Fitch Rates Denver Health's (CO) Series 2014 A/B bonds 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings assigns a 'BBB+' rating to the following bonds expected to be issued by the Denver Health & Hospital Authority (Denver Health):

--$73,185,000 healthcare revenue bonds, series 2014A;

--$16,990,000 taxable healthcare revenue bonds, series 2014B.

Additionally, Fitch affirms the 'BBB+' rating for the following bonds issued by Denver Health:

--$27,625,000 healthcare recovery zone facility revenue bonds, series 2010;

--$3,985,000 healthcare revenue bonds, series 2009A;

--$114,645,000 healthcare revenue bonds, series 2007A;

--$63,180.000 healthcare revenue bonds, series 2007B.

The Rating Outlook is Stable.

The series 2014A and 2014B bonds are expected to be issued as tax-exempt fixed rate bonds and taxable fixed rate bonds, respectively. Proceeds of series 2014 A/B bonds will be used to finance the acquisition and construction of a new clinic, the renovation of an existing clinic, various renovation and improvement projects on the main campus and to pay costs of issuance. Pro forma maximum annual debt service (MADS) is expected to equal $21.4 million, increasing from the current MADS of $15.8 million. The series 2014 A/B bonds are expected to price the week of April 22, 2014 via negotiation.

SECURITY

The bonds are secured by a pledge of the gross revenues of the obligated group and a debt service reserve fund.

KEY RATING DRIVERS

ESSENTIAL SERVICE PROVIDER: Denver Health is an essential health care service provider in the Denver metropolitan area assuming the roles of the city's safety net hospital and public health system while providing care for approximately one-third of Denver's residents and approximately 34% of Denver's children. The essentiality of services mitigates some of the credit metrics which are below 'BBB+' peers.

RELIANCE ON GOVERNMENT FUNDING: Denver Health's high exposure to Medicaid and significant funding from other government sources makes the system vulnerable to state and federal budget cuts.

HISTORICALLY LIGHT PROFITABILITY: Operating profitability is light for the rating category with operating EBITDA margin averaging 7.3% since fiscal 2008 and equaling 7.1% in fiscal 2013 relative to Fitch's 'BBB' category median of 9.0%. Profitability is expected to improve with the expanded coverage under the PPACA, with fiscal 2014 budgeted operating EBITDA margin equal to 8.6%.

LOW DEBT BURDEN: Denver Health's light debt burden, with pro forma MADS equal to a low 2.7% of revenue in fiscal 2013, allows for solid MADS coverage by operating EBITDA equal to 2.6 times (x) in fiscal 2013 relative to Fitch's 'BBB' category median of 2.7x.

LIGHT LIQUIDITY METRICS: With $155 million of unrestricted cash and investments at December 31, 2013 equating to 75.8 days cash on hand, 7.3x pro forma cushion ratio and 43.2% cash to pro forma debt, liquidity metrics are light relative to Fitch's 'BBB' category medians of 144.7 days, 10.2x and 91.7%.

RATING SENSITIVITIES

MAINTENANCE OF CREDIT PROFILE: Fitch expects that Denver Health will maintain its broad operating platform and essentiality within the City and County of Denver while sustaining coverage metrics that are consistent with Fitch's 'BBB' category medians.

CREDIT PROFILE

Denver Health is an integrated health care delivery system with an extremely broad operating platform in the Denver metropolitan area. In addition to Denver Health Medical Center, a 525 licensed bed acute care hospital, Denver Health operates the city's public health system, the Rocky Mountain Center for Medical Response to Terrorism, the Rocky Mountain Regional Trauma Center, an HMO, a Medicaid Choice managed care plan and a network of federally qualified health centers. Denver Health's essential nature to the Denver metropolitan area is highlighted by the fact that it provides healthcare services to approximately one-third of Denver's residents and approximately 34% of Denver's children.

Fitch's analysis is based upon Denver Health's consolidated financial statements. The obligated group accounted for 96% of consolidated total assets and 100% of consolidated operating revenues in fiscal 2013.

