CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' long-term rating on the following revenue bonds issued by the Illinois Finance Authority on behalf of Carle Foundation (Carle):
--$234.7 million series 2011A;
--$61.9 million series 2009A;
--$160 million series 2009B-E*.
*Underlying rating. The bonds are supported by bank letters-of-credit issued by Northern Trust Company, N.A. or JP Morgan Chase Bank, N.A.
The Rating Outlook is Stable.
SECURITY:
Debt payments secured by a security interest in the gross receipts of the Obligated Group (OG; which includes the Carle Foundation, the Carle Foundation Hospital, Carle Health Care, Incorporated and Carle Retirement Centers, Inc.). There is no mortgage or property pledge or debt service reserve fund.
KEY RATING DRIVERS:
FINANCIALLY STRONG INTEGRATED SYSTEM: Fitch views as a credit strength Carle's fully integrated clinical model that includes a tertiary hospital, a large base of employed physicians, and a health plan. Consolidated financial results have been solid over the last three years, with the operating margin averaging 4.5% a year and unrestricted liquidity growing by 41% to approximately $1.1 billion at Sept. 30, 2014 from $771 million at Dec. 31, 2011. The operating margin in the 2014 nine-month interim period remained steady at 4.5%, relative to the 'AA' median of 3.9%.
REDUCTION IN LEVERAGE EXPECTED: By year end, Fitch expects Carle to make the final $34.9 million payment on the subordinate note related to the purchase of the assets of the Carle Clinic (the Clinic) and Health Alliance Medical Plans (HAMP). The payments, spread over five years, have been an ongoing credit concern affecting Carle's leverage metrics. After the last payment, maximum annual debt service (MADS) will drop to $37.2 million from $68.2 million. Coverage of the current MADS was a solid 3.6x in the nine-month 2014 interim period but a robust 6.5x for the lower MADS figure.
MARKET SHARE CONTINUES TO GROW: Carle has grown its leading inpatient market share position to 52.8% in 2013 from 51.2% in 2012 in its primary service area of Champaign-Urbana, and has grown it every year since 2002. In addition, most of Carle's patient volume numbers continue to show steady growth, with inpatient volume growing 0.4% from 2012 to 2013 and a very strong 11.6% in the year-over-year nine-month interim period. The strong volume growth in 2014 reflects in part the opening of Carle's new inpatient tower in October 2013.
CONTINUED CAPITAL SPENDING: Over the next five years, Fitch expects Carle's capital spending to remain above 1x depreciation. Major projects including the buildout of shelled space in the new tower for an additional 48 beds (due to the strong volumes) and potential expansions of outpatient clinics and surgery centers. Capital spending may require some new debt, but nothing has been finalized. Fitch believes Carle has additional debt capacity at the current rating level, given the expected steep drop in MADS at the end of 2014 and the solid coverage of the lower MADS figure.
RATING SENSITIVITIES:
CONTINUED STRENGTH IN PERFORMANCE: Fitch expects a steady operating performance from both Carle's hospital operations and HAMP, its health plan, with both continuing to show good topline revenue growth. HAMP still has a large exposure in the state of Illinois, with approximately 45% of its premium revenue coming from state insurance contracts and Illinois continuing to delay payments. However, Carle has been able to handle the financial stress of the delayed payments and the growth in liquidity of the consolidated organization further mitigates concerns about this exposure.
CREDIT SUMMARY
Located in Urbana IL, Carle Foundation consists of 393-bed Carle Foundation Hospital, Carle Health Care, Incorporated (which includes Carle Physician Group, comprised mostly of former Clinic physicians), Carle Retirement Centers, a 174-unit retirement center d/b/a The Windsor, and a health plan.
Fitch's credit analysis is based primarily on the results of the consolidated entity which includes Health Alliance Medical Plans, Inc. (HAMP), a non-obligated health insurer licensed in the State of Illinois. In 2013, HAMP accounted for roughly 60% of the $1.8 billion in consolidated operating revenues.
SOLID CREDIT PROFILE
The 'AA-' rating reflects the strategic benefit of Carle's integrated delivery model, its growing market share position and its improved financial profile over the last few years. In addition, Fitch expects Carle to make the last payment on a promissory note it incurred for the purchase of the Clinic.
At the time of the purchase in April 2010, the Clinic consisted of a 350-physician multi-specialty group and HAMP. Carle purchased the Clinic for $250 million. The acquisition was financed with $67 million in cash, $22 million in long-term debt and $161 million of promissory notes. With the last payment of the promissory note, Carle's MADS will drop by almost 50%.
