CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned 'AA-/ F1+' ratings to the expected issuance of $265.9 million series 2015A-C revenue and revenue refunding bonds to be issued by the University of Colorado Hospital Authority (UCHA). In addition, Fitch affirms the 'AA-' ratings on approximately $511.3 million revenue bonds issued by UCHA and $215 million of Colorado Health Facilities Authority revenue bonds issued on behalf of Poudre Valley Health Care, Inc. (PVHS). The Rating Outlook is Stable.
University of Colorado Health (UCHealth) expects to issue $265.9 million of series 2015 bonds composed of $151.5 million series A new money bonds; $57.4 million series B refunding bonds and $56.9 million series C refunding bonds. The bonds will be multi-modal and will initially be offered in a 'Windows' mode. The bonds are expected to price the week of Jan. 22nd through negotiated sale.
Proceeds from the series A bonds will be used to pay for various capital expenditures at the Poudre Valley Hospital campus, Anschutz Medical Campus and at Memorial Hospital; proceeds from the series B bonds will be used to advance refund UCHA's outstanding series 2006A bonds; proceeds from the series C bonds will be used to current refund the outstanding PVHC series 2005F issued through Colorado Health Facilities Authority; and pay costs of issuance.
Fitch used pro forma maximum annual debt service (MADS) of $81.1 million as provided by management.
SECURITY
The series 2015 bonds will be secured by a pledge of gross revenues and pledged accounts of the UCHA Obligated Group and PVHS Obligated Group. Certain obligations issued under the PVH Master Indenture are also secured by a mortgage on the hospital facilities of Poudre Valley and MCR.
KEY RATING DRIVERS
ROBUST OPERATING PROFITABILITY: UCHealth's robust profitability fueled by strong volume growth, strong expense control and excellent management practices is a key credit strength. UCHealth has generated operating EBITDA margins of 15.7% and 16.8% in fiscal 2014 and 2013, respectively, which are well in excess of the 'AA' category medians of 11%.
EXTENSIVE MARKET PRESENCE: UCHealth includes the state's only academic medical center and the organization has an extensive presence in the state as it covers a 10 county primary service area (PSA) along the front range of the Rocky Mountains from the Wyoming border south to the City of Colorado Springs. UCHealth benefits from its close affiliation with the University of Colorado's School of Medicine and the excellent clinical results of UCHA and PVHS. Fitch believes the system is uniquely positioned among providers to coordinate and deliver clinical services to a large and growing population.
IMPROVING LIQUIDITY POSITION: At Oct. 31, 2014, UCHealth had $2.07 billion of unrestricted cash and investments, which is up 42% from fiscal year-end (FYE) 2013 ($1.45 billion) due to the system's strong profitability and favorable investment returns. However, liquidity metrics are mixed. Days cash on hand of 328.5 exceeds the 'AA' median of 277.1 while pro forma cushion ratio of 25.4x and cash-to-pro forma debt of 141.5% each lag the respective 'AA' medians of 26.5x and 178.5%.
SOLID DEBT SERVICE COVERAGE: Certain of UCHealth's debt metrics are elevated when compared to 'AA' category medians reflecting heavy capital spending necessitated by strong utilization growth. However, pro forma MADS coverage by operating EBITDA is solid at 5.0x and 4.8x in fiscal 2014 and 2013, respectively, and exceeds the 'AA' category median of 4.4x.
SHORT-TERM RATING: The 'F1+' rating on the 2015A-C bonds reflects the current structure of the bonds (Windows mode) which provides 180 days notice to remarket or refinance the bonds in the case of a failed remarketing. With six months of available notice, the 'F1+' rating reflects UCHealth's ample liquidity available relative to the $266 million of bonds in a Windows mode and market access at the rating level.
RATING SENSITIVITIES
IMPROVING FINANCIAL PROFILE: Fitch expects UCHealth to sustain its strong operating performance. Further improvement in liquidity and a moderation in certain leverage metrics will likely trigger positive rating action. However, increased projected capital spending to address expansion and clinical capacity needs could hamper liquidity growth or potentially entail issuance of additional debt.
CREDIT PROFILE
UCHealth was formed in 2012 through the combination of the UCHA and PVHS. The system consists of an academic medical center and four community hospitals located in Denver, Colorado Springs and Fort Collins with a combined 1,512 licensed beds including Colorado Springs Memorial Health System (MHS). In fiscal 2014, UCHealth generated total revenues of $2.6 billion.
ROBUST OPERATING PROFITABILITY
Historical operating profitability has been consistently robust. UCHealth generated income from operations of $207.4 million (8% operating margin) in fiscal 2014 compared to income from operations of $218 million (9.4% operating margin) in fiscal 2013. Operating EBITDA margins of 15.7% and 16.8% in FY 2014 and 2013, respectively, are very strong and are well in excess of the 'AA' category median of 11%. Through the four month interim periods ended Oct. 31, 2014, UCHealth generated operating and operating EBITDA margins of 12.7% and 19.9%, respectively.
