CHICAGO--()--Fitch Ratings has assigned an 'AA-' rating to the following bonds expected to be issued by the Wisconsin Health and Educational Facilities Authority (the authority) on behalf of Froedtert Health, Inc. Obligated Group (Froedtert):
--$162.465 million series 2012A health system revenue bonds.
In addition, Fitch has affirmed the 'AA-' rating on the following bonds issued by the authority on behalf of Froedtert:
--$8 million fixed rate revenue bonds, series 2001;
--$47.1 million fixed rate revenue bonds, series 2003;
--$179.5 million fixed rate revenue bonds, series 2009C.
The Rating Outlook is Stable.
The 2012A bonds are expected to be issued as fixed rate bonds. Bond proceeds will be used to fund certain capital projects including the construction of a Cardiovascular Transplant Intervention (CVTI) building, to refund Froedtert's outstanding series 2001 and 2003 bonds and to pay costs of issuance. The bonds are expected to price the week of Sept. 17 via negotiation.
Bond payments are secured by a security interest in the pledged revenues of the obligated group.
KEY RATING DRIVERS
STRONG BALANCE SHEET: Froedtert's liquidity metrics further improved in fiscal 2012. At fiscal year-end 2012, days cash on hand (DCOH) of 286, pro forma cushion ratio of 25.8 times (x) and cash to pro forma long-term debt of 165.9% compare favorably to Fitch's 'AA' category medians.
LEADING MARKET SHARE: Credit stability is strengthened by a leading 36.8% market share in Froedtert's primary service area along the U.S. 41/45 corridor northwest of Milwaukee.
EXCELLENT CLINICAL REPUTATION AND ACADEMIC AFFILIATION: Patient volumes and market share are enhanced by Froedtert's close clinical relationship with the Medical College of Wisconsin and status as the only academic medical center in eastern Wisconsin.
ADEQUATE OPERATING PROFITABILITY AND COVERAGE: Excluding non-recurring items, operating EBITDA margin improved to 9.2% in fiscal 2012 from 8.2% in the prior year providing adequate cash flows to cover pro forma maximum annual debt service (MADS) at 3.5x. Despite the improvement, both metrics are somewhat light when compared to the respective 'AA' category medians of 10.6% and 4.2x.
The 'AA-' rating is supported by Froedtert's strong liquidity position , its leading market share position with favorable demographics and adequate profitability and coverage metrics. Fiscal 2012 results are based upon Frodtert's draft audit.
Froedtert's unrestricted cash and investments further improved in fiscal 2012 increasing to $973.6 million at June 30, 2012 from $898.5 million at the prior fiscal year-end. DCOH, pro forma cushion ratio and cash to pro forma long-term debt of 286.2, 25.8x and 165.9% are all in line with Fitch's 'AA' category medians. The improvement in liquidity during fiscal 2012 reflects non-recurring legal settlements, investment returns and solid cash flows.
Froedtert has identified its core service area as the U.S. 41/45 corridor that runs through parts of Milwaukee and Washington counties. Within that core area Froedtert held a leading market share position of 36.8% in 2011 up from 33.6% in 2008. In the larger primary and secondary service areas, Froedtert's market share has held steady at 11% in 2010 and 2011 while Aurora Health Care (revenue bonds rated 'A' by Fitch) has seen a slight increase to 16% in 2011.
With a reputation for excellent clinical quality, Froedtert Hospital's status as the only academic medical center in eastern Wisconsin and as the primary teaching affiliate of the Medical College of Wisconsin are credit positives. Froedtert Hospital has received national recognition in many clinical areas for its quality, safety and cost effectiveness. Froedtert's location on the campus of the Milwaukee Regional Medical Center, along with the Medical College of Wisconsin and the Children's Hospital of Wisconsin, helps to increase both referral volumes and visibility in a competitive market place.
Operating profitability was bolstered by non-recurring items in fiscal 2012, increasing operating margin to 5.7%. Excluding approximately $27.2 million of non-recurring revenue received related to two legal settlements, operating profitability improved over fiscal 2011 levels but remains adequate for the rating category with a 3.9% operating margin and 9.2% operating EBITDA margin. The improved operating performance is due to increased outpatient revenues, payor rate increases and continued cost control initiatives. The legal settlements were recorded as offsets to operating expenses.
Excluding non-recurring items, coverage of pro forma MADS by EBITDA remains adequate for the rating category at 4.4x in fiscal 2012. However, coverage of pro forma MADS by operating EBITDA of 3.5x is somewhat light relative to the 'AA' category median of 4.2x. Pro forma MADS of $37.7 million was provided by the underwriter.
Froedtert updated its five-year capital plan and expects increased capital spending levels through 2017. The majority of the capital plans are related to addressing capacity limitations, renovating Froedtert's surgical and interventional platforms, including construction of the CVTI building, and new clinical sites. Fitch views the projects positively as the renovated surgical and interventional platforms should provide for increased throughput and efficiencies while the additional clinic sites will provide for increased access throughout the total service area. The combination of Froedtert's cash flows and the new money proceeds of the series 2012 issuance should provide adequate funds for the capital plans without negatively impacting Froedtert's balance sheet.
Fitch's primary credit concern continues to be the competitive Milwaukee metropolitan and eastern Wisconsin service area. Despite the increased market share, Froedtert continues to face significant competition from Aurora, Wheaton Franciscan Health Care and Columbia St. Mary's (sponsored by Ascension Health, rated 'AA+' by Fitch). However, the recent growth of the Quality Health Solutions (QHS) joint venture is viewed positively. Originally formed in 2010, QHS has eight sponsoring members representing 28 hospitals in eastern Wisconsin, northern Illinois and the upper peninsula of Michigan. QHS was created to develop a clinically integrated healthcare delivery network, to aggregate clinical data and to engage in various accountable care strategies.
The Stable Outlook is based upon Fitch's expectation that Froedtert will maintain its strong liquidity metrics and that both operating profitability and coverage will remain consistent with historical performance.
Upon closing of the series 2012A bonds, Froedtert will have 69% underlying fixed rate bonds with the remaining 31% underlying variable rate bonds swapped to fixed rate. Froedtert is counterparty to two fixed payor swaps with a negative $43.1 million mark to mark valuation as of June 30, 2012 and $20.7 million in collateral posted. Froedtert's balance sheet is strong enough to support the variable rate exposure and the risks associated with the swaps.
Froedtert is an integrated health system that includes three hospitals with 772 staffed beds. Total operating revenues equaled $1.45 billion in fiscal 2012. Froedtert covenants to provide annual disclosure no later than 180 days after the end of each fiscal year and quarterly disclosure no later than 60 days of the end of each fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
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 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 23, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria