NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the following revenue bonds issued on behalf of Ochsner Clinic Foundation (OCF; Obligated Group [OG] entity within the Ochsner Health System):
--$250,000,000 Ochsner Clinic Foundation taxable bonds series 2015;
--$269,545,000 Louisiana Public Facilities Authority Refunding revenue bonds (Ochsner Clinic Foundation Project) series 2015.
In addition, Fitch affirms the following parity debt issued by Louisiana Public Facilities Authority also on behalf of OCF:
--$150,000,000 revenue bonds (Ochsner Clinic Foundation Project) series 2011;
--$368,420,000 fixed-rate revenue bonds (Ochsner Clinic Foundation), series 2007A;
--$75,595,000 fixed-rate revenue bonds (Ochsner Community Hospitals), series 2007B
The Rating Outlook is revised to Positive from Stable.
Proceeds from the bonds will be used to refund the 2011 bonds and a portion of the 2007A and B bonds, fund a variety of capital projects, and pay for cost of issuance. OCF will be releasing the debt service reserve funds associated with the refunded debt. In addition, OCF plans to issue an additional series of privately placed bonds that will refund a portion of the 2007 bonds. Fitch is not rating that series. Maximum annual debt service (MADS), as provided by management, will increase to approximately $74 million from $65 million. Bonds are expected to sell via negotiated sale the week of June 15.
SECURITY
Gross revenue pledge of the OG and a mortgage on certain properties. A debt service reserve fund is not expected to be funded.
KEY RATING DRIVERS
IMPROVING FINANCIAL PROFILE: The Positive Outlook reflects OCF's improving financial profile, characterized by a strengthening operating performance and growing liquidity. Audited 2014 results show a 1.8% operating margin, the strongest over the four-year historical period, and coverage of pro forma maximum annual debt service (MADS) by EBITDA of 3x, both better than Fitch's 'BBB' medians, of 1.1x and 2.6x, respectively.
STRATEGY YIELDING RESULTS: OCF's strategy to grow as a regional referral center is gaining traction as referrals have increased every quarter since first quarter 2014 (1Q14), with referrals up 61% in 1Q15 over 1Q14. The growth in referrals helped drive a solid 2.3% operating margin in 1Q15; the first quarter is historically OCF's lowest performing yearly quarter.
LIQUIDITY GROWTH: OCF's improved cash flow helped drive a 24% increase in unrestricted cash and investments in 2014. At FYE 2014 OCF's cash and investment totaled $551.3 million compared to $446.3 million at FYE 2013. On a pro forma basis, liquidity ratios are expected to improve, as certain bond proceeds are expected to augment OCF's existing cash and investments position.
BORROWING FOR CAPITAL PROJECTS: OCF is borrowing approximately $250 million in taxable debt to fund a variety of projects that will provide additional capacity to meet the increasing demand for services. A pro forma analysis of the debt shows the debt burden remaining relatively manageable with MADS as a percentage of revenue at 3% relative to Fitch's 'BBB' median of 3.1%.
RATING SENSITIVITIES
SUSTAINED OPERATING PROFITABILITY: Over the next year, should Ochsner Clinic Foundation's operating performance and liquidity growth be sustained, a rating upgrade would be likely. Ochsner Clinical Foundation is budgeting for $50 million in operating income for 2015 (2% operating margin) despite approximately $40 million in expected cuts, including $22 million in supplemental funding and $15 million in Medicare Advantage. Given the ongoing fiscal challenges at the state level (Louisiana is dealing with a $1.6 billion budget deficit), Fitch would view as a credit positive Ochsner Clinic Foundation's ability to increase its operating margin while absorbing this reduction in government funding.
PROGRESS OF CAPITAL PROJECTS: Ochsner Clinic Foundation expects to use a combination of bond proceeds and operating cash flow to fund a number of capital projects to expand inpatient, outpatient, and surgical capacity. The progression of these projects without eroding pro forma liquidity metrics would lead to upward movement in the rating
CREDIT PROFILE
Located in New Orleans, LA, OCF is a large regional academic, multi-specialty, healthcare delivery system with 12 owned, managed, or affiliated hospitals and over 50 health centers in Louisiana. Ochsner employs more than 1,000 physicians in over 90 medical specialties and subspecialties and conducts over 300 clinical research trials annually. In 2014, OCF reported approximately $2.4 billion in operating revenue.
Outlook Reflects Positive Operating Trend
OCF's 1.8% operating margin and 7.8% operating EBITDA margin in fiscal 2014 was its strongest financial performance in the last four years. The 2014 results reflect the successful implementation of a number of growth and efficiency initiatives that OCF has undertaken in the last few years, and the results further distance the organization from 2012, when a series of one-time events, including hurricane Isaac and a system-wide EPIC implementation, resulted in a negative operating margin and drop in liquidity.
