Fitch Rates Greater Fairbanks Community Hosp Foundation (AK) Series 2014 Bonds 'A' ; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to the approximately $50 million Alaska Industrial Development and Export Authority revenue bonds (Greater Fairbanks Hospital Foundation Project) series 2014. In addition, Fitch has affirmed the 'A' rating on Greater Fairbanks Community Hospital Foundation's outstanding debt, which is listed at the end of the press release.

The series 2014 will be fixed rate and bond proceeds will fund a portion of the cost of a surgery project, fund a debt service reserve, and pay costs of issuance. The bonds are expected to price the week of March 25.

The Rating Outlook is Stable.

Greater Fairbanks Community Hospital Foundation (the Foundation) owns Fairbanks Memorial Hospital (FMH), a 152-bed acute care hospital; the Denali Center (DC), a 90-bed skilled nursing facility; and the Fairbanks Cancer Treatment Center, all of which are located on the same campus in Fairbanks, AK, approximately 350 miles northeast of Anchorage. The Foundation also acquired Tanana Valley Clinic (TVC) in 2008, which includes approximately 40 employed physicians. FMH/DC/TVC are leased to Banner Health System (Banner; rated 'AA-').

SECURITY

Debt payments are secured by a pledge of the gross revenues of the Foundation. The Foundation is the only member of the obligated group. Gross revenues exclude rental income from TVC.

KEY RATING DRIVERS

LEASED FACILITY OPERATING STRUCTURE: Banner Health System has a long history of operating the leased facilities and has been the only operator of the hospital since it opened in 1972. The lease agreement is cancelable with a one-year notice period and extends through December 2032. This arrangement has been fruitful for both parties as the hospital produces solid operating cash flow that is distributed to the Foundation and Banner per formula. The Foundation issues debt on behalf of the hospital and is responsible for capital improvements.

MAJOR CAPITAL PROJECT: The organization has decided to move forward with the surgery project, which will replace existing operating rooms, provide new pre- and post-operating surgical areas as well as a sterile processing department and a corridor to connect to the emergency room and inpatient floors. This project will cost approximately $81 million with $50 million funded by the series 2014 bonds and the remaining from Foundation cash.

INCREASED LEVERAGE: The combined financial profile of the Foundation and hospital is solid; however, leverage has increased especially due to its relatively small revenue base. Pro forma debt service coverage is somewhat pressured and improved operating cash flow is expected once the new operating rooms and more efficient space is brought on line.

SOLE COMMUNITY PROVIDER: The hospital operates in a remote and vast service area and is the sole provider of major services. The hospital has a dominant market share and reimbursement rates are favorable, which somewhat compensates for its difficult geographic area with access and physician recruitment challenges.

RATING SENSITIVITIES

SUSTAINED SOLID CASH FLOW: Given the additional leverage, the organization will need to demonstrate consistent solid operating cash flow. Fitch believes the capital investment should result in revenue growth opportunities as well as improved operating efficiencies in the new space.

Credit Profile

The lease agreement between the Foundation and Banner was executed in 1993 with a 20-year term which was extended for another 20-years in 2012. Under the agreement, the Foundation receives a basic rent payment based on the fair market value of facilities and equipment, which has historically met or exceeded depreciation expense on the Foundation's leased assets. There is also supplemental rent that equals at least 82% of the remaining cash flow to the Foundation net of certain payments. The remaining net income is then distributed to Banner subject to a limit. Fitch views Banner's strong management practices,, which are considered to be disciplined and results-oriented, favorably, and the hospital has had solid financial performance. Fitch's main credit concern is the cancelable feature in the operating lease.

Dominant Provider

Strong operating performance has been driven by the hospital's dominant market share and its designation as a sole community provider. The nearest competitor in its large and expansive primary service area is the Bassett Army Community Hospital in Fairbanks--a U.S. military hospital providing care to active duty U.S. service personnel. Otherwise, outmigration of tertiary and quaternary services flows to Anchorage and Seattle. The hospital has been adding to its depth of services with a recent investment in cardiac services. There has been increased competition with the 2010 opening of a physician-owned surgery center as well as loss of ancillary revenue from Indian Health Services' recently opening its own facility; they had previously been referring the business to FMH.

