Fitch Rates CoxHealth's (MO) 2013A Revs at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has removed CoxHealth's rating from Negative Watch and assigned an 'A' rating to the expected issuance of $199.6 million of Missouri Health and Educational Facilities Authority (MHEFA) bonds, Series 2013A issued on behalf of CoxHealth. Fitch also affirms the following MEHFA bonds also issued on behalf of CoxHealth:

-- $162,5000,000 Fixed-Rate Revenue and Refunding Bonds, Series 2008A

-- $70,000,000 Variable-Rate Revenue and Refunding Bonds, Series 2008B

-- $34,635,000 Variable-Rate Revenue Bonds, Series 2008C

-- $31,130,000 Revenue Capital Appreciation Bonds, Series 1992H

-- $15,080,000 Fixed-Rate Revenue Bonds, Series 1993I

The Rating Outlook is Stable. CoxHealth's rating had been on Rating Watch Negative due to the pending debt issuance.

The 2013A bonds are expected to be issued as fixed rate. Proceeds from the bonds will be used to finance a new to patient tower on CoxHealth's main campus ($115 million), fund the acquisition of and capital projects at Skaggs Medical Center (renamed Cox Medical Center Branson) ($50 million), refund all of Cox Medical Center Branson's (Cox Branson) outstanding debt ($30 million), and pay for capitalized interest and the cost of issuance. Maximum annual debt service (MADS) increases to $29.8 million from $22.9 million and that figure was provided by the underwriter. After issuance, CoxHealth will have $512.9 million in total bonded debt with 80% composed of fixed-rate bonds.

SECURITY

Gross revenue pledge from CoxHealth and a mortgage (only on Cox Medical Center South campus and Cox Walnut Lawn campus, including Ambulatory Surgery Center at the Walnut Lawn campus).

KEY RATING DRIVERS

INTEGRATED MODEL A STRENGTH: Fitch views CoxHealth's integrated system, which includes five hospitals, a high level of employed physicians, 83 clinic sites, a single IT platform across the system, a health plan, and home care agencies, as a credit strength, historically providing Cox with operational stability, but increasingly positioning it well as health care reform progresses.

NEW TOWER BEING FUNDED: The current debt issuance includes $115 million to fund a new patient tower. Fitch believes the project is strategically necessary, upgrading CoxHealth's main campus to all private rooms. The new tower, the capital projects to be funded at Cox Branson with this debt issue, and the projects CoxHealth completed with its 2008 bond issue address most of CoxHealth's major long-term capital needs, which will allow CoxHealth to grow into the debt over time.

INCREASED DEBT LOAD MANAGEABLE: Concerns about the increase in debt burden--maximum annual debt service increases $6.8 million to $29.8 million--are mitigated by the addition of Cox Branson, which averaged $12.4 million in EBITDA over the last two fiscal years, as well as the freeing up of $5.6 million in yearly cash flow as CoxHealth makes its last payment under its five-year Department of Justice settlement.

STABLE OPERATING PERFORMANCE: Over the last two fiscal years (Sept. 30 year end) and through the six month interim, CoxHealth has produced operating margins between 2% and 2.5% and operating EBITDA margins between 7% and 7.4%. While lower than Fitch's 'A' category medians of 2.8% and 9.8% respectively, the level of performance is consistent reflecting the stability of CoxHealth's integrated model.

INCREASED MARKET SHARE: With the acquisition of Cox Branson, CoxHealth's inpatient market share increased to just under 50% in its primary service area. There still remains a solid second hospital competitor in Mercy Springfield with approximately a 40% market share.

RATING SENSITIVITIES

MAINTENANCE OF OPERATING PERFORMANCE: Deviation from operating performance either up or down could change the rating; however, Fitch expects CoxHealth to maintain operating margins between 1.5% and 2%.

CREDIT SUMMARY

The 'A' rating reflects CoxHealth's solid market position, including a nearly 50% inpatient market share with the Cox Branson acquisition, and supported by a stable integrated operating platform, with over 300 integrated physicians. Located in Springfield, Missouri, CoxHealth clinical services cover a 24 county service area in southwest Missouri and parts of northern Arkansas. CoxHealth owns and operates four tertiary hospital facilities (802 licensed beds in Springfield, Missouri), with over 300 integrated physicians. CoxHealth also operates a skilled nursing facility, a psychiatric and rehabilitation facility, over 83 outpatient sites, a home care company, a health plan, and a foundation. In fiscal 2012, CoxHealth had operating revenues of approximately $1 billion.

FINANCIAL PROFILE

CoxHealth's operating performance has been stable over the last three audited years with CoxHealth averaging a 2% operating margin and a 7.3% operating EBITDA over this time. Three month fiscal 2013 results show CoxHealth maintaining the stable operations, with a 1.9% operating margin and 7.4% operating EBITDA.

The consistent operations have supported solid historical debt service ($22.9 million) coverage, which averaged 3.5 times (x) over the last three audited years. The rise in pro forma MADS to $29.8 million drops coverage to 2.9x from 3.8x in fiscal 2012, but this is based on just CoxHealth's results. Adding Cox Branson's $12.7 million in EBITDA brings the pro forma coverage up to 3.4x. Cox Branson was acquired on January 1, 2013 and that is the date when its operations were consolidated into CoxHealth's.

