Fitch Affirms Central DuPage Health (Illinois) Revs at 'AA'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'AA' rating on the following Illinois Finance Authority revenue bonds:

--$90,000,000, series 2009;

--$240,000,000, series 2009B.

The bonds are issued on behalf of Central DuPage Health (d/b/a Cadence Health).

The Rating Outlook is Stable

SECURITY

The bonds are unsecured obligations of the obligated group. They are not secured by a pledge of, mortgage on or security interest in any obligated group assets.

SENSITIVITY/RATING DRIVERS

STRONG FINANCIAL PROFILE: Cadence Health (Cadence) continues to have a strong financial profile for the rating category. This is highlighted by Cadence's excellent balance sheet indicators, solid profitability and robust debt service coverage. Fitch views Cadence's financial profile as a primary credit strength.

DOMINANT MARKET POSITION: Central DuPage Health and Delnor combined control 66.4% of the market share in their primary service area.

HIGH BUT DECLINING DEBT BURDEN: Cadence's debt burden is somewhat high for the rating category. That said, the debt is moderating with maximum annual debt service (MADS) representing 4% of total revenues in fiscal 2012 compared to 5.9% in fiscal 2011 and 6.3% in fiscal 2010. It still remains above the 'AA' category median of 2.5%. However, because of the robust profitability, MADS coverage by EBITDA remains solid at 5.2x in fiscal 2012.

CREDIT PROFILE

The 'AA' rating reflects Cadence's robust liquidity, consistently strong profitability and leading market share position as a tertiary provider in the west suburban area of Chicago. This analysis is based on the consolidated audited results of CDH and Delnor (Cadence).

At Sept. 30, 2012, Cadence had approximately $1.23 billion in unrestricted cash and investments, equating to 507.3 days cash on hand, 30.6x cushion ratio and 210.9% cash to debt. Fitch views the organization's balance sheet metrics favorably and provides Cadence with ample financial cushion.

In fiscal 2012, Cadence posted $108.2 million in operating income or a 10.7% operating margin and 21.4% operating EBITDA margin. These metrics compare favorably against the respective 'AA' category medians of 4% and 10.6%. Moreover, historical operating performance has been very consistent, and Cadence has averaged a 10.8% operating margin and 20.7% operating EBITDA margin over the past four fiscal years (2009-2012).

Strong profitability has led to robust debt service coverage as Cadence's MADS coverage by EBITDA was a strong 5.2x in fiscal 2012. Consistently strong operations are driven by management's continued focus on investing in its key service lines. Among them are pediatrics, neurosciences, orthopedics, oncology and cardiology, attracting specialists and sub-specialists that historically have strategically differentiated Cadence from its competitors and transformed the hospital into a tertiary medical center. Cadence has benefited from its integrated delivery strategy, which has resulted in a strong referral network through its growing employed physician base.

Total combined outstanding debt for Cadence as of November 2012 was $580.1 million, of which, about 68% is fixed rate, and about 32% is variable-rate that has been placed with a bank through a direct purchase. Fitch rates $330 million of Central DuPage's debt but factors Cadence's total outstanding debt into its analysis.

The primary credit concerns include Cadence's relatively high debt burden and the highly fragmented Chicagoland service area.

MADS for Cadence equated to a high 4% of fiscal 2012 revenues but continues to decline and was 3.6% of revenues at Sept. 30, 2012 (three-month interim). CDH completed its bed tower project and emergency department expansion in 2011 and does not have plans to issue additional debt in the near-to-medium term. CDH has a total of $212.1 million notional of fixed payer swaps with Morgan Stanley and UBS AG, as counterparties. As of November 2012 the total mark-to-market valuation on the swap portfolio was negative $61.69 million; however, there is no collateral posting requirement.

The merger between Central DuPage Health and Delnor Hospital has resulted in an expanded regional presence and some economies of scale. Despite the competitive nature of the service area, Central DuPage and Delnor have a combined 66.4% market share in the primary service area.

The Stable Outlook reflects Fitch's expectation that Cadence will continue to maintain its strong financial profile and leading market position in the service area.

CDH-Delnor Health System includes Central DuPage Health, which is a 313-licensed bed hospital located in Winfield, IL, approximately 30 miles west of Chicago, and Delnor Hospital, which is a 159-bed hospital located in Geneva, IL, approximately 40 miles west of Chicago. Cadence Health had combined total revenues of $956.4 million in fiscal 2012. CDH covenants to disclose annual financial information within 150 days of each fiscal year-end and quarterly information within 60 days of the first three fiscal quarter-ends to EMMA.

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' (June 12, 2012);

--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 12, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418

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Contacts

Fitch Ratings
Primary Analyst
Dana N. Sodikoff, +1-312-368-3215
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Committee Chairperson
Emily Wong, +1-212-908-0651
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Dana N. Sodikoff, +1-312-368-3215
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Committee Chairperson
Emily Wong, +1-212-908-0651
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com