NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to the following bonds issued by County of Lake, Ohio:
--$72,285,000 hospital facilities refunding revenue bonds (Lake Hospital System, Inc.), series 2015.
The series 2015 bonds are expected to be issued as fixed rate debt. Proceeds will be used to refund a portion of the outstanding series 2008C bonds; provide up to $19 million in new money for capital projects, of which $8.9 million will represent self-reimbursement; and pay costs of issuance. The bonds are expected to price the week of July 20.
Additionally, Fitch has affirmed the 'A-' rating on approximately $67 million hospital facility revenue bonds series 2008C issued by Lake County, Ohio on behalf of Lake Hospital System, Inc.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by interest in receipts, which include all revenues and accounts receivables of the obligated group and special fund moneys and investment earnings of such moneys.
KEY RATING DRIVERS
STRONG CASH FLOW: Lake Health (LH) generates consistently strong operating cash flow margins, averaging 12.6% operating EBITDA over the prior four years and remaining strong in the four-month interim period through April 30, 2015 (interim period). Operating EBITDA has been consistently better than Fitch's 'A' category medians, despite soft operating performance in 2013 due to management's emphasis on reducing re-admissions and delivering care in more appropriate clinical settings.
LEADING MARKET POSITION: LH commands a leading market share in the competitive Lake County primary service area, bolstered by its expansive primary and ambulatory care network. Through the third quarter of 2014 (3Q14), LH's 52.4% market share position was nearly twice its nearest competitor, Cleveland Clinic Foundation (Cleveland Clinic), at 27.2%.
MODERATELY HIGH DEBT; CONTINGENT CAPITAL STRUCTURE: LH's debt burden is elevated. Pro forma maximum annual debt service (MADS) of $16.3 million equates to 5% of 2014 total revenues, which is high when compared to the 'A' category median of 3.1%. In 2014, LH generated coverage of MADS by EBITDA of 3.1x, below the category median of 3.8x. Pro forma debt-to-capitalization (46.6%) and debt-to-EBITDA (4.6x) ratios are higher than category medians of 3.6x and 36.3%. Additionally, LH has a high proportion (62.6%) of bank-placed debt on a pro forma basis which is largely fixed out with swaps, elevating renewal and counterparty risk.
ADEQUATE LIQUIDITY METRICS: Unrestricted cash and investments have grown to $215.5 million at the interim period from $193 million at fiscal year-end 2012. As of the interim period, LH's days cash on hand of 261 easily exceeds the 'A' category median of 199. However, cushion ratio of 13.2x and cash-to-debt of 100.8% lag the respective 'A' category medians of 17x and 131.2%. Given the funding of a $197 million equity-funded capital program through 2019, Fitch is not anticipating further liquidity growth over the near term.
RATING SENSITIVITIES
SUSTAINED CASH FLOW: Lake Health's ability to maintain strong cash flow is necessary to generate adequate debt service coverage due to its elevated leverage position and sizable capital plans. A sustained decline in cash flow, while unexpected, would likely pressure the rating. Conversely, a material and sustained improvement in cash flow and/or debt-related liquidity metrics may provide upward rating momentum.
CREDIT PROFILE
Lake Health consists of two acute care hospitals (the 119-licensed bed TriPoint Medical Center and 226-licensed bed LakeWest), various ambulatory ventures, a medical group employing over 100 practitioners, a clinically integrated physician-hospital organization, a captive insurance entity, and a foundation, located in Lake County, Ohio. Obligated group assets and revenues represented 96% and 99% of respective consolidated 2014 assets and revenues. Total system revenues were $326.9 million in 2014.
PLAN OF FINANCE
The series 2015 bonds are expected to be issued as fixed rate debt. Proceeds will be used to refund a portion of the outstanding series 2008C bonds for savings; provide up to $19 million in new money for capital projects, of which $8.9 million will represent self-reimbursement; and pay costs of issuance. The series 2008C debt service reserve fund (DSRF) will be partially released toward repayment of the series 2008C bonds and the 2015 series is not anticipated to carry a DSRF; $54.5 million of the series 2008C bonds is expected to be refunded. The bonds are expected to price the week of July 20. Pro forma MADS is estimated to be $16.3 million, including roughly $1 million in leases and guarantees, and occurs in 2021. Debt service is level through 2038. Covenants are expected to include a debt service coverage ratio of 1.1x and adequate limitations on additional debt.
STRONG CASH FLOW & ADEQUATE PROFITABILITY
LH has generated strong and consistent cash flow margins over the past four years solidly above Fitch medians. Operating EBITDA and EBITDA margins have averaged 12.6% and 14%, comparing well to Fitch's respective 'A' category medians of 9.5% and 11%. Fitch believes the strong operating performance reflects the successful execution of LH's strategy to develop a community-based integrated health network in Lake County.
Management's emphasis on reducing re-admissions and delivering care in more appropriate clinical settings over the past two years resulted in a 9.6% inpatient volume drop in 2013 from prior year and reportedly prevented 565 re-admissions. As a result, LH's operating and operating EBITDA margins fell to 0.3% and 10.7% in 2013, respectively. However, Fitch believes that re-admission management should help to position LH to benefit from value-based population health-focused reimbursement patterns over the longer term. Additionally, LH's organizational efficiency program enabled a 2.4% decrease in 2013 expenses.
