NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA' rating on the following bonds issued by the Kentucky Economic Development Finance Authority on behalf of St. Elizabeth Medical Center (SEMC):
--$89,000,000 fixed rate bonds, series 2009A;
--$31,250,000 variable rate bonds, series 2009B.
The series 2009B bonds are supported by a standby bond purchase agreement from US Bank. The 'AA' rating is an underlying rating.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a revenue pledge of the hospital and a negative mortgage pledge.
KEY RATING DRIVERS
MARKET DOMINANCE: SEMC continues to be supported by its excellent operating platform as the sole acute care provider in its primary service area of Northern Kentucky with a network of facilities and a highly integrated physician network. SEMC's market share has been consistently above 80% in its primary service area (PSA), where 86.4% of 2014 admissions were generated.
EXCELLENT FINANCIAL PROFILE: The 'AA' rating reflects outstanding financial results supported by the strong operating platform. In the fiscal year ended Dec. 31, 2014, nearly all key metrics measuring profitability, liquidity, and debt well exceeded Fitch's 'AA' medians.
HEIGHTENED BUT MANAGEABLE CAPITAL PLANS: Capital spending in the next five years is budgeted at 156% of depreciation expense. Given SEMC's strong cash flow and balance sheet, Fitch believes there is plenty of room at this rating level to sufficiently fund the expenditures through either cash flow or debt issuance.
RATING SENSITIVITIES
STABILITY EXPECTED: Given the organization's market position, operating platform, history of strong cash flow generation, projected profitability, and manageable capital plans, Fitch expects the overall financial position to be maintained in support of the 'AA' rating. Due to the limited revenue diversity operating in a single market, upward rating pressure is unlikely in the foreseeable future.
CREDIT PROFILE
Saint Elizabeth Medical Center, Inc. consists of Saint Elizabeth Hospitals, St. Elizabeth Physicians, and other health care related entities. The organization has facilities in Covington, Edgewood, Florence, Fort Thomas, Falmouth and Williamstown, KY, with additional outpatient and ancillary services throughout Northern Kentucky. SEMC operates six major facilities with approximately 1,200 licensed beds and more than 860 physicians on staff in over 100 primary care and specialty office locations in Kentucky, Indiana, and Ohio. Total operating revenue in fiscal 2014 was $1.1 billion.
STRONG MARKET LEADERSHIP
SEMC is the dominant regional provider of acute care services in Northern Kentucky with an inpatient market share of over 81%, which has held steadily over 80% since the acquisition of its main competitor in 2008. SEMC employs approximately 95% of the primary care physicians in its service area and has an excellent reputation for quality. As a result, the hospital is well positioned to compete in the greater Cincinnati/Northern Kentucky market which includes a number of strong hospital systems.
SEMC's integrated clinical platform also positions the organization to pursue population health management and alternative forms of reimbursement models. Fitch believes the evolution of value-based reimbursement, combined with the Kentucky Certificate of Need (CON) restrictions, will continue to protect SEMC's operating platform and allow for continued market dominance.
ROBUST PROFITABILITY
Supported by its strong operating platform and Medicaid expansion, profitability was excellent with operating and operating EBITDA margins of 7.7% and 13.8%, respectively, in fiscal 2014. Interim results through the six months ended June 30, 2015 were similarly strong with operating and operating EBITDA margins of 8.7% and 14.9%. Management expects this trend to continue through the year-end, and believes SEMC will exceed the budgeted operating margin of 5.1%, which Fitch also believes is likely.
CONTINUED LIQUIDITY GROWTH
Unrestricted cash and investments continued to grow, and totaled $777.9 million at June 30, 2015, up 36% from Fitch's last review two years ago. Days cash on hand of 303, cushion ratio of 83x, and 647% cash-to-debt compare very well against the 'AA' medians of 289 days, 27x, and 201.7%.
Capital spending is expected to rise to 156% of depreciation over the next five years. Fitch believes future capital plans are manageable whether SEMC chooses to spend cash or issue debt to fund projects.
DEBT PROFILE
At June 30, 2015, SEMC had $120 million in long-term debt outstanding, consisting of $89 million of series 2009A fixed rate bonds and $31 million series 2009B variable rate bonds secured by a standby bond purchase agreement with US Bank (expiring September 2018). Debt mix of 74% fixed and 26% floating is relatively conservative and is viewed favorably.
SEMC's leverage and coverage metrics are very strong, due to the light debt burden. In fiscal 2014, maximum annual debt service (MADS) as a percentage of revenue was 0.9% and debt-to-capitalization was 12.8% compared to the medians of 2.4% and 28.1%. Due to strong cash flow and low MADS, coverage was very good at 17.9x in 2014 and 22.9x for the six-month interim period.
SEMC has a floating- to fixed-rate swap with a total notional value of $32.5 million with Merrill Lynch as counterparty. The mark to market for the swaps was negative $4.1 million as of June 30, 2015. SEMC is not required to post collateral at the current rating level.
DISCLOSURE
The hospital has covenanted to disclose annual results within 180 days of year-end and quarterly results within 60 days of quarter-end to bondholders through the Municipal Securities Rulemaking Board EMMA system.
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. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990241
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990241
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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