Revenue generation and profitability is fueled by UCHA and PVHS. In fiscal 2014, UCHA and PVHS accounted for roughly 45% and 34% of total system revenues, respectively. In fiscal 2014, UCHA generated operating and operating EBITDA margins of 10.6% and 18.9% respectively on total revenues of $1.16 billion. PVHS generated operating and operating EBITDA margins of 11.5% and 20.4%, respectively, in fiscal 2014 on total revenues of $875.6 million. Revenue growth and profitability have been bolstered by excellent growth in clinical volumes. Admissions, inpatient surgeries and outpatient visits at UCHA and PVHS combined increased 10.6%, 11% and 6.6%, respectively from fiscal 2013 to fiscal 2014. Similarly, through the four month interim period, inpatient admissions, inpatient surgeries and outpatient visits at UCHA and PVHS combined were up 2.5%, 5.1% and 13.1%, respectively, compared to the prior year period.
In fiscal 2014, MHS posted an operating loss of $30.9 million or a negative 5.8% operating margin on total revenues of $565.8 million. However, various cost control measures implemented in 2014 gained traction during the second half of the year. As a result, MHS has generated break-even operations through the first four months of fiscal 2015.
EXTENSIVE MARKET PRESENCE
The formation of UCHealth creates an extensive health system that can coordinate the delivery of clinical services across a large 10 county primary service area (PSA). UCHealth's PSA follows Colorado's I-25 corridor, an expansive area ranging from Colorado's Wyoming border to the City of Colorado Springs (roughly 200 miles). The PSA's population of 4.2 million accounts for approximately 77.5% of Colorado's total population. From 2000-2014, the PSA population grew almost 24% and is expected to continue to grow above national averages in the future. UCHealth held had a 22.4% market share in its PSA in 2013 compared to HealthOne at 24.6% and Centura at 20.4%. Within the Denver market (Central Region) University Hospital experienced a growth in market share to 12.2% in 2013 from 11.3% in 2012 reflecting a 6.4% increase in inpatient discharges.
UCHealth benefits from the strong clinical reputations developed independently by UCHA and PVHS as well as its close affiliation with the University of Colorado's School of Medicine. As the only academic medical center in Colorado and as the primary teaching hospital for the School of Medicine, University of Colorado Hospital has been recognized for clinical excellence in several clinical services by U.S. News and World Reports and has ranked in the top 10 academic medical centers for quality for four years by the University Health System Consortium. UCHealth has committed to provide funding to the School of Medicine (five year agreement) to support the teaching and research mission. Similarly, PVHS was awarded the Malcolm Baldrige National Quality Award in 2008 in recognition of its operational and clinical achievements. Furthermore, Fitch believes branding the system 'University of Colorado Health' ties the new system to a trusted, highly regarded institution that is recognized throughout the region by patients, physicians, and employers.
SOLID LIQUIDITY POSITION
While UCHealth's liquidity metrics are mixed relative to Fitch's 'AA' category medians, the growth in liquidity has been strong. At Oct. 31, 2014, UCHealth had $2.07 billion of unrestricted cash and investments which is a 42% increase from $1.45 billion at FYE 2013. While days cash on hand of 328.5 well exceeds the 'AA' category median of 277.1, UCHealth cash-to-pro forma debt of 141.5 lags the 'AA' median of 178.5%. Pro forma cushion ratio of 25.4x is in line with the 'AA' median 26.5x. Further, the addition of MHS was dilutive to UCHealth's cushion and cash to debt ratios as the City of Colorado Springs retained the cash and investments of MHS and used a portion of those monies, along with the proceeds from the purchase price by UCHA to refund debt related to MHS. Thus, the cash and investment position of the system reflects the liquidity built by only UCHA and PVHS.
SOLID DEBT SERVICE COVERAGE
The system's strong cash flow generation results in strong coverage of pro forma MADS by operating EBITDA of 5.0x and 4.8x in fiscal 2014 and 2013, respectively, which exceed the 'AA' category median of 4.4x. Through the four month interim period, MADS coverage by operating EBITDA improved to a strong 6.9x.
DEBT PROFILE
Including the series 2015 bonds, UCHealth will have approximately $1.46 billion of total debt outstanding composed of 44% fixed rate and 56% variable rate. Of the variable rate debt, 66% is in a floating rate mode and 34% is in a 'Windows' mode. Further, UCHealth has a total of $477.3 million of direct placed debt with four different lenders. The debt has mandatory tender dates in 2017, 2020 and 2021 with the maximum mandatory tender amount being $175.9 million.
UCHealth is counter-party on two fixed payor swaps with a total notional value of $162.8 million. At FYE 2014, the market value of the swaps was negative $27.8 million. The swaps do not require UCHealth to post any collateral.
DISCLOSURE
UCHealth covenants to provide bondholders with audited annual information within 150 days of fiscal year-end and unaudited quarterly statements within 60 days of quarter-end to the national recognized municipal securities information repositories. The content of UCHealth's disclosure includes a balance sheet, income statement, cash flow statement, utilization statistics, and management discussion and analysis and viewed favorably by Fitch.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria, June 16, 2014;
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014;
--'Rating US Public Finance Short Term Debt', Jan. 7, 2015.
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
Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=973756
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