NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA' rating on the following bonds that were issued on behalf of Jefferson Health System, which has been restructured and now renamed Main Line Health System (MLHS):
--$152.4 million Chester County Health and Education Facilities Authority health system revenue bonds, series 2010A;
--$56.8 million Montgomery County Industrial Development Authority health system revenue bonds, series 2012A.
In addition, Fitch has withdrawn its ratings for the following Jefferson Health System (PA) bonds due to pre-refunding activity:
--Philadelphia Hospital & Higher Education Facilities Authority (PA) (Jefferson Health System) health system revenue bonds, series 2010B (all maturities).
The bonds are removed from Rating Watch Evolving. The bonds were placed on Rating Watch Evolving in May 2014 due to the planned system restructuring. The Rating Outlook is Stable.
The outstanding bonds are general unsecured debt obligations of MLHS. Fitch does not view the legal structure as a credit concern at the current rating level; however, bondholders' recourse is limited given the unsecured general obligation of the system.
KEY RATING DRIVERS
SYSTEM RESTRUCTURING: Jefferson Health System (JHS) was composed of three members - Thomas Jefferson University Hospital System (TJUH), Main Line Health, Inc. (MLH) and Magee Rehabilitation Hospital (MRH). Effective July 1, 2014, TJUH and MRH have withdrawn from JHS, and the obligated group. As a result of the restructuring, TJUH has directly assumed the indebtedness of JHS that was allocable to TJUH, as well as the interest rate swaps associated with the indebtedness. To date, all of TJUH's assumed debt has been redeemed or defeased. JHS has subsequently been renamed to MLHS and MLHS remains the sole member of the obligated group.
STRONG FINANCIAL PROFILE: The affirmation of the 'AA' rating and the Stable Outlook is supported by MLHS's robust operating profile and financial metrics, all of which exceed Fitch's 'AA' category medians. Fitch notes that MLHS is a mid-sized, regional provider in a concentrated market, which precludes it from attaining a higher rating level at this time.
VERY LOW DEBT BURDEN: MLHS's debt burden is low as evidenced by maximum annual debt service (MADS) at 1% of total revenues in fiscal 2014, comparing well to Fitch's 'AA' median of 2.9%. Additionally, MLHS's MADS coverage by EBITDA of 18.4x greatly exceeded the median of 5.4x. MLHS has debt capacity at the current rating level.
COMPETITIVE MARKET: MLHS maintains a leading market share of 46.4% in its service area (based on 2013 discharges), but operates in a competitive environment with several other health systems. MLHS's largest competitor in terms of market share is Penn Medicine with 18.7% market share.
Main Line Health System is a regional health system located throughout Chester, Delaware, Montgomery and Philadelphia counties in Pennsylvania. MLHS operates four acute care hospitals and one rehabilitation hospital with a total of 1,340 beds and one drug and alcohol rehabilitation facility. In addition, MLHS operates four ambulatory health centers, an employed physician network and a home care and hospice service line. MLHS had total revenues of $1.49 billion in fiscal 2014 (June 30 year end).
Prior to June 30, 2014, JHS was the parent of MRH, TJUH and MLH. On June 30, 2014, JHS was restructured, with TJUH and MRH formally separating from JHS, which was concurrently renamed as MLHS. MLHS continues to be the sole corporate member of MLH. Management reports that the impact on MLHS from the separation has been minimal and that MLHS did not experience any significant deterioration in volumes, market share or rates with commercial payors as a result.
MLHS has maintained a number of its clinical affiliations and collaborative relationships with TJUH post-separation, including joint ownership in the Delaware Valley Accountable Care Organization (ACO). The ACO currently manages 30,000 Medicare attributed lives and management is expecting the number to increase to approximately 50,000 by Jan. 1, 2015, due to the addition of new primary care practices to the ACO, which should be further accretive to the organization.
STRONG FINANCIAL PROFILE
MLHS's $1.26 billion in unrestricted cash and investments at June 30, 2014 equated to 365.3 days cash on hand (DCOH), 586.2% cash to debt and an 82.8x cushion ratio, all of which significantly exceeded Fitch's 'AA' medians of 277.1 days, 178.5% and 26.5x, respectively. In addition, MLHS had $138.4 million in income from operations which equated to a 9.3% operating margin, above the 3.9% median. MLHS's operating profile allows room for some operational volatility going forward; however, its relatively smaller size and regional concentration, in a competitive environment, likely cap the organization at the current rating level.
VERY LOW DEBT BURDEN
MLHS's debt burden remains very low with MADS of $15.2 million at just 1% of revenues in fiscal 2014. MLHS's debt coverage was a very strong 18.2x in the same year.
MLHS's routine capital expenditures are expected to be approximately $55 million in fiscal 2015; however, this figure does not include any potential large scale capital projects. The organization has historically funded a large portion of its capital spending through cash flow and it recently completed a $480 million expansion and modernization project at Lankenau Hospital, of which only $30 million was funded from debt. Fitch believes that MLHS has ample debt capacity at the current rating level to support future capital plans.
Total outstanding debt is only $209 million and is 100% fixed rate. There are no derivative instruments.
MLHS covenants to provide certain financial information in an Annual Report, no later than 180 days after the fiscal year-end. MLHS also provides quarterly information for the first three fiscal quarters on the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria