NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating for the following City of Shakopee, Minnesota bonds issued on behalf of St. Francis Regional Medical Center (St. Francis):
--$40.3 million health care revenue bonds, series 2014.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by gross revenues of the obligated group.
KEY RATING DRIVERS
CONSISTENTLY STRONG FINANCIAL PERFORMANCE: St. Francis has continued to generate strong operating profitability that far exceeds the 'A' category medians with operating margins of 10.6% in fiscal 2015 and 7.8% in fiscal 2014, respectively.
ROBUST DEBT SERVICE COVERAGE: Operating cash flows of 18.3% and 16.5% in fiscal 2015 and 2014, respectively, have yielded ample debt service coverage, which Fitch views as a key credit strength. Maximum annual debt service (MADS) coverage was 7.3x in fiscal 2015 (ended Dec. 31, 2015).
BENEFICIAL OWNERSHIP AND MANAGEMENT STRUCTURE: St. Francis benefits from its ownership structure with Allina Health (rated 'AA-'; Outlook Stable) and HealthPartners each owning a 46.5% share, and a 6.9% ownership from Critical Access Group (a subsidiary of Essentia Health rated 'A'; Outlook Stable). Allina has the responsibility for the operations at St. Francis, and this management and ownership structure provides St. Francis with administrative support, purchasing, strategic planning and access to physicians.
FLAT LIQUIDITY: Despite the remarkable cash flow generation, days cash on hand (DCOH) has remained relatively flat as this metric is managed to approximately 175 days in order to make annual cash distributions to St. Francis' joint owners. DCOH was 179.3 days at fiscal year-end 2015, which is slightly lower than the median of 205.3 days for the 'A' category but adequate for the rating level.
COMPETITIVE SERVICE AREA WITH FAVORABLE DEMOGRAPHICS: St. Francis operates in a somewhat competitive market because of its proximity to the Twin Cities. Some of the volume in this service area goes to Allina or HealthPartners facilities, but there is also competition from Fairview Health Services. This concern is mitigated by St. Francis' solid market position as the only hospital in its primary service area and the favorable demographics in this market.
RATING SENSITIVITIES
STABILITY EXPECTED: Based on St. Francis' steady operating performance and the level of annual distributions to its owners, Fitch does not expect any material changes to its financial profile.
IMPROVING CASH TO DEBT POSITION: As debt continues to moderate in future periods and cash to debt improves to over 100%, there may be positive credit pressure if St. Francis continues to operate at the current profitability levels.
CREDIT PROFILE
St. Francis operates an 85-bed acute care hospital (53-staffed beds) in Shakopee, MN, approximately 23 miles southwest of downtown Minneapolis. Total revenues for fiscal 2015 were $137.2 million. St. Francis is jointly owned by Allina Health System (Allina), HealthPartners and Critical Access Group. Fitch views the benefits of St. Francis' relationship with the joint members as a credit positive. Although one of Fitch's main credit concerns is St. Francis' small revenue base, this is partially mitigated by its ownership structure, which includes benefits such as access to a strong physician network and ability to utilize Allina's electronic medical record platform as well as participate in Allina's treasury program. Allina is responsible for managing day-to-day operations, operating and capital budgeting, strategic planning, and cash management.
STEADY PROFITABLE RESULTS
St. Francis' operations have generated operating margins above 7% in each year since 2010. The strong financial performance is the result of a number of factors, including the benefits from the management oversight and administrative assistance provided by Allina, performance improvement strategies, low capital needs, a healthy payor mix with low Medicare, and the advantages of physician alignment without the expenses related to physician employment. St. Francis does not currently employ any physicians but approximately 38% of its active medical staff is employed by Allina or HealthPartners.
LIQUIDITY METRICS TO REMAIN STABLE
For fiscal 2015, St. Francis reported DCOH of 179.3 and cash to debt of 93.9%, which is below the 'A' rating median of 143.7%. These metrics have been relatively stable year to year as DCOH is held at approximately 175 days after allocating funds for capital and debt service and paying the annual distribution to the joint owners. Since 2013, and pursuant to a letter of understanding between the owners, Critical Access Group's ownership will be further reduced from the original one-third membership interest to five percent. To that end, St. Francis made an $8.5 million distribution in 2013, $15 million in 2014 and $6.8 million in 2015 to Critical Access Group to reduce that group's current ownership to 6.9%. There were no distributions to Allina or HealthPartners during the three year period while Critical Access Group's ownership interest was being reduced.
Capital spending continues to be moderate and anticipated to remain just below the depreciation level of $7.5 million in 2016 and 2017. There are no significant capital needs as the hospital is relatively new and the average age of plant is 10.2 years.
FAVORABLE BUT COMPETITIVE SERVICE AREA
St. Francis experienced a modest increase in market share in 2015 to 34.3% as a result of inpatient growth from an improved emphasis by St. Francis and its owners on keeping certain clinical services local. Fitch expects that 2016, similar to prior years, will be relatively flat on the inpatient side but will see modest outpatient growth as St. Francis has also been focusing on improving its ambulatory presence.
The main competition for St. Francis comes from Fairview Health Services, which holds a 22.6% market share across three hospitals. St. Francis' primary service area is characterized by favorable demographics including population growth, low unemployment and above-average median household income.
CONSERVATIVE DEBT PROFILE
St. Francis' has a conservative and manageable debt profile with only $710,000 remaining in letter of credit-backed variable rate demand debt that is maturing in October 2016. Total debt outstanding of $60.2 million at fiscal-year end 2015 includes $14.8 million for a financing obligation related to a medical office building (MOB) that is recorded on St. Francis' balance sheet. The MOB was financed through a joint venture in which St. Francis is a part owner and the debt service is paid through the lease income from the MOB. MADS of $3.5 million does not include the financing obligation of approximately $800,000 in annual rental payments made to the medical office building. Allina and St. Francis have master leases on the MOB.
DISCLOSURE
St. Francis covenants to disclose annual and quarterly information to EMMA. Annual and quarterly financial statements can also be found on EMMA. Quarterly statements include a balance sheet, income statement, utilization statistics, cash flow statement and 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. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005235
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