Operations for 2014 were solid despite a further 4.2% drop in inpatient admissions, resulting in a 3.1% operating margin and beating a budgeted 2% gain. Improved performance has resulted from a growing primary care network and additional service lines, including the addition of a bariatric surgery and electrophysiology service lines.
LH's inpatient volumes are outperforming expectations in 2015, up 8.6% through March 2015 year on year, in comparison with an overall Northeastern Ohio market increase of 2.6%. Year-to-date performance is strong, with a 12.3% operating EBITDA margin through the interim period. The 2015 budget reflects a material decrease in charity care and bad debt and continuing payment improvements which started in 2014 driven by Medicaid expansion and insurance exchanges.
Fitch believes that LH is well positioned for future stable profitability. Fitch believes LH's clinically integrated physician hospital enterprise (IPHE), which aligns the hospital and area physicians in managing resources and clinical care, should allow LH to successfully navigate the expected move to value-based reimbursement models. LH is planning an aggressive recruitment schedule through 2017, with a targeted increases in physicians, advanced practice nurses, and physician assistants.
LH's focus on efficiencies since 2011 also positions it well: the program has decreased staffing by 8% since 2012 year end, to 2,059 as of the interim period, without a drop in quality. Management attributes $7.1 million in direct savings from its lean operational efficiency program and a 57% improvement in emergency room patient satisfaction.
LEADING SHARE IN COMPETITIVE MARKET
LH commands a leading inpatient market share in the competitive Lake County primary service area, northeast of Cleveland, which has continued to consolidate over the past two years. Through 3Q14, LH's 52.4% market share position was nearly twice its nearest competitor, Cleveland Clinic, at 27.2%. Lake County has a favorable economic profile, with median income above the state average and a low unemployment rate.
LH has a dominant market share in Lake County, its primary service area, differentiating itself as the low-cost provider in the county in contrast to its nearest competitors, Cleveland Clinic and University Hospitals Health System. LH's market position is solidified by its varied clinical partnerships and good relationships with commercial health plans. This results in sustained demand as evidenced by LH's participation in nearly all contracts, including pay for performance agreements with revenue upside. Inpatient market share has slipped to 52.4% in 3Q14 from 55.5% in 2012 over the past two years, which management attributes in part to its emphasis on reducing re-admissions, growth in primary care activity, and lower acuity relative to other market providers.
SUBSTANTIAL CAPITAL PLANS MAY SUPPRESS LONG-TERM LIQUIDITY GROWTH
LH is undertaking a five-year, $222 million capital investment program, which will be almost entirely financed from operating cash flows. LH will spend approximately $138 million on facility and strategy initiatives, $44 million on information technology, and $40 million on routine replacement. LH's most notable project is approximately $50 million for renovations at West Medical Center. Fitch believes that LH has adequate flexibility in its plans to maintain strong coverage should cash flow dampen, but believes that above-average capital investment is necessary to preserve LH's position in the competitive northeast Ohio market.
LH's liquidity is adequate for the rating, its pro forma debt burden, and management's projections. DCOH was 261 as of April 30, 2015, easily exceeding the 'A' category median of 199, though pro forma cushion and cash-to-debt ratios were below medians.
HIGH LEVERAGE; BANK-EXPOSED DEBT PROFILE
LH's elevated debt burden, high exposure to bank-placed debt, and interest rate swaps are a credit concern. Pro forma MADS of $16.3 million equals a high 5% of 2014 revenues and exceeds the 'A' category median of 3.1%. Debt-to-capitalization at Dec. 31, 2014 of 44.5% exceeds the 'A' category median of 36.3%. Despite LH's strong profitability, coverage of MADS by operating EBITDA is light at 2.0x and 2.5x in 2013 and 2014, respectively, below Fitch's 'A' category median of 3.1x, and remained flat at 2.5x in the interim period.
LH is exposed to a high level of renewal risk in its capital structure, with 62.6% or $142 million of pro forma debt directly purchased. The series 2012A, B, & C bonds have renewal dates in 2019, 2022 and 2017, respectively, somewhat mitigating concerns around renewal risk. All bank placements are held by JPMorgan Chase & Co. (parent rated 'A+/F1'/Stable Outlook by Fitch), increasing counterparty risk. Additionally, the bank placements have more restrictive covenants, with a 1.25x coverage covenant and a 75 DCOH covenant and feature cross-default provisions. Positively, cash-to-bank-debt ratio is solid at 151%.
Pro forma debt structure is 93% fixed or synthetically fixed. LH has three fixed-payer swaps with a notional amount of approximately $126 million, 77% of which has PNC as counterparty (parent rated 'A+/F1'/Stable Outlook by Fitch) and 23% with JPMorgan Chase & Co. The aggregate mark-to-market valuation of the swaps was negative $45.9 million, requiring a $19.4 million collateral posting as of April 30, 2015.
DISCLOSURE
LH provides continuing disclosure on a quarterly basis to the Security and Exchange Commission's EMMA system within 45 days of quarter-end. The disclosure includes an unaudited balance sheet, statement of operations, and selected operating statistics. LH also provides annual disclosure 150 days after the close of its fiscal year.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Not-for-Profit Hospitals and Health Systems Rating Criteria (pub. 23 Sep 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=779548
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986897
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986897
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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