SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to the approximately $175 million Illinois Finance Authority revenue bonds series 2016A&B issued on behalf of University of Chicago Medical Center (UCMC). In addition, Fitch has affirmed the 'AA-' long-term rating on UCMC's outstanding debt, as listed at the end of the press release.
The Rating Outlook is Stable.
The series 2016A&B bonds will be fixed rate and bond proceeds will be used to refund the series 2009A&B (partial refunding), 2009C and 2011C bonds. The series 2016A&B bonds are expected to price on Oct. 19.
Debt payments are secured by a pledge of unrestricted receivables.
KEY RATING DRIVERS
INTEGRAL RELATIONSHIP WITH THE UNIVERSITY: UCMC plays a fundamental role in the highly integrated clinical and research platform between UCMC and the University of Chicago's (the university; revenue bonds rated 'AA+') Biological Sciences Division, which includes the Pritzker School of Medicine. UCMC has consistently provided transfers to the university to support the academic programs in biology and medicine, which suppresses liquidity growth.
SOLID MARKET POSITION IN COMPETITIVE SERVICE AREA: UCMC is among the leading academic medical centers in the U.S. and maintains a strong reputation for clinical excellence in the provision of advanced high-acuity services. Its relationship with the university and focus on research differentiates it in a highly competitive and consolidating market.
STRATEGIC GROWTH: UCMC is in the process of growing its network and provider base and various initiatives are underway including partnering and affiliating with community hospitals, expanding its ambulatory presence, and aligning with community physicians.
CONSISTENT STRONG PROFITABILITY: Operating cash flow has remained strong driven by good volume growth and continued focus on expenses. Operating EBITDA margin was 14% in fiscal 2016 (June 30 year-end) and 13.1% in fiscal 2015.
CONTINUED HEALTHY CAPITAL SPENDING: Strong volume growth and its strategic growth plan results in ongoing capital spending at almost 2x depreciation expense a year. The total 10-year capital plan is $1.56 billion and includes a new and expanded emergency room, the addition of 188 beds when an existing facility (Mitchell Hospital) is renovated and modernized, and growth in outpatient facilities. Only $200 million of the plan will be funded by additional debt and the rest will be from cash flow.
DECLINE IN LIQUIDITY: Liquidity has declined at June 30, 2016 due to slow payments from Illinois Medicaid, high capital spending, and increased swap collateral posting. Days cash on hand and cash to debt dropped to 228.9 days and 103.3%, respectively from 305.3 and 131% the prior year.
HIGH DEBT BURDEN: UCMC's debt burden is high and most debt metrics compare unfavorably to the 'AA' category medians.
CONSISTENT FINANCIAL PROFILE: Fitch expects The University of Chicago Medical Center to maintain its consistent strong operating performance as it executes its strategic growth plans, which will require additional debt and ongoing capital spending. With the softening of liquidity metrics, there is less cushion at the current rating level for a deterioration in operating performance and profitability.
UCMC currently operates 641 beds in three hospitals including the Center for Care and Discovery (CCD) , Bernard A. Mitchell Hospital (adult facility), and Comer Children's Hospital, which are all located in Chicago on the main campus of the university. Total revenue for fiscal 2016 was $1.6 billion.
Relationship with the University
The 'AA-' rating reflects UCMC's excellence and reputation in advanced high-acuity clinical services, the integral role of UCMC within the university, and its solid financial profile. Located on the main campus of the university, UCMC is the principal teaching affiliate of the university's Pritzker School of Medicine. UCMC provides a comprehensive array of services and its focus and clinical excellence is in quaternary care. The university is the sole corporate member of UCMC.
UCMC's strategic growth plans include growing its geographic presence and establishing an ambulatory and community physician affiliation strategy. UCMC finalized the merger with Ingalls Health System (Ingalls) and UCMC is now the sole corporate member of Ingalls effective Sept. 30, 2016. Ingalls is a community hospital in south suburban Chicago who was looking for a partner. Ingalls has a strong balance sheet but weak operating performance and its debt will remain separately obligated. UCMC has created a new organizational structure as it expands regionally and a new division, Community Health and Hospital Division (CHHD), was created. CHHD has a separate nine-member board (five from UCMC and four from Ingalls).
UCMC has joint ventures with other community hospitals in specific service lines, such as cancer with Silver Cross. These relationships continue to expand and a letter of intent was signed with Little Company of Mary related to a similar structure. The Silver Cross joint venture has been very successful with volume growth exceeding projections and the ability to provide care locally and in a lower cost setting.
Historically, UCMC's medical staff was all faculty physicians. Recently, UCMC formed a clinically integrated network (University of Chicago Medicine Care Network) to align with community physicians. The University of Chicago Medicine Care Network will include employed and affiliated non-faculty physicians. This physician base will be key to its ambulatory growth strategy, and Fitch will monitor the growth and impact on financial performance.
UCMC has plans to grow its ambulatory presence and add multispecialty outpatient clinics in Orland Park and South Loop, which are expected to be staffed by the faculty and University of Chicago Medicine Care Network physicians. These clinics are expected to open in late 2016.
