NEW YORK--()--Fitch Ratings assigns its 'AA-' long-term rating to the approximately $74.4 million Illinois Finance Authority, revenue bonds, series 2012A (University of Chicago Medical Center). In addition, Fitch affirms the 'AA-' long-term rating on the University of Chicago Medical Center's (UCMC) outstanding debt.
The Rating Outlook is Stable.
The series 2012A bonds are expected to be fixed rate and will refund the series 2001 bonds. UCMC also plans to issue $75 million of additional debt through a direct bank loan in 2013, which was incorporated in this rating action. Total pro forma debt outstanding is $921 million with 47% traditional fixed rate, 35% synthetic fixed, 17% variable rate. The series 2012A bonds are expected to price the week of June 18th.
Debt payments are secured by a pledge of unrestricted receivables
KEY RATING DRIVERS
SOLID MARKET POSITION: UCMC is among the leading academic medical centers in the U.S. and maintains a strong reputation for clinical excellence in the provision of advanced high-acuity services that has led to a strong financial profile which is characteristic of an 'AA' category credit.
INTEGRAL RELATIONSHIP WITH THE UNIVERSITY: UCMC plays a fundamental role in the highly integrated clinical and research platform between UCMC and the University of Chicago's (the university; revenue bonds rated 'AA+' by Fitch) Biological Sciences Division, which includes the Pritzker School of Medicine.
NEW HOSPITAL PAVILION PROJECT ON TRACK: UCMC's new hospital pavilion project is on time and within budget. The total project cost is $700 million with $500 million funded by debt and $200 million funded from cash flow and philanthropy. The new pavilion is expected to open in January 2013.
COMPETITIVE MARKET: Although UCMC operates in the highly fragmented and competitive greater Chicago metropolitan area, UCMC's closed faculty staff, research platform, high-acuity service focus, and increasing affiliations with other community providers differentiates it from other competitors.
Since Fitch's last rating review, UCMC essentially has a new leadership team that has been in place less than two years. Due to the integrated structure with the university, the president and CFO of UCMC report to the Dean of the Biological Sciences Division (BSD) and Pritzker School of Medicine. The new leadership is focused on leveraging the organization's reputation and enhancing its relationships with community providers, as well as reducing cost and improving operating efficiency.
The 'AA-' rating reflects UCMC's excellence and reputation in advanced high-acuity clinical services, the integral role of UCMC within the university, and its solid financial profile. Located on the main campus of the university, UCMC is the principal teaching affiliate of the university's Pritzker School of Medicine. While UCMC provides a comprehensive array of services, its focus and clinical excellence is in quaternary care. The university is the sole corporate member of UCMC. UCMC benefits from the closed medical staff model as all active physicians are also faculty at the university and a newly created Dean of Clinical Practice position is expected to improve the coordination among the physicians in the faculty practice plan.
UCMC has been successful in partnering with other providers in the area, which has allowed it to focus on the complex cases while the primary and secondary services are treated in more cost effective settings of its regional partners. These affiliations include Mercy Hospital and NorthShore University Health System. In addition, UCMC entered into a joint venture with Silver Cross Hospital on a cancer center at Silver Cross' new hospital, which has already resulted in improved referrals from this market.
However, the market remains very competitive and fragmented with UCMC capturing 3.1% of the privately insured tertiary and quaternary market in the metropolitan Chicago area. The market leader is Northwestern Memorial Hospital with 5.3%. Fitch expects UCMC's market share to grow as management continues to increase its regional partnerships in addition to ongoing physician recruitment and added capacity in the new hospital pavilion.
UCMC's new hospital pavilion (NHP) project is on time and within budget and expected to open in January 2013. The NHP will house the programs for adult complex cases in one building with a focus on cancer, gastrointestinal, neuroscience, advanced surgery and high-tech imaging. There will also be two shelled floors for future expansion. At project completion, UCMC will operate a total of 555 beds and will open with 21 out of a maximum of 28 new operating rooms.