HIGH EXPOSURE TO GOVERNMENT FUNDING

Given its high level of exposure to government funding, Denver Health is susceptible to state and federal budget cuts. As the city's safety net provider, Denver Health is the largest recipient of disproportionate share hospital (DSH) funding in Colorado and is among the largest Section 330 Public Health Service grant recipients in the United States.

Additionally, Medicaid accounted for a high 34.9% of gross revenues in Fiscal 2013. The high Medicaid exposure is reflective of Denver Health's role as a safety net provider for the medically indigent and uninsured. Total supplemental funding (net of provider fee expense) increased to $105 million in fiscal 2013 from $89 million in fiscal 2012.

Denver Health's status as the city's safety net provider and the essential nature of its services provide a level of operating stability and has historically provided some insulation from potential budget cuts. However, major revenue components are vulnerable to local, state and national changes in health policy and reimbursement mechanisms. The uncertainty of funding levels and distribution formulas as the industry moves through healthcare reform is a credit concern.

HISTORICALLY LIGHT PROFITABILITY

Operating profitability remains light for the rating category, despite the increased supplemental funding in fiscal 2013 with operating margin equal to negative 0.6% and operating EBITDA margin equal to 7.1%. Profitability was challenged in fiscal 2013 by decreased inpatient volumes, state budget cuts and federal sequestration cuts.

Profitability is expected to improve in fiscal 2014 due to the benefits of expanded coverage under the PPACA and operational improvement initiatives. Initiatives include productivity improvement (including a new flexible staffing model and a 261 FTE reduction since January 2013), continued expansion of Denver Health's LEAN operations program and the opening of a short stay unit in summer 2013 to increase efficiencies associated with observation stays. Management is budgeting for an 8.6% operating EBITDA margin in fiscal 2014. Operating EBITDA margin equaled 10.3% through the two month interim period ending February 28, 2014.

LIGHT DEBT BURDEN

Despite the light profitability, Denver Health's light debt burden allows for solid pro forma MADS coverage. MADS coverage by EBITDA and operating EBITDA equaled 3.2x and 2.6x, respectively, in fiscal 2013 and is consistent with Fitch's 'BBB' category medians of 3.2x and 2.7x.

Total debt outstanding is expected to increase by approximately $90 million to $299.6 million (including capital leases and notes payable). Notes payable increased by approximately $18.5 million in fiscal 2013 due to a non-cash charge incurred from the restructuring of an IT system contract. The charge will be paid out in annual installments through 2020, but is not considered debt under the master trust indenture. Denver Health's pro forma debt mix equals 79% fixed rate and 21% underlying variable rate. The variable rate bonds are swapped to fixed rate. The swap contains no collateral posting requirements as long as Denver Health's rating is 'BBB-' or above.

LIGHT LIQUIDITY

Unrestricted liquidity decreased 10% to $155 million at December 31, 2013 from $172 million at December 31, 2012. The decrease was primarily due to increased capital expenditures, increased days in accounts receivable, early retirement incentive payments and an early bond principal payment. Liquidity metrics are light for the rating category with 75.8 days cash on hand, 7.3x pro forma cushion ratio and 43.2% cash to pro forma debt. Management expects liquidity to increase in fiscal 2014.

DISCLOSURE

Denver Health covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of the end of the first three fiscal quarters and within 60 days of the end of the fourth fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system. Denver Health's disclosure practices are excellent, consisting of a detailed management discussion and analysis, balance sheet and income statement, utilization statistics and other supplemental material.

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 2013).

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria - Effective July 23, 2012 to May 20, 2013

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826337

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Contacts

Fitch Ratings
Primary Analyst:
Adam Kates, +1-312-368-3180
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Gary Sokolow, +1-212-908-9186
Director
or
Committee Chairperson:
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Adam Kates, +1-312-368-3180
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Gary Sokolow, +1-212-908-9186
Director
or
Committee Chairperson:
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com