPROVED PROFITABILITY: Although SCLHS' financial profile has deteriorated over the last few years, Fitch believes improved operating cash flow exhibited through the interim period should be sustained due to the new management team's effort in system alignment and integration. The failure to sustain improved operating cash flow or stable levels of absolute liquidity could place downward pressure on the rating.
SCLHS has continued on its 'Sustaining our Mission' strategic improvement plan, which is expected to generate over $97 million in total benefit in 2011, with further incremental gains in 2012. Additionally, SLCHS expects that integration-related savings around shared system services will generate over $50 million in positive financial impacts in 2012.
Operating cash flow remains weak for the rating level with 8% operating EBITDA margin in fiscal 2010 and 9.1% in fiscal 2009, but improved to 10.5% in the interim period. Fitch expects SCLHS to continue to improve its cash flow in light of its capital plans. The fiscal 2012 budget has an 11.1% operating EBITDA margin.
The integration of the Exempla affiliates in Denver has gone successfully, and the integration of shared services with SCLHS has accelerated, producing approximately $8 million in savings in 2011. The Good Samaritan, Lutheran, and Saint Joseph facilities combine for 21% market share in Denver metro, and maintain a strong relationship with Kaiser, which generates 50% of patient volumes. Further, the now integrated board approved the $623 million replacement of the 577-bed Saint Joseph Hospital, expected to take place from 2011-2015.
Future capital plans are sizeable and total $380.5 million in fiscal 2012, $378.3 million in fiscal 2013, and $365.7 million in fiscal 2014. Capital spending is on the Saint Joseph Hospital replacement facility, information technology, and routine needs. Since SCLHS' historical cash flow has been below the projected capital spending, Fitch would expect management to scale back its capital spending as necessary relative to its available funding sources. The fiscal 2012 EBITDA is budgeted at $420 million.
SCLHS' geographic diversity remains a credit strength, with 11 facilities in eight markets, across four states. Further, while SCLHS does rely on its top three acute care facilities for the great majority of its operating EBITDA, this reliance is decreasing as system-wide operational improvements have a positive impact on underperforming entities. Fitch expects SCLHS to continue taking actions to decrease its dependence on its top three performing acute care facilities, which currently include St. Mary's (CO), Exempla Saint Joseph (CO), and Exempla Lutheran (CO).
Total debt increased to $1.38 billion at Sept. 30, 2011, producing debt to capitalization of 35.3% and debt to EBITDA of 5.9x against Fitch's 'AA' category medians of 34.4% and 3.0x, respectively. Debt service coverage is weak for the rating level at 2.3x in the interim period, 3.2x in fiscal 2010 and 3.4x in fiscal 2009 compared to the 'AA' category median of 5x. As calculated per SCLHS' master trust indenture, debt service coverage was 3.0x in the interim period and 5.4x in fiscal 2010.
Following some reimbursement for prior capital spending in 2010, SCLHS has maintained adequate unrestricted liquidity at Sept. 30 2011 of $1.8 billion. Liquidity metrics are expected to remain stable against significant capital needs; however, Fitch notes that any material deterioration could pressure the rating.
The Stable Outlook is supported by Fitch's expectation that SCLHS will continue to realize the improvements of integration and its strategic plan, producing improved operating cash flow to levels which support its capital needs. Fitch expects ongoing incremental improvement in profitability over the next 12 months, with no erosion in liquidity. The failure to achieve this would likely result in downward rating pressure.
SCLHS is a large, multi-state health care system operating 11 hospitals in Kansas, Montana, Colorado and California. In FY 2010, SCLHS reported total revenues of approximately $2.5 billion. SCLHS posts all financial (including management's discussion and analysis) and utilization statistics quarterly on the organization's web site, which Fitch views positively.
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', June 20, 2011.
'Nonprofit Hospitals and Health Systems Rating Criteria', Aug. 12, 2011
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria