Fitch Rates BayCare Health System (FL) 2014 Revs 'AA/F1+'; Affirms Outstanding; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' long term rating and F1+ short term rating to the expected issuance of the following Polk County Industrial Development Authority bonds issued on behalf of BayCare Health System (BayCare):

-- $50,000,000 health system revenue bonds, BayCare Health System issue, series 2014A-1

-- $50,000,000 health system revenue bonds, BayCare Health System issue, series 2014A-2

In addition, Fitch affirms the rating on the following parity bonds:

-- $199,364,000 City of Tampa Health System revenue bonds (BayCare health system issue) series 2012A, at 'AA';

-- $77,215,000 City of Tampa Health System revenue bonds (BayCare health system issue) series 2012B, at 'AA/F1+';

-- $179,127,00 City of Tampa, FL Health System Revenue Bonds (BayCare Health System Issue), Series 2010, at 'AA';

-- $200,000,000 Pinellas County Health Facilities Authority, FL health system revenue bonds (BayCare health system issue), series 2009A-1, A-2, A-3, at 'AA';

-- $12,567,000 Pinellas County Health Facilities Authority, FL health system revenue bonds (BayCare health system), series 2003A-1, at 'AA';

-- $15,682,000 Pinellas County Health Facilities Authority, FL health system revenue bonds (BayCare health system), series 2003A-2, at 'AA';

-- $44,925,000 City of Tampa, FL health system revenue bonds (Catholic Health East issue), series 1998A-1, at 'AA'.

The Rating Outlook is Stable.

The 2014A-1 and 2014A-2 bonds are expected to be issued as variable-rate Windows. Proceeds from the two bond series are expected to refund BayCare for capital expenditure related to the new St. Joseph's Hospital - South, refinance a loan used to redeem certain bonds of Winter Haven Hospital (WH), as part of BayCare's acquisition of WH, and pay for cost of issuance. Bonds will sell via negotiation the week of April 21.

Maximum annual debt service (MADS), provided by the underwriter, remains relatively the same at $63.7 million. Total long-term debt after issuance will be approximately $1 billion, of which approximately 60% will be variable rate, not including the effect of fixed payor swaps.

Security:

Obligated group pledge of gross receipts.

Key Rating Drivers

EXCEPTIONAL FINANCIAL PERFORMANCE: BayCare's financial profile is very strong for the 'AA' category, with most of BayCare's financial ratios exceeding Fitch's 'AA' category medians. Fiscal 2013 financial indicators include days cash on hand of 389 (includes WH annualized), an operating margin of 7.2%, pro forma MADS coverage of 8.2x, and total operating revenue of $2.6 billion. All of these exceed category medians.

RATING LEVEL AND LIQUIDITY SUPPORT RATING: The 'F1+' rating on the 2014A-1, 2014A-2, and the 2012B bonds takes into account that BayCare will have 180 days past the 30-day remarketing period to pay off or refinance bonds that fail to remarket. With six months of available notice, the 'F1+' rating reflects BayCare's ample liquidity available relative to the $177.2 million in Window bonds and market access at the rating level. Pro forma cash to debt for all of BayCare's long-term debt, including the Windows, is a solid 252.9%.

WINTER HAVEN ACQUISITION COMPLETED: WH became a part of BayCare on Aug. 30, 2013. Fitch views the acquisition as a credit positive, as the acquisition extends BayCare's market area into Polk County, which is contiguous with BayCare's current service area. Financially, BayCare should be able to improve WH's operating performance, with WH posting a slight negative operating margin from Aug. 30, 2013 to Dec. 31, 2013. The 2014 bond issue refinances a $77.6 million loan that BayCare took out to retire all of WH's outstanding debt upon the acquisition.

PROGRESS ON POSITIONING FOR REFORM: BayCare has made material progress in positioning itself for the changes related to value-based purchasing and population management that is expected to come with health care reform. Fitch views positively BayCare's sizable clinical footprint, which includes 12 hospitals across four counties, a 31.8% inpatient market share across this area, behavioral health, ambulatory surgery, urgent care and home health care operations and facilities, a robust IT platform, and a large, integrated physician network.

