Fitch Affirms ThedaCare, Inc. (Wisconsin) Revs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'AA-' rating on the following Wisconsin Health and Educational Facilities Authority (WI) bonds issued on behalf of ThedaCare, Inc. (ThedaCare):

--$23,740,000 revenue refunding bonds, series 2010;

--$90,000,000 revenue bonds, series 2009A;

--$31,266,000 revenue refunding bonds, series 2009B;

--$55,906,000 revenue bonds series 2005.

The Rating Outlook is Stable

SECURITY

Pledge of gross revenues.

KEY RATING DRIVERS

SOFTER 2013 OPERATING PERFORMANCE: After a challenging first half of fiscal 2013 (Dec. 31 year end), with ThedaCare posting a negative operating margin, ThedaCare's management team used its lean methodology to quickly rein in expenses and implement other revenue initiatives and was able to end 2013 with an adequate 2.6% operating margin and 10.5% operating EBITDA margin (unaudited results). Debt service coverage was 4.2 times (x) in 2013 compared to 4.6x coverage in 2012 and Fitch's 'AA' category median of 5x and. ThedaCare reports being ahead of budget through the first quarter of 2014.

LIQUIDITY A CREDIT STRENGTH: At Dec. 31, 2013, ThedaCare had $478.6 million (net of $16.5 million in illiquid investments) in unrestricted cash and investments. ThedaCare has added over $100 million in unrestricted cash and investments to its balance sheet since 2010, with ThedaCare's liquidity ratios now comparing well to Fitch's 'AA' category medians.

STRONG PRIMARY CARE BASE: ThedaCare's stable operating platform is supported by an employed physician group, ThedaCare Physicians, comprised of 155 primary care physicians (representing 75% of the primary care physicians who admit/refer to ThedaCare) and 67 midlevel practitioners.

COMPETITIVE SERVICE AREA: ThedaCare's primary service area, Fox Cities, is competitive and includes two other systems, Affinity Health System (part of Ascension Health Alliance; revenue bonds rated 'AA+' by Fitch) and Aurora Healthcare, Inc. (revenue bonds rated 'A' by Fitch). ThedaCare remains the market share leader at 48.7%, but ThedaCare's market share has trended down since 2011, which has impacted operations. Affinity's inpatient market share has grown to 36.1% from 33.9% over this time.

RATING SENSITIVITIES

CONTINUED STRENGTH OF OPERATING PLATFORM: Fitch believes ThedaCare's large employed primary care base, solid service area characteristics, and longstanding use of and sophistication with lean methodology, provide ThedaCare with a stable operating platform. A prolonged negative deviation from historical performance, not expected, could pressure the rating.

CREDIT PROFILE

ThedaCare is a five-hospital system operating in northeast Wisconsin, with two flagship hospitals, Appleton Medical Center (150 staffed beds) and Theda Clark Medical Center (167 staffed beds). ThedaCare is also the sole corporate member of ThedaCare Physicians, which operates 26 clinics in the service area and employs 155 physicians. Unaudited total revenue in 2013 was $720 million.

The 'AA-' rating reflects ThedaCare's historically stable financial and operating profile, which is characterized by consistent operating and coverage metrics, a leading market share, strong physician alignment, and an affluent service area. Over the last four years (2010-2013), ThedaCare has averaged an operating margin of 3.1% and an operating EBITDA margin of 11.4%, compared to Fitch's 'AA' category medians of 4.2% and 11.8%.

Financial Profile

Fiscal 2013 was a softer year in terms of operating performance due to expenses in the first half of the year outpacing volumes, but ThedaCare adjusted and ended the year on a positive operating trend, which according to management has carried over into the first quarter of 2014. ThedaCare has been a long-time utilizer of lean management practices, which has helped keep operations steady and helped in executing strategic plans. Further supporting the operating profile is a well-insured service area, with government payors representing a manageable 50.6% of gross revenue in 2013.

ThedaCare has seen its inpatient market share slide to 48.7% from 51.4% in 2011. However, ThedaCare is in the process of finalizing two mergers with health care organizations in its southern and western service area. The largest of the two is with the Community Health Network (CHN), a non-profit health care organization located in Berlin, WI, with a critical access hospital, a long term care facility, and home care, rehab, and pharmacy services. CHN has about 4.1% of the market share in ThedaCare's service area. Fitch views the acquisition as a credit neutral but believes CHN's market share, primary care physicians, and potential tertiary referrals to ThedaCare should be accretive to ThedaCare's operating profile.

Of note, ThedaCare's outpatient revenue as a percentage of revenue is very high at over 70% and ThedaCare maintains a larger outpatient market share lead compared to its main competitor.

In spite of the softer operations, Thedacare's liquidity continues to show solid growth, with ThedaCare's liquidity ratios now comparing well to Fitch's 'AA' medians. At Dec. 31, 2013 (unaudited figures), ThedaCare had $478.6 million (net of $16.5 million in illiquid investments) in unrestricted cash and investments, which equated to 266.4 days cash on a hand, a 22x cushion ratio, and 200.3% cash to debt. Fitch's 'AA' medians are 254.3, 23.4x, and 173.6%, respectively.

CAPITAL PROFILE

At Dec. 31, 2013, ThedaCare had $239 million in long-term debt, the vast majority of which (except for $4 million of former Shawano Hospital debt) is fixed rate. Fitch views ThedaCare's conservative debt profile positively. ThedaCare does have one swap, also a legacy of the Shawano acquisition but the notional amount is only $3 million.

ThedaCare's debt burden remains slightly elevated, although it has been easing over the last three years. Maximum annual debt service (MADS) as a percent of revenue was 3% in 2013, relative to a median of 2.6%. However, MADS is front loaded and debt service declines over the life of the bonds. In addition, debt to EBITDA was good at 2.6x, relative to a median of 2.9x. ThedaCare's largest current capital project is a new hospital at Shawano, which is expected to be finished in 2015 and will require a total of $50 million in capital in 2014 and 2015. Other capital needs for ThedaCare should remain manageable over the next two years.

Disclosure

ThedaCare covenants to post its annual and quarterly statements on EMMA by no later than 150 days after the end of the fiscal year and 45 days after the end of each quarter, respectively.

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals 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=826884

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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 10004
or
Secondary Analyst
Adam Kates, +1-312-368-3180
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

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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 10004
or
Secondary Analyst
Adam Kates, +1-312-368-3180
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