The total project cost is $700 million with $500 million funded from debt, $100 million from cash flow and $100 million from philanthropy. The $500 million of debt has been issued. Fundraising has been slower than expected with only $22 million raised to date. Also of note is the need for additional parking given the NHP, which was not foreseen during the initial planning for the NHP. Management is currently acquiring the land for the parking garage with an expected opening in August 2014. This will be financed with $75 million direct bank loan in October 2013. Fitch expects management will be able to handle the temporary disruptive parking situation since the parking garage will open after the NHP, which is imperative since UCMC needs to maintain strong cash flow given its high debt burden.
UCMC's overall financial profile is solid with financial ratios generally exceeding the 'AA' category medians. Profitability has been strong and consistent with operating EBITDA margins of 12.4% in fiscal 2011, 13.8% in fiscal 2010 and 12.2% in fiscal 2009 compared to the 'AA' category median of 10.6%. Profitability has been driven by volume growth, focus on highly complex cases and improving payor mix, and implementation of lean initiatives. Through the nine months ended March 31, 2012, operating cash flow remains very strong with 16.1% operating EBITDA margin (includes a non-recurring $20 million payment related to prior year medical education expenses). The fiscal 2013 budget includes an operating EBITDA margin of 14.7% ($187 million).
Liquidity is strong with $971 million of unrestricted cash and investments or 325.1 days cash on hand at March 31, 2012 compared to the 'AA' category median of 240. Days cash on hand has remained above 250 days over the last five years. A portion of UCMC's investments are invested with the university; however, the overall availability of its investments is fairly liquid. Moreover, liquidity is solid despite a rise in days in accounts receivable to 66.3 at March 31, 2012 from 43.6 at fiscal year-end 2011 reflecting a significant increase in Illinois Medicaid accounts receivable due to the state's financial condition.
Fitch's main credit concern is UCMC's above-average debt burden. Pro forma ratios include maximum annual debt service (MADS) of 4.2% of total revenue in fiscal 2011 compared to the 'AA' category median of 2.6% and debt-to-capitalization of 44.5% compared to the 'AA' category median of 34.4%. In addition, MADS coverage by operating EBITDA is low 2.9x for fiscal 2011 compared to 3.1x the prior year and the 'AA' category median of 4.1x. Coverage is more pressured at 2.5x for fiscal 2011 when the transfer to the university ($23 million) is included. Furthermore, UCMC expects to increase the amount transferred due to its commitment in supporting the basic sciences and research; however, this transfer is at the sole discretion of the board and is subordinate to debt service. Pro forma cash-to-debt is more pressured with the additional debt expected in 2013, but is still over 1x. The debt burden is mitigated by UCMC's strong qualitative factors including its integral role as part of the university and its market position in addition to its consistent solid cash flow.
Total outstanding debt after this issuance is approximately $921 million with 47% underlying fixed-rate, 35% underlying VRDBs, and 9.2% tax exempt commercial paper (supported by a letter of credit) and 8.1% indexed floating direct bank loan. UCMC's LOC exposure is diversified among four different banks, and all the expiration dates range from 2012 to 2016. UCMC's cash-to-putable debt is solid at 2.7x. UCMC has a $325 million floating to fixed rate swap with two counterparties and is posting $9.6 million of collateral at March 31, 2012 on one of the swaps ($50 million threshold), and the other swap does not have has collateral posting requirements unless UCMC's rating is downgraded to A+ or lower.
The Stable Outlook is based on the expectation that UCMC will continue to maintain its strong operating cash flow and bring the NHP online with minimal operational disruption. Liquidity metrics may be compressed due to the funding of the equity portion of the project as well as any shortfall in fundraising proceeds and increased transfers to the university. Therefore, it is imperative that UCMC maintain its strong operating cash flow.
UCMC currently operates a total of 567 beds at three hospitals including the Bernard A. Mitchell Hospital (adult facility), Chicago Lying-in Hospital (women's hospital), and Comer Children's Hospital, which are all located in Chicago on the main campus of the university. Total revenue for the fiscal year ended June 30, 2011 was $1.2 billion. UCMC covenants to provide annual audited financials within 150 days of fiscal year end and unaudited quarterly financials for the first three fiscal quarters within 60 days of quarter end.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria