Fitch Rates CoxHealth's (MO) 2015A Revs 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to the expected issuance of $124.2 million of Missouri Health and Educational Facilities Authority (MHEFA) revenue bonds, series 2015A issued on behalf of CoxHealth. Fitch also affirms the following MHEFA bonds also issued on behalf of CoxHealth:

--$201,475,000 revenue bonds (CoxHealth) series 2013A;

--$162,500,000 fixed-rate revenue and refunding bonds, series 2008A;

--$70,000,000 variable-rate revenue and refunding bonds, series 2008B;

--$34,375,000 variable-rate revenue bonds, series 2008C;

--$33,450,000 revenue capital appreciation bonds, series 1992H;

--$6,430,000 fixed-rate revenue bonds, series 1993I.

The Rating Outlook is Stable.

The 2015A bonds are expected to be issued as fixed rate. Proceeds from the bonds will be used to refund a portion of CoxHealth's 2008A bonds and pay for cost of issuance. Bonds are expected to price via negotiation the week of April 6, but the bond refunding is interest rate sensitive and may be delayed or withdrawn depending on market conditions at the time of sale.

SECURITY

Gross revenue pledge from CoxHealth and a mortgage (only on Cox Medical Center South campus and Cox Walnut Lawn campus, including Ambulatory Surgery Center at the Walnut Lawn campus).

KEY RATING DRIVERS

SOLID FISCAL YEAR 2014 (FY14) FINANCIAL PERFORMANCE: CoxHealth's 1.7% operating margin, which was in line with Fitch's expectations, coupled with the full integration of Cox Branson into the system and good investment returns produced pro forma maximum annual debt service (MADS) coverage of 3.7x, which compares well to Fitch's 'A' category median of 3.8x.

HIGHLY INTEGRATED SYSTEM: Fitch views as a credit strength CoxHealth's integrated health system, which includes five hospitals, a larger number of employed and other aligned physicians, 83 clinic sites, a system-wide IT system, health plan, and home health agencies. The level of integration has supported a very stable operating performance, and Fitch believes positions CoxHealth well for health care reform.

NEW TOWER PROJECT PROGRESSES: The new tower construction project on CoxHeath's main campus, which was funded by a 2013 debt issuance, is on time and on budget and is expected to be completed in May or June. Additional projects at Cox Branson also funded by the 2013 bonds, including a new emergency department, are expected to finish in the fall of 2015.

MANAGEABLE DEBT BURDEN: While the 2013 borrowing increased CoxHealth's leverage, coverage has remained stable and pro forma MADS as a percent of revenue was 2.9% at Dec. 31, 2014, better than Fitch's 'A' median of 3.1%, which indicates a manageable debt burden at the rating level.

IMPROVED LIQUIDITY: At Dec. 31, 2014, CoxHealth had $543 million in unrestricted cash and investments (OG only) up from $408 million at Sept. 30, 2011. Over that time days cash on hand (DCOH) increased to 186.9 days from 167.9 days, and is now nearing the 'A' median of 199.2 days.

RATING SENSITIVITIES

CONTINUED STABILITY IN OPERATING PERFORMANCE: Fitch expects CoxHealth to maintain operating margins between 1.5% and 2%; a deviation from operating performance either up or down could change the rating.

CREDIT SUMMARY

Located in Springfield, Missouri, CoxHealth clinical services cover a 24 county service area in southwest Missouri and parts of northern Arkansas. CoxHealth owns and operates four tertiary hospital facilities (802 licensed beds in Springfield, Missouri), with over 300 integrated physicians. CoxHealth also operates a skilled nursing facility, a psychiatric and rehabilitation facility, over 83 outpatient sites, a home care company, a health plan, and a foundation. In fiscal 2014, CoxHealth had operating revenues of approximately $1.2 billion.

STABLE CREDIT PROFILE

The 'A' rating reflects CoxHealth's solid market position, including a nearly 50% inpatient market share in its primary service area and an integrated operating platform, which supports a consistent operating performance.

As anticipated in Fitch's last rating action, CoxHealth's operating performance compressed as CoxHealth absorbed the acquisition of Branson and moved forward on a large tower project. CoxHealth had a 1% operating margin in FY13 and a 1.7% operating margin in FY2014, after averaging a 2.4% operating margin over the prior two fiscal years. The results were in line with Fitch's expectations. CoxHealth posted a very strong 2.7% operating margin (OG results only) in the first quarter of FY15, which is normally its slowest quarter.

The results were driven in large part by volume growth at Branson, which led to above budget performance at that hospital, as well as good expense management across the system. CoxHealth has made strategic investments at Branson, including the recruitment of 22 new physicians, and a new emergency department expected to be finished in the spring of 2015 should support additional volume growth at Branson.

In spite of the lower operating margins, CoxHealth's pro forma MADS coverage was very stable over the last four audited years. MADS after the refunding is expected to be $32.5 million and was provided by the underwriter. Pro forma MADS coverage was a solid 3.7x in FY14, after averaging 2.6x over the prior three audited years. Over this time, MADS as a percent of revenue lowered to 2.6% from 3.4% as compared to a median of 3.1%, which has helped CoxHealth grow into its debt and kept MADS coverage consistent.

GOOD LIQUIDITY GROWTH

Strong cash flow in FY14 helped CoxHealth grow its unrestricted cash and investments by 12% year over year. At Sept. 30, 2014, CoxHealth had $592.6 million in unrestricted cash and investments, which equated to 183.6 DCOH, an 18.2x pro forma cushion ratio, and cash to debt of 106.7%, relative to medians of 199.6 days, 17x, and 131.2%.

TOWER PROJECT UPDATE

In 2013, CoxHealth issued $115 million of debt to finance the building of a new patient tower. The construction project is on time and in budget and is expected to open in May or June. The tower will have nine stories and multiple floors of inpatient and ambulatory space (approximately 65-80 net new adult and pediatric patient rooms), three to four shelled floors, ambulatory and inpatient operations for neuroscience, and a new post-partum and NICU center. The tower will allow CoxHealth to move to mostly private patient rooms and is being built contiguous to the current patient tower.

Fitch notes that the project takes care of major capital needs at CoxHealth's main campus, and the other projects at Branson also address near term capital needs on that campus. CoxHealth has absorbed the additional debt well, with coverage above 3x in FY14 and cash to debt now back over 100%. Moving forward, CoxHealth's capital need should be manageable and that should help to further reduce the elevated debt burden. In terms of information technology, CoxHealth has consistently made IT investments and is a HMSS level six hospital, so IT costs should remain manageable as well.

DEBT PROFILE

Most of CoxHealth's debt is fixed, with CoxHealth's variable rate debt exposure, at $105 million, a manageable figure. The variable rate debt is in two separate bond series that are privately placed index bonds and have put dates in December 2017 and December 2018. CoxHealth has one basis swap with a notional amount of $200 million, no collateral posting requirements, and a mark-to-market of $1.6 million as of Jan. 31, 2015.

DISCLOSURE

CoxHealth has covenanted to provide quarterly and annual disclosure of financial statements to bondholders. Recent disclosure to Fitch has been excellent and includes a balance sheet, income statement, utilization statistics, statement of cash flows and management discussion and analysis.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 2014);

--'Revenue-Supported Rating Criteria' (June 2014).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981660

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Gary Sokolow
Director
+1-212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
James Lebuhn
Senior Director
+1-312-368-2059
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Gary Sokolow
Director
+1-212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
James Lebuhn
Senior Director
+1-312-368-2059
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com