Fitch also notes that at the time of the purchase there was concern over the dilutive effects of the acquisition on Carle's consolidated financial profile and capital metrics. However, while remaining weaker than OG results, consolidated results were adequate for the rating level, and in 2013, Carle had its strongest performance year ever, on a consolidated basis.
In 2013, on fully consolidated basis, Carle generated income from operations of $146.1 million on total revenues of $1.84 billion (2.1% margin) in 2012. Through the nine months ended Sept. 30, 2014, Carle generated operating income of $67.3 million on revenues of $1.48 billion (4.5% operating margin), which exceeds Fitch's 'AA' category median. The operating performance was helped by solid topline revenue growth of 9%, which had remained relatively flat from 2011 to 2012. The biggest improvement came from HAMP, which had revenue growth of 4.5% in 2013, after revenue dropped year over year in 2012.
On an OG-only basis, Carle generated an operating margin of 15.4% in 2013 and 12.3% in the nine-month 2014 interim period.
LIQUIDITY GROWTH
At Sept. 30, 2014, Carle had unrestricted cash and investments of approximately $1.1 billion, up from $771 million at year-end 2011. Cash-to-debt of 182.7% is above the 'AA' median and the cushion ratio of 16x trails the 'AA' median, but should improve with the retirement of the Clinic promissory notes. The strong growth in unrestricted cash and investments helps offset concerns about the state of Illinois' delayed payments to HAMP. At Sept. 30, 2014, HAMP was owed approximately $326 million, plus interest, from the state.
SOLID MARKET POSITION
Carle has further increased its leading inpatient market share in its primary service area of Champaign County over the last two years to 52.8% in 2013 from 48.8% in 2011. Presence Covenant has the second-largest market share position at 21.9% and that has fallen from 24.1% in 2011. Moreover, Carle remains the market leader in key clinical lines such as neurosciences, heart and vascular, oncology and women's services. Regionally, Carle continues to extend its reach through growth of clinical alignments with smaller regional hospitals and expanding outpatient sites. HAMP also has a strong regional presence, and Carle and HAMP continue to explore regional business opportunities, as well as other potential initiatives around health care reform, including its ability to manage care coordination and control costs. HAMP has expanded into Washington State and Iowa, as well.
TOWER PROJECT UPDATE
In October 2014, Carle opened its new nine-story, 348,000 square foot patient tower on time and within budget. The tower has new patient floors, with almost all private rooms and integrated family space, 50,000 square feet for physician's offices, a new intensive care unit for adults and children, and improved alignment of clinical services.
The new tower helped grow inpatient volume by 11.6% in the year-over-year nine-month interim period. As a result of the strong demand, Carle submitted a Certificate of Need request to the state to add 48 inpatient beds for which it received approval. The 48 beds were added as of Nov. 21, 2014. Carle also plans to build out shelled space in the new tower to accommodate the patient volume growth and that project is expected to cost approximately $18 million.
DEBT STRUCTURE/BURDEN
At Sept. 30, 2014, Carle's long-term debt was approximately $590.8 million, including the $34.9 million remaining promissory note. Carle has approximately 50% of fixed-rate debt and 50% variable-rate debt. Of the variable-rate debt approximately $160 million is letter of credit (LOC)-supported and the remaining is bank loans. Expiration dates on the LOCs and bank loans range from 2015 to 2024, with no more than $110 million expiring on any one date.
Carle has four swaps in place - two fixed payor swaps and two basis swaps. Total notional value of the swaps is $197 million. There are four counterparties, which provides for good counterparty diversity as it limits exposure to any single counterparty. The collateral thresholds on the swaps range from $15 million to $20 million and Carle has never had to post collateral. The mark to market on the swaps is -$12.7 million at Sept. 30, 2014.
Leverage metrics have moderated over the historical period. Fitch used a MADS figure of $68.2 million, which will fall to $37.2 million after the final payment of the promissory note. In the nine-month interim, coverage of the $78.2 million was 3.6x and 6.5x for the $37.2 million. Both debt-to-capitalization at 31% and debt-to-EBITDA of 2.5x, at Sept 30, 2014 compared well to the 'AA' category medians and both have shown improvement since year-end 2011, when they were 48.3% and 3.5x, respectively. Fitch's 'AA' medians are 31.1% and 2.9x.
Disclosure
Carle covenants to disclose annual financial information within 150 days of each fiscal year-end and quarterly information within 50 days of each fiscal quarter-end to EMMA. Disclosure to date has been excellent and includes balance sheet, income statement, cash flows, and management discussion and analysis.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Rating Guidelines For Nonprofit Hospitals and Health Systems', dated May 30, 2014.
Applicable Criteria and Related Research:
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=960335
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