Strong Profitability and Volume Growth
Profitability has been consistently strong and aided by good volume growth and continued focus on lean initiatives. Multiple initiatives are underway regarding supply chain, pharmacy operations, lab operations and labor productivity. UCMC's operating margin was 6.6% in fiscal 2016 compared to 5.5% in fiscal 2015, 4.8% in fiscal 2014, and 5.9% in fiscal 2013. UCMC has a financial target of maintaining operating margins above 4.5%.
Admissions have increased at a CAGR of 6.2% from FY 2011-2015 compared to a decline in the market of 2.1% over the same time period. Volume growth has also been strong in key specialty service lines. The growth has been due to physician relationships, better throughput in the emergency department, and added capacity (additional 49 beds since fiscal 2013).
Ongoing Capital Spending
UCMC completed a new hospital pavilion project (CCD) that opened in February 2013 and cost $700 million. The CCD was initially expected to move patient care out of the older hospital (Mitchell); however, due to capacity constraints, UCMC received approval to add back a net of 188 beds at Mitchell. Mitchell will need to be renovated and modernized and this will be done over a four- to five-year period at a cost of $187 million. Management also expects to consolidate cancer services at Mitchell. Another major project is a new and expanded emergency department, which is expected to open by early 2018. The cost of the ER is $36 million, and UCMC is also applying for Level I trauma designation.
The total 10-year capital plan is $1.52 billion. Since the majority of the plan will be funded from cash flow, sustaining strong operating cash flow will be key to maintaining the rating. UCMC expects to issue $200 million of additional debt to fund a portion of the capital plan; however, this is expected to be issued over the next four to five years, which Fitch views favorably given UCMC's current high debt burden. Of the $200 million, $36 million is expected to be issued within the next year.
Unrestricted cash and investments totaled $892 million at June 30, 2016 compared to $1.15 billion at June 30, 2015. The decline reflects higher capital spending, continued slow payments from the State of Illinois on Medicaid receivables, and swap collateral posting. At June 30, 2016, UCMC was posting $36.7 million in collateral and days in AR have increased 16 days (net accounts receivable totaled $288.4 million from $209.7 million the prior year). Capital spending was funded from cash flow and totaled $230.7 million (2.6x depreciation expense) in fiscal 2016 compared to $109.5 million (1.3x depreciation expense) in fiscal 2015.
Liquidity growth is also pressured due to ongoing transfers to the university in support of the School of Medicine, and transfers have been around $70 million a year the last few years.
High Debt Burden
A credit concern is UCMC's above-average debt burden. Current MADS is $52.7 million and estimated to drop to $51 million with the refinancing. Pro forma MADS accounted for 3.2% of total revenue in fiscal 2016, which has declined from 4% in fiscal 2012 but compares unfavorably to the 'AA' category median of 2.2%. Debt service coverage calculations do not include the transfers to the university, and debt service coverage has been adequate at 4.8x in fiscal 2016, 5.2x in fiscal 2015 and 4.5x in fiscal 2014 (on pro forma MADS).
Somewhat Aggressive Debt Portfolio
Total outstanding debt at June 30, 2016 was $853 million with 44% underlying fixed-rate and 56% underlying variable-rate ($325 million variable-rate demand bonds, $74 million indexed floating direct bank loan, $76 million commercial paper). UCMC's letter of credit exposure is diversified among five banks, and the expiration dates range from 2017 to 2021. UCMC's cash-to-putable debt is solid at 2.2x. The covenants under the bank and direct bank loan agreements are more restrictive than the master trust indenture covenants.
UCMC has a $325 million floating-to-fixed rate swap with JPMorgan and Wells Fargo. Including the swaps, UCMC's debt mix is 83% fixed rate. Collateral posting requirements are at a $50 million threshold for the JPMorgan swap at UCMC's current rating level, and the Wells Fargo swap does not have collateral posting requirements unless UCMC's rating is downgraded to 'A+' or lower. As of June 30, 2016, UCMC was posting $36.7 million of collateral related to the JPMorgan swap.
UCMC covenants to provide annual audited financials within 150 days of fiscal year end and unaudited quarterly financials for the first three fiscal quarters within 60 days of quarter end.
--$64,615,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue bonds series 2012A
--$90,000,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue bonds series 2011C
--$46,250,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2011B (LOC: Sumitomo Mitsui Banking Corporation)
University of Chicago Medical Center bank bonds series 2011B
--$46,250,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2011A (LOC: Bank of America, N.A.)
--$46,250,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2010B (LOC: Wells Fargo Bank, N.A.)
--$46,250,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2010A (LOC: Bank of America, N.A.)
--$70,000,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2009 D-1, D-2 (LOC: PNC Bank)
University of Chicago Medical Center bank bonds series 2009D-1, D-2
--$70,000,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2009 E-1 and E-2 (LOC: Wells Fargo Bank, N.A.)
--$60,900,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue bonds series 2009C
--$128,890,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue refunding bonds series 2009A&B
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
Dodd-Frank Rating Information Disclosure Form
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