NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on the following revenue bonds issued by the Missouri Health & Educational Facilities Authority on behalf of St. Luke's Episcopal-Presbyterian Hospitals (St. Luke's):
--$33,595,000 series 2011 fixed rate bonds;
--$54,210,000 series 2006 fixed rate bonds.
In addition, Fitch withdraws the 'A+' rating on St. Luke's series 2013 taxable bonds, as the bonds did not sell as planned.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of the gross revenues of the obligated group, consisting of the hospital and its parent, St. Luke's Health Corporation.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The 'A+' rating is supported by St. Luke's strong overall financial profile, producing key financial metrics that compare favorably against Fitch's respective medians.
COMPETITIVE MARKET: Fitch's main credit concern continues to be the competitive market mostly dominated by several large regional health systems. However, St. Luke's has sustained stable inpatient market share in its primary service area (PSA) at above 13% in the last five years.
STRONG OUTPATIENT PRESENCE: The organization's recent capital investments have been focused on enhancing service offerings and expanding the number of outpatient locations, and St. Luke's extensive outpatient presence has supported its continued success.
FAVORABLE SERVICE AREA: St. Luke's operates in Chesterfield, MO (a suburb of St. Louis), which has favorable demographic and payor mix characteristics as evidenced by low Medicaid and self-pay exposure (around 3% of gross revenues combined) and a high proportion of managed care.
HIGHER CAPITAL SPENDING: Capital spending is projected to be higher over the next few years due to the construction of a medical office building (approximately $40 million) at its west campus.
RATING SENSITIVITIES
STABILITY EXPECTED: Fitch expects St. Luke's to maintain its stable market position and sustain its financial position.
CREDIT PROFILE
St. Luke's Episcopal-Presbyterian Hospitals owns and operates an acute care general hospital with 493 licensed beds, a skilled nursing facility with a residential care services, St. Luke's Rehabilitation Hospital (a joint venture), and other related healthcare facilities in Chesterfield, Missouri, a suburb of St. Louis. In fiscal year ended June 30, 2014, St. Luke's generated $478 million in total operating revenue.
IMPROVED PROFITABILITY
Profitability improved for the second year in fiscal 2014, supported by growth in hospital stays (admissions plus observation cases), more profitable mix of services, and rate increases from private payors. Operating margin and operating EBITDA margins were 4.3% and 10.1%, improved from 3.7% and 10% in 2013 and stronger than the 'A' medians of 2.5% and 9.5%. Fiscal 2014 results include $2.7 million in meaningful use fund receipts, and without these funds, operating margin would have been 3.7% which is still favorable for the rating. Management has a long-term target of maintaining a 3% operating margin, which Fitch believes is attainable.
OUTPATIENT GROWTH STRATEGY
St. Luke's continued its expansion of service lines in enhancing capacity to provide a broader continuum of care. Since 2008, the organization has added an outpatient center, wellness center for adults with Down Syndrome, rehabilitation hospital, home health services, hospice services, cardiovascular step-down unit, private duty services, additional urgent care centers, renovated and expanded cancer center, and convenient care center. St. Luke's Desloge Outpatient Center is across the street from the hospital (west campus) and has convenient access off Highway 141. Management will further expand its presence on the west campus by adding a medical office building.
COMPETITIVE MARKET
St. Luke's defined PSA consists primarily of St. Louis and St. Charles counties, which have above average personal income levels and favorable payor mix. In fiscal 2014, managed care contributed 41.7% to gross patient revenues, and Medicaid and self-pay exposure was low at 3.2% combined.
Fitch's main primary credit concern is the very competitive market which is mostly dominated by large regional systems. St. Luke's two main competitors in the PSA are Mercy Hospital - St. Louis and Missouri Baptist Medical Center, which are part of Mercy and BJC Healthcare, respectively. Management indicated that St. Luke's competitive position hinges on its highly aligned physicians and reputation for quality, and the organization has been able to negotiate favorable managed care rates in the competitive environment due to the hospital's status as a low cost provider.
CAPITAL PLANS
Total capital spending is projected to be $23.5 million in fiscal 2015, which is just below depreciation levels. An additional $40 million is expected to be spent in the near term, but spread out over approximately 3 years for the medical office building construction. Management plans to fund the projects with internally generated cashflow, which Fitch believes is reasonable given planned expenditures and timeframe.
STRONG BALANCE SHEET
St. Luke's balance sheet continued to strengthen. Unrestricted cash and investments of $240 million June 30, 2014 represented a 9% increase from the prior year and equated to 202 days cash on hand, 28.9x cushion ratio and 265% cash to debt compared to the respective medians of 199 days, 17x, and 131%.
DEBT PROFILE
At June 30, 2014, long-term debt totaled $90.4 million, consisting of the series 2011 and 2006 bonds. All debt is fixed rate and generates a maximum annual debt service of $8.3 million. St. Luke's does not have any swap exposure.
Debt burden is very low as measured by MADS as a percentage of revenue of 1.7% and debt to capitalization of 19.6% compared to the respective 'A' medians of 3.1% and 36.3%. MADS coverage is also consistently sound, averaging 5.7x over the last five years and most recently reported at 6.2x compared to the median of 3.8x.
DISCLOSURE
St. Luke's covenants to provide annual disclosure within 180 days after year end, and quarterly disclosure within 45 days of the quarter end through with the Municipal Securities Rulemaking Board.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria', June 16, 2014
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=916255
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