Fitch Affirms Monroe Clinic (WI) Revs at 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A-' rating on $43,285,000 of series 2009 development revenue bonds issued by the Redevelopment Authority of the City of Monroe, Wisconsin on behalf of The Monroe Clinic (the Clinic).

The Clinic also has $32.1 million in series 2012A and 2012B private placements outstanding, which Fitch does not rate but are incorporated into the overall analysis.

SECURITY

The bonds are secured by a gross revenue pledge and a debt service reserve fund.

KEY RATING DRIVERS

STRONG OPERATING PLATFORM: The Clinic's highly integrated physician model is a leading driver of operating stability, supporting its dominant market position which has been well protected in its primary service area (PSA).

SOLID LIQUIDITY GROWTH: Unrestricted cash and investments grew consistently over the last three years after a $25 million equity spend on a replacement hospital in 2011. Liquidity ratios at June 30, 2015 were consistent with Fitch's 'A' medians.

ELEVATED CAPITAL PLANS: Capital expenditures are expected to be heightened over the next five years as the Clinic addresses the mostly vacant old hospital building. Master facilities planning is complete, with planned capital spend averaging 130% of depreciation from 2016-2019.

SOUND PROFITABILITY: Fiscal 2014 profitability was solid, after a weaker 2013 affected by unusually high charity care and employee healthcare costs. Profitability metrics are sound for the rating category and generate sufficient cash flows to adequately cover debt service.

MODERATING DEBT BURDEN: Leverage metrics have improved since 2009, and are now at levels consistent with the 'A' medians. The Clinic has no plans to issue new debt.

RATING SENSITIVITIES

OPERATING STABILITY EXPECTED: Given The Monroe Clinic's (the Clinic) strong market position and integrated delivery platform, as well as the benefits from the new facility, Fitch expects overall operating and financial stability to be maintained for the foreseeable future.

GROWTH IN LIQUIDITY: Continued improvement in the Clinic's liquidity metrics leading to levels in excess of the 'A' medians would lead to positive rating pressure.

CREDIT PROFILE

Located 40 miles south of Madison and 110 miles southwest of Milwaukee in Monroe, WI, The Monroe Clinic is a full-service 95-licensed bed (58 operated) hospital and integrated physician clinic with 10 satellite clinics and a medical staff or 128 active physicians. The Clinic had total revenues of $172.9 million for the fiscal year ended Dec. 31, 2014.

Excellent Operating Platform

The Clinic has effectively used the employed physician model for over two decades, resulting in sophisticated levels of integration across the organization. This allows for active physician engagement in quality, financial, and satisfaction initiatives from the board level to day-to-day operations. As an early adopter of EPIC electronic health records, progress and utilization of electronic medical records is very good, particularly compared to other providers of similar size.

Fitch believes the integrated clinical delivery system and IT platform well-position the organization for population health management and value-based reimbursement models, despite its relatively limited geographical coverage and patient base compared to other providers in the 'A' rating category. Although the Clinic is more susceptible to operating and financial volatility as a smaller provider with a limited revenue base, its market leadership in its primary service area mitigates some concerns. In 2014, inpatient and outpatient market shares were very good at 46.2% and 48.6%, respectively. Additionally, the competitive environment in the area is favorable, as the Clinic has demonstrated market leadership for a long time and is well aligned with the next largest regional provider, the University of Wisconsin Hospital, which holds an 18.1% inpatient and 26.1% outpatient market share.

Sound Profitability

Supported by its solid operating platform, profitability has been good over the last three years, with average operating and operating EBITDA margins of 3.3% and 12%, respectively. Revenues were aided by an improvement in payor mix resulting from the expansion of insurance coverage under the Affordable Card Act and general economic improvement. Fitch also views the Clinic's little to no exposure to supplemental funding programs favorably. Management remains focused on LEAN initiatives and in providing quality care at a low cost. The 2015 budget targets a 2.4% operating margin, which Fitch believes is achievable.

Continued Liquidity Growth

Unrestricted cash and investments totaled $107.5 million at June 30, 2015, representing solid growth since the completion of the new tower in 2012. Days cash on hand of 253, cushion ratio of 16.2x, and 143% cash-to-debt were in line with Fitch's respective 'A' medians of 205 days, 18.5x, and 144%.

Slowdown in liquidity growth is anticipated as capital spending ramps up over the next five years while the organization executes on its master facility plan. Key objectives are to address the old hospital building and refresh the main clinic building. Capital expenditures are projected to average 130% of depreciation from 2016-2019 and be funded by cash flow and equity. No new debt is anticipated. Given projected profitability and scheduled debt amortization, overall balance sheet metrics should continue to improve in the near term.

DEBT PROFILE

At June 30, 2015, long-term debt totaled $75.4 million, consisting of the series 2009 bonds, 2012A direct purchase loan with JPMorgan Chase Bank, and 2012B direct purchase loan with Associated Bank. The series 2012A&B loans were used to current refund the series 1999 bonds and advance refund a portion of the 2009 bonds for debt service savings. Interest rate is fixed for both series, with the terms extending to the final maturity of the bonds. All debt is fixed, and the Clinic does not have any swaps outstanding.

Since the issuance of series 2009 bonds to fund the construction project, leverage metrics have moderated considerably with maximum annual debt service (MADS) equating to 3.8% of revenues in 2014 versus 4.5% in 2011, and debt-to-capitalization of 32.6% in 2014 compared to 39.1% in 2011. MADS coverage is in line with the rating at 4.2x in 2014 and 3.4x in 2013. No new debt is anticipated for the near to medium term.

DISCLOSURE

The Clinic covenants to provide annual disclosure within 180 days of year-end and quarterly disclosure within 45 days of quarter-end to bondholders.

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=990390

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990390

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA
Director
+1-212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Paul Rizzo
Director
+1 212-612-7875
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA
Director
+1-212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Paul Rizzo
Director
+1 212-612-7875
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com