Fitch believes the underlying drivers of the improved performance are sustainable, as reflected in the strong 1Q15. OCF's patient service revenue grew by 21% year over year in 1Q15, with OCF producing a 2.4% operating margin ($14 million in operating income), 8.3% operating EBITDA margin and pro forma coverage of 2.8x. The first quarter is generally OCF's lowest performing quarter as illustrated by OCF's $10 million loss from operations in 1Q14. OCF has budgeted operating income of $50 million in 2015, but Fitch believes that OCF may exceed budget given the strong 1Q results.
A key driver of the improved performance which has generated strong revenue growth has been the successful execution of a regional growth strategy. From 2010 to 2014, regional transfers grew by 64% and discharges from patients more than 25 miles away grew by 17%. OCF's strategy has involved a variety of affiliation strategies including clinical affiliations, management agreements and acquisitions. Over the last two years these partnerships included a management agreement to run St. Charles Parish Hospital, a joint operating agreement with St. Tammany Hospital (general revenues bonds rated 'A' by Fitch), and the purchase of the River Parishes Hospital.
Given the strong start to the year, Fitch expects further growth in transfer and regional discharges for the remainder of 2015. Additionally, these regional patients generally have a higher acuity - OCF's Medicare case index has increased to 1.9 from 1.8 since 2010 - and represent a better payor mix. Fitch also expects OCF to continue grow its clinical footprint regionally using this affiliation and alignment strategy.
Further supporting the strong performance is a number of efficiency initiatives that OCF has undertaken to manage expenses. OCF management reports margin improvement of $54 million in 2014 due to these efforts and is budgeting for additional cost control initiatives in 2015 that include $17 million in supply chain.
Overall, the Positive Outlook reflects Fitch belief that OCF will meet or exceed its 2015 budget and can sustain this performance in future years. Additionally, it factors in OCF's other underlying credit strengths that include a growing market position in its primary service area, a large base of employed physicians, and experience with population health management. OCF continues to increase the number of lives it manages, with approximately 32,000 lives in its local New Orleans market under full-risk contracts through capitated payments. OCF performs well under these contracts and continues to show the ability to bend the cost curve for the care of these patients while maintaining high quality.
Liquidity Continues to Strengthen
The stronger operating results and investment returns have helped grow liquidity. At March 31, 2015, unrestricted cash and investments was $545.4 million, a 40% increase from March 31, 2014 when it was $389.1 million (both net of a $53 million line of credit). At March 31, 2015, OCF has days cash on hand (DCOH) of 86.5, a cushion ratio of 7.3x, and cash to debt of 70.1%.
OCF will put the $250 million of proceeds from the taxable debt onto its balance sheet, which will improve DCOH to approximately 134.5 days. OCF anticipates that its cash flow over the next few years will keep the balance stable as it draws down these taxable funds for projects. Given the current levels of performance Fitch believes this is achievable.
Growth Driving Capital Projects
With the 2015 debt issuance, OCF is moving forward on approximately $200 million to $250 million of capital projects focused on meeting an increase in the demand for services across the system. The largest of these will be tower expansion at OCF's flagship hospital, Ochsner Medical Center (OMC), in New Orleans. The $108 million project will add six floors to the main building, with 66 beds added as part of a Phase 1 and a potential 100 beds added as part of Phase II.
The remaining projects include a cancer center expansion, an operating room expansion at Elmwood Hospital, and an expansion at the Elmwood Clinic. The tower project is expected to be completed by 1Q18 and the other projects are expected to be completed at various times through 2019.
While the projects bring construction risk, Fitch notes that the need for the project is being driven by the demand for and growth in OCF's services. Further mitigating concerns is OCF's recent completion of a number of capital projects that have proved accretive to its operating performance. A primary care medical office building opened at OMC in 2014 has led to a 9% increase in unique primary care patients seen in 1Q15 over 1Q14.
A $50 million capital project that moved womens service and the NICU off the OMC campus to Ochsner Baptist Medical has increased NICU utilization and opened 60 additional beds at OMC. Part of the need for the current expansion is the high utilization even after this increase in capacity.
Debt Profile
After issuance, OCF will have approximately $1 billion in long-term debt. The vast majority of the debt will be fixed rate, of which approximately $847 million will be fixed rate revenue bonds and the rest various notes and loans payable. Excluded from the total long-term debt calculation is $53 million in borrowing under a line of credit agreement, which is classified as short-term debt and netted out of unrestricted cash and investments.
A pro forma analysis of the debt at the end of fiscal 2014 shows a mixed debt burden, with coverage and MADS as a percentage of revenue good at 3x and 3.2%, respectively, relative to 'BBB' medians of 2.6x and 3.6%. However, debt-to-EBITDA of 4.6x is above the 'BBB' median of 3.9x.
Disclosure
Ochsner has covenanted to provide annual and quarterly disclosure through the Municipal Securities Rule Making Board's EMMA system that includes a management discussion and analysis.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 30 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985975
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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