CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on the following bonds issued by the Illinois Finance Authority on behalf of Alexian Brothers Health System (ABHS):
--$66,150,000 series 2010 revenue refunding bonds;
--$3,075,000 series 2008 revenue bonds;
--$60,830,000 series 2005A revenue refunding bonds; and
--$23,655,000 series 2005B revenue refunding bonds.
The Rating Outlook is Stable.
The bonds are secured by a pledge of the gross revenues of the ABHS obligated group. Additional security is provided by a mortgage pledge and debt service reserve fund.
KEY RATING DRIVERS
CONTINUED PROFITABILITY IMPROVEMENT: Operating profitability has continued to improve with operating EBITDA margin at 11.5% and 11.2% in fiscal years 2012 and 2013 and increasing to 13.4% in the nine month interim period ending March 31, 2014 (the interim period) from 9.5% in fiscal 2011. The sustained improvement reflects continued cost management initiatives and efficiencies gained through the Ascension (Fitch rated 'AA+') acquisition in 2012.
LEADING MARKET SHARE: ABHS' clinical reputation and strong physician alignment has resulted in a leading 48% market share in a competitive environment. The system's competitive position should be further strengthened by a pending affiliation with Adventist Midwest Health and a pediatric service line affiliation with Loyola University Health System (Loyola, owned by CHE Trinity, rated 'AA').
ELEVATED DEBT BURDEN: ABHS's debt burden remains elevated with MADS equal to 4.2% revenue in fiscal 2013 relative to Fitch's 'A' category median of 3.1%. Despite solid operating profitability, MADS coverage by EBITDA is only adequate for the rating category at 3.0x in fiscal 2013 and 3.4x in the interim period.
LIGHT LIQUIDITY METRICS: Liquidity metrics remain light for the rating category with 144.7 days cash on hand, 8.2x cushion ratio and 71.7% cash to debt at March 31, 2014. The light liquidity metrics reflect strong historical capital spending with capital expenditures averaging 208% of depreciation expense between fiscal 2011 and 2013.
ACQUISITION BY ASCENSION: ABHS was acquired by Ascension in January 2012. Although ABHS remains separately obligated on its outstanding debt, Fitch views the acquisition as a credit positive and expects ABHS to benefit from Ascension's size, scale and financial resources.
SUSTAINED OPERATING PERFORMANCE: Fitch expects that ABHS will maintain its solid operating profitability while continuing to benefit from effective cost management practices and the scale provided by Ascension.
ABHS, headquartered in Arlington Heights, IL, consists of two acute-care hospitals, a behavioral hospital, a rehabilitation hospital, a women's and children's hospital, several long-term care facilities and an employed physician group. The two acute-care hospitals have 604 total staffed beds and are located approximately 25 and 30 miles northwest of Chicago, respectively. Total operating revenues equaled $993.6 million in the fiscal year ended June 30, 2013. Fitch's analysis of fiscal year end results is based upon consolidated audited financial statements. The obligated group accounted for 99.2% of total consolidated assets and 95.7% of consolidated total operating revenue in fiscal 2013. Fitch's analysis of interim period results is based upon the obligated group.
ABHS became part of Ascension on Jan. 1, 2012. The ABHS bonds remain secured under the ABHS master trust indenture dated Oct. 1, 1992 and are not secured or guaranteed by Ascension. In February and March of 2012, Ascension refunded and tendered approximately $297 million of ABHS' outstanding bonds. In return, ABHS issued a note (variable rate) to Ascension whereby it remains responsible to Ascension for debt service associated with the refunding and tendering. Fitch views the acquisition by Ascension positively as ABHS's operating performance should continue to benefit from Ascension's size, scale and financial resources.
CONTINUED PROFITABILITY IMPROVEMENT
The pace of ABHS's operating profitability improvement accelerated subsequent to the acquisition by Ascension. After operating EBITDA margin increased from 9.0% in fiscal 2008 to 9.5% in fiscal 2011, it further increased to 11.5% in fiscal 2012 and equaled 11.2% in fiscal 2013. ABHS is now fully integrated into Ascension. Operating improvements and synergies have been achieved in supply chain management, revenue cycle, information technology, insurance services and clinical engineering. Additionally, fiscal 2013 profitability was bolstered by supplemental funding received through Illinois' hospital assessment program which equaled $29.9 million. This amount is expected to increase to $45.5 million in fiscal 2014. The program was recently extended through 2017.
Profitability improvements continued in the interim period with operating EBITDA margin increasing to 13.4%. Management is budgeting for operating EBITDA margin to equal 11.1% in fiscal 2015 which Fitch views as reasonable.
LEADING MARKET SHARE
ABHS' maintains a leading market share in its affluent, densely populated primary service area (PSA) in Chicago's northwest suburbs. However, the PSA only accounts for approximately 55% of admissions. The leading market share reflects ABHS' clinical reputation and strong physician alignment. The PSA market share has been volatile in recent years, decreasing from approximately 50% in fiscal 2010 to 48% in fiscal 2013 before increasing to approximately 49% in the first quarter of 2014. The volatility reflects the extremely competitive nature of the healthcare market in the greater Chicago area.
Since becoming a member of Ascension, ABHS has pursued additional affiliations to further secure its competitive position. ABHS and Adventist Midwest Health (AMH) signed a non-binding letter of intent in June 2014 to form a joint operating company, under which AMH's four hospitals and ABHS' five hospitals in suburban Chicago would form an integrated health care system. The systems currently operate in contiguous service areas. Under the terms of the agreement, each entity would maintain separate balance sheets, but would share an income statement and split net income based upon a valuation currently being performed on ABHS and AMH. The agreement is expected to be completed in early fall 2014.
Additionally, ABHS and Loyola signed a letter of intent in August 2014 to affiliate their pediatric service lines. The two systems plan to jointly recruit pediatric specialists and subspecialists. ABHS's women's and children's hospital opened in April 2013, and this move is expected to maximize that new asset in the market.
Fitch views the proposed affiliations positively and expects them to further secure ABHS' leading market share in its primary service area and to lead to further operating efficiencies.
ELEVATED DEBT BURDEN
Despite the improved operating performance, MADS coverage is only adequate for the rating category due to an elevate debt burden. ABHS' debt burden remains high with MADS equal to 4.2% of operating revenue in fiscal 2013, exceeding Fitch's 'A' category median of 3.1%. MADS coverage by EBITDA improved each year since fiscal 2011 to 3.0x in fiscal 2013 and to 3.4x in the interim period, but remains light relative to Fitch's 'A' category median of 3.8x.
LIGHT LIQUIDITY METRICS
Unrestricted cash and investments decreased marginally from $345 million in fiscal 2012 to $345.4 million at March 31, 2014 reflecting continued elevated levels of capital spending. Liquidity metrics are light for the rating category with 144.7 days cash on hand, 8.2x cushion ratio and 71.7% cash to debt. Capital spending averaged 208% of depreciation expense between fiscal 2011 and fiscal 2013, and included completion of the new women's and children's hospital in April 2013. Capital spending decreased to 130% in the interim period and is projected to remain at current levels in the near term.
ABHS covenants to provide annual disclosure within 150 days after the end of each fiscal year and quarterly disclosure within 60 days of the end of each fiscal quarter. Disclosure is provided through the Municipal Security Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria