CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the following Illinois Finance Authority revenue bonds, issued on behalf of Swedish Covenant Hospital (SCH):
--$107.1 million revenue bonds, series 2016.
The series 2016 bonds are being issued as fixed-rate, to be used to refund SCH's series 2010A and 2010C bonds outstanding, fund capital expenditures, and pay costs of issuance. The series 2016 bonds are expected to price via negotiated sale the week of Oct. 31.
In addition, Fitch affirms the following:
--$49.5 million variable-rate demand revenue bonds, series 2008A at 'BBB+';
--$92 million revenue bonds, series 2010A at 'BBB+'.
The Rating Outlook is Stable.
SECURITY
Pledge of obligated group (OG) gross revenues is expected to secure the series 2016 bonds. Series 2010 bonds are further secured by a debt service reserve and mortgage.
KEY RATING DRIVERS
MANAGEABLE DEBT BURDEN: The series 2016 bonds will not add net debt to SCH's balance sheet, and its overall debt burden is expected to continue to moderate over time. Maximum annual debt service (MADS) will decline slightly to an estimated $11.8 million, which represented 3.7% of interim 2016 operating revenues relative to the 'BBB' median of 3.6%, and was covered 2.7x from operating EBITDA relative to the 'BBB' median of 2.6x.
STEADY PROFITABILITY: SCH's operating profitability is consistent with expectations, generating a 10.1% operating EBITDA margin through the nine-month interim period ended June 30, 2016. Solid results show improved operating efficiencies and optimization of a now stabilized medical staff. Profitability is expected to decline in fiscal 2017 but remain solid for the rating level with an adequate 8% operating EBITDA margin budgeted (16% OG operating EBITDA budgeted).
HEALTHY LIQUIDITY: SCH's liquidity remains solid, though increasing capital plans over the near term may slow continued growth somewhat. At June 30, 2016, unrestricted cash and investments was $149.6 million, which translated to 185.1 days cash on hand (DCOH) 83% cash to debt, and a 12.7x cushion ratio. These are comparable to Fitch's respective 'BBB' category medians of 161.2 DCOH, 11.7x cushion, and 90.8% cash-to-debt, and have improved consistently year-over-year. Fitch believes this level of liquidity serves as an important buffer to mitigate the risks of SCH's small revenue base.
MIXED SERVICE AREA: The greater Chicago market is competitive, and SCH's service area in northern Cook County houses several sizeable competitors with comparable services and has challenging demographic and economic indicators. SCH has maintained its 12-zip code service area inpatient market position over the past few years at 18.6% share in 2015 (versus 18.9% share in 2014 and 2013). Fitch expects heightened competitive activity for a limited clinical volume base to remain an ongoing credit challenge, as well as SCH's unfavorable payor mix and exposure to fluctuations in supplemental funding.
RATING SENSITIVITIES
STEADY OPERATING RESULTS: Rating stability is supported by the expectation that Swedish Covenant Hospital (SCH) will generate operating results that are consistent with budget expectations. Specifically, management is budgeting for a consolidated operating EBIDA margin of 8% in fiscal 2017 and obligated group operating EBITDA margin of 16%. Further, balance sheet strength is expected to remain stable and commensurate with the rating.
CREDIT PROFILE
Located approximately 10 miles north of Chicago city center in the Ravenswood community, SCH is a 312-bed acute care hospital which was founded by the Evangelical Covenant Church in 1886. The sole corporate member of SCH is Covenant Ministries of Benevolence, which is a subordinate entity of the Church. Today the organization also includes the Swedish Covenant Medical Group (SCMG), the captive insurance company Swedish Covenant Insurance Company (SCIC), several ambulatory care sites, and a Foundation.
Fitch uses consolidated financials in its analysis. The hospital is the sole member of the OG, which represents approximately 89% of net revenues and 98% of total assets of the consolidated entity. Total operating revenues were $319.3 million in fiscal 2015 (audited, Sept. 30 year end).
SOLID OPERATIONS
SCH's efforts in 2014 and 2015 to implement strategic ambulatory growth, as well as to optimize its medical staff helped produce solid results in fiscal 2015 and well into 2016. Through the nine-month interim period ended June 30, 2016, SCH generated a 10.1% operating EBITDA margin and 2.7x coverage of MADS, following fiscal 2015's 11% operating EBITDA margin and 3x MADS coverage.
Capital outlays have been modest over the past three fiscal years, and are expected to grow over the near term as SCH undertakes an emergency room renovation/expansion (fall 2016-spring 2018) and implements an electronic health record system upgrade in mid-2017. While approximately $10 million in bond proceeds from the series 2016 transaction will help fund capital needs, SCH will also utilize cash flow, philanthropy, and available funds from the Tax Increment Financing (TIF) grant awarded to SCH.
CHALLENGING MARKET
SCH's service area is challenging, due to the presence of several sizeable acute care competitors as well as a difficult payor environment. SCH's level of governmental and supplemental payor exposure remains a credit concern, though Fitch notes a robust advocacy strategy has helped preserve supplemental revenues and more timely reimbursement from the state to date. SCH expects to receive approximately $27 million in Medicare disproportionate share hospital (DSH), safety net designation, Medicaid high-volume DSH, and net Illinois provider assessment payments in fiscal 2016, compared to $28 million in fiscal 2015.
Going forward, Fitch believes SCH's designation as a safety net provider coupled with its steady market position should help stabilize revenue through the near term. Further, SCH's ambulatory and service line growth strategy, its work to position its clinical enterprise for value-based reimbursement, and its robust advocacy efforts will also help support operating stability.
DEBT PROFILE
Post issuance, SCH's total debt will remain near $180 million, with a 66% fixed-to-variable mix. SCH expects to fully refund its $92 million in fixed-rate series 2010A bonds and $13 million in fixed-rate series 2010C privately placed bonds with the series 2016 issuance. MADS is estimated at $12.4 million and debt service is largely level through maturity. SCH produced 4.12x coverage and had 209.4 DCOH per its June 30 2016 covenant calculations based on the OG. SCH also has $49.5 million in series 2008A variable-rate demand bonds are supported with a letter of credit which expires Oct. 31, 2017, $8.3 million in series 2011A variable-rate privately placed debt (not rated) and a $12.6 million fixed-rate new market tax credit loan (not rated).
SCH has approximately $118.4 million in notional swaps outstanding, which effectively fix SCH's variable-rate debt mix to 90%. With a $7.5 million collateral posting threshold, SCH had posted $7.4 million in collateral as of Sept. 30, 2016.
DISCLOSURE
SCH covenants to disclose annual financial information within 150 days of each fiscal year end and quarterly information within 60 days of each fiscal quarter end to the Municipal Securities