CAPITAL SPENDING REMAINS ROBUST: Capital spending as percent of depreciation has averaged 151.4% a year over the last five audited years, which compares favorably to Fitch's 'AA' median of 146.7%. Moving forward, capital spending should remain robust with BayCare continuing to invest in IT, completing major capital projects at Morton Plant Hospital and St. Joseph's Hospital, and finishing St. Joseph's - South, a new $225 million hospital in southern Hillsborough county that is being funded mostly out of cash flow.

Rating Sensitivities

STABLE FINANCIAL PERFORMANCE: Fitch believes BayCare's solid market position, strategic focus, ongoing capital investment, and strong current operational results should provide BayCare with a measure of financial flexibility and cushion even as potential changes in payment mechanisms move forward as part of health care reform over the next few years.

Credit Summary

BayCare is a large health care system with 12 hospitals, 3,343 licensed beds (of which 2,965 are staffed), and a 163-bed long-term care facility.

The 'AA' rating reflects BayCare's continued strong operating performance and solid financial profile relative to Fitch's 'AA' category. For 2013, BayCare's 7.2% operating margin and 14.7% operating EBITDA margin exceeded Fitch's 'AA' rating category medians of 4.2% and 11.8%, respectively. Operating results in 2013 were helped by continued growth in volumes, with ambulatory surgery increasing 18.4%. Inpatient admissions were down slightly, 1.4%, on a same store basis, but overall inpatient volumes were up when including WH. BayCare is budgeting for a 5.5% operating margin in 2014 and Fitch expects BayCare to make budget. BayCare continues to maintain a leading inpatient market share of approximately 32% in the four-county region of Hillsborough, Pinellas, Polk, and Pasco, which Fitch views as a credit strength.

BayCare's liquidity also compares favorably to Fitch's 'AA' category. At Dec. 31, 2013, BayCare had $2.5 billion in unrestricted cash and investments, which equated to days cash on hand of 389.5 (includes WH annualized), a pro forma cushion ratio of 42.2x, and pro form cash to debt of 252.9%, all better than Fitch's 'AA' category medians of 254.3, 23.4x, and 173.6%, respectively. Over the last four audited years BayCare has grown its unrestricted cash and investments by approximately 58%.

Competitive Market

The local Tampa market remains very competitive with BayCare competing against several large for-profit and not-for-profit hospital systems. The for-profit hospital company HCA has 13 hospitals in the region and maintains the leading market share in Pasco County. Additionally, Adventist Health System Sunbelt, Inc. (Fitch revenue bonds rated 'AA') entered the market in Hillsborough County in 2010 and has another hospital in Wesley-Chapel, which competes with BayCare's St. Joseph - North. BayCare has managed the competition well and continues to grow its clinical footprint, including the acquisition of WH, the building of St. Joseph's Hospital - South, and a management agreement with Sarasota Memorial Hospital (Fitch revenue bonds rated 'AA-').

Swap Profile

BayCare has nine outstanding floating- to fixed-rate swaps with two counterparties. The swaps are not a credit concern given BayCare's financial profile and the small amount of counterparty diversity. Collateral postings are different for each counterparty. Two swaps have a mark to market at Dec. 31, 2013 of ($25.1 million), and those swaps are insured and depend on the rating of the insurer. The other swaps have an aggregate mark to market of $2.5 million and collateral posting is required at $30 million. To date, BayCare has not had to post collateral on these swaps.

Disclosure

BayCare covenants to provide annual audited financial statements and quarterly financial disclosure, including balance sheet, income statement, cash flow statements, and operating statistics, which Fitch views favorably. Disclosure material is made available on EMMA.

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

Applicable Criteria and Related Research:

-- 'Revenue-Supported Rating Criteria', dated May 20, 2013;

-- 'Rating U.S. Municipal Short-Term Debt, dated Dec. 9, 2013.

Applicable Criteria and Related Research:

Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826276

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Gary Sokolow, +1-212-908-9186
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Eva Thein, +1-212-908-0674
Senior Director
or
Committee Chairperson
James LeBuhn, +1-212-908-0651
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Gary Sokolow, +1-212-908-9186
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Eva Thein, +1-212-908-0674
Senior Director
or
Committee Chairperson
James LeBuhn, +1-212-908-0651
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com