Revenue growth strategies include continued physician recruitment, a focus on underutilized service lines, and its investment in the renovation of its surgical space.

Financial Performance

Fitch analyzed the financial performance of the Foundation and hospital separately (audited) as well as on a combined basis (unaudited). The Foundation's financial profile is characterized by strong liquidity and good debt service coverage. There is little income statement activity except for the receipt of rental income. The hospital has solid operating cash flow and minimal cash as the net income is distributed to the Foundation and Banner.

On a combined basis, total revenue was $219 million in fiscal 2013 (Dec. 31 year end; unaudited), which was flat compared to the prior year's $219 million of total revenue. Inpatient utilization has declined with the continued shift of services to the outpatient setting as well as increased observation cases. Operating margin was 5.9% in fiscal 2013 compared to 4.2% the prior year. Operating EBITDA margin was 16.6% and 15.4% for the same time period compared to Fitch's 'A' category median of 10.7%.

Combined unrestricted cash and investments was $192 million as of Dec. 31, 2013, which translated to 375.6 days cash on hand and 104.5% pro forma cash-to-debt (includes $30 million Foundation one-time equity contribution, although equity is planned to be distributed over three years) compared to Fitch's 'A' category medians of 196.3 and 129.2%. The Foundation targets maintaining at least 1x cash-to-debt.

Maximum annual debt service (MADS) coverage (per covenant calculation) was 4.77x for fiscal 2013. On a pro forma basis (MADS of $11.9 million), coverage declines to 3.05x.

Surgery Project

The hospital will build a new surgical tower that will include the replacement of 7-8 operating rooms, provide a sterile processing department, pre- and post-operating surgical area, and support areas. This new tower will be connected via a new corridor and elevator to the emergency department and inpatient floors. The total cost is expected to be $81 million with $50 million funded by the series 2014 bonds and the remainder to be funded from Foundation cash. The new surgical space is expected to open in 2017. Although existing operations can support the additional debt, it is expected that improved revenue growth opportunities from the new space will be realized.

Debt Profile

The Foundation's total pro forma debt is $154.8 million with approximately 52% underlying variable rate demand bonds (VRDBs). The VRDBs are backed by a letter of credit from Union Bank (series 2009A) and US Bank (series 2009B). The letters of credit expire in June 2018 and April 2017, respectively. Fitch believes the Foundation's liquidity position mitigates the risk associated with its VRDB exposure with cash-to-putable debt of 2.4x at Dec. 31, 2013.

The Foundation has a fixed payor swap outstanding with Citibank as the counterparty and currently there are no collateral posting requirements at the current rating levels of the Foundation and the insurer (Assured Guaranty).

Disclosure

Annual and quarterly disclosure is provided for the Foundation and hospital separately as well as combined and is available on EMMA. The combined statements exclude the operations of TVC.

Outstanding Debt:

--$8,020,000 Alaska Industrial Development & Export Authority (AK) (Greater Fairbanks Community Hospital Foundation Project) revenue refunding bonds series 2009C;

--$16,635,000 Alaska Industrial Development & Export Authority (AK) (Greater Fairbanks Community Hospital Foundation Project) revenue refunding bonds series 2009B (LOC: U.S. Bank National Association) ;

--$61,550,000 Alaska Industrial Development & Export Authority (AK) (Greater Fairbanks Community Hospital Foundation Project) revenue refunding bonds series 2009A ;

--$18,635,000 Alaska Industrial Development & Export Authority (AK) (Greater Fairbanks Community Hospital Foundation Project) revenue bonds series 2004A.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--and Health Systems Rating Criteria', dated May 20, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823143

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Contacts

Fitch Ratings
Primary Analyst:
Michael Burger, +1-212-908-0555
Director
Fitch Ratings, Inc.
One State Street plaza
New York, NY 10004
or
Secondary Analyst:
Emily Wong, +1-415-732-5620
Senior Director
or
Committee Chairperson:
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Michael Burger, +1-212-908-0555
Director
Fitch Ratings, Inc.
One State Street plaza
New York, NY 10004
or
Secondary Analyst:
Emily Wong, +1-415-732-5620
Senior Director
or
Committee Chairperson:
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com