CoxHealth's liquidity has generally compared well with Fitch's A' category medians, but liquidity was lower through the three month interim with unrestricted cash and investments totaling $389.1 million, due to a $25 million payment to acquire Cox Branson. Interim liquidity figures show 163.8 days cash on hand, a pro forma cushion ratio of 13.1x, and pro forma cash to debt of 79.6%, all below category medians. However, with the bond issue CoxHealth will put $25 million back on the balance sheet and add another $28 million of cash and investments that was on Cox Branson's balance sheet, which will move liquidity figures closer to the medians.

Most of CoxHealth's debt is fixed, with CoxHealth's variable rate debt exposure, at $105 million, a manageable figure. A Bank of Nova Scotia (Fitch rated 'AA-/F1+') letter of credit (LOC) for $70 million is due for renewal in 2014 and the bank has indicated to CoxHealth that it will not renew. CoxHealth management will likely privately place these bonds in a bank-qualified transaction, which it did with the other $35 million in variable rate debt. Fitch is not concerned about the LOC termination, given CoxHealth's liquidity and its access to the market at the 'A' rating level. CoxHealth has one basis swap with a notional amount of $200 million, no collateral posting requirements, and a mark-to-market of a negative $2.7 million as of December 31, 2012.

COX BRANSON ACQUISITION

As of Jan. 1, 2013, Cox Branson, a 167-bed community hospital in Branson, MO, became the fourth hospital in the CoxHealth system. As part of the acquisition, CoxHealth contributed $25 million to the Skaggs Foundation (a non-profit foundation in Branson, MO, whose general purpose is to support Cox Branson), will borrow an additional $25 million for capital needs at Cox Branson, included in the current bond issue, and has committed capital investments of another $35 million at Cox Branson over the medium term, which CoxHealth believes it will be able to fund through the cash flow of Cox Branson.

Fitch views the acquisition positively. For CoxHealth, it grows its market share in its primary service area and provides access to a fairly well-insured population as Branson is a vacation and retirement destination. CoxHealth should be able to stem the outmigration of services in Branson, as well as redirect a larger proportion of referrals up to Springfield. For Branson, joining CoxHealth will provide it the opportunity to gain from CoxHealth's size, in terms of group purchasing and managed care leverage, to upgrade its information technology to the same systems CoxHealth uses, and to utilize the resources CoxHealth can provide in rotating staff and physicians down to Branson to manage the seasonality of Branson's local patient population.

In fiscal 2012, Cox Branson had a slight operating loss of $898,000 on a revenue base of $149.7 million. The operating loss was an improvement over fiscal 2011 results and the positive operating trend continued through the eight-month fiscal 2013 interim period, with a 4.6% operating margin and 10.9% operating EBIIDA margin.

The $25 million in capital investments will finance the retrofitting and expansion of the emergency department, a possible addition of an observation unit, and renovation of the critical care areas.

COXHEALTH TOWER PROJECT

CoxHealth is issuing $115 million of the debt to finance the building of a new patient tower that will be contiguous with its current patient tower and provide for all private rooms at CoxHealth. The new nine story inpatient tower will have multiple floors of inpatient and ambulatory space (approximately 65-80 net new adult & pediatric patient rooms), three to four shelled floors, ambulatory and inpatient operations for neuroscience, and a new post-partum and NICU center. The total cost is projected at $130 million with $115 million in bonds funds, $10 million in philanthropy (CoxHealth has a $5 million lead gift in place), and $5 million in cash, if needed.

A GMP is not currently in place but is expected to be signed around the time of the issuance of the bonds.

The project will provide significant upgrades to CoxHealth's current main campus. Concerns about the general risks of a capital project of this size are mitigated by the current management team's history of undertaking successful capital projects. I n 2008, CoxHealth borrowed $105 million for a series of projects, which included a new emergency room/trauma center, parking garage, significant renovations and expansion of Cox Walnut Lawn Hospital, and the building of an ambulatory surgery center. CoxHealth completed all of the projects under budget and was able to use the remaining funds to renovate and expand its intensive care unit.

STABLE OUTLOOK

The Stable Outlook reflects Fitch expectation that the factors that contribute to Coxhealth's consistent operating performance and debt service coverage will remain stable over the near term.

DISCLOSURE

CoxHealth has covenanted to provide quarterly and annual disclosure of financial statements to bondholders. Recent disclosure to Fitch has been excellent and includes a balance sheet, income statement, utilization statistics, statement of cash flows and management discussion and analysis.

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. 6, 2012);

--'Nonprofit Hospitals and Health Systems Rating Criteria'(July 23, 2012).

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

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
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Gary Sokolow, +1 212-908-9186
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10014
or
Secondary Analyst
Emily Wadhwani, +1 312-368-3347
Associate Director
or
Committee Chairperson
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or
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Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow, +1 212-908-9186
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10014
or
Secondary Analyst
Emily Wadhwani, +1 312-368-3347
Associate Director
or
Committee Chairperson
James Lebuhn, +1 312-368-2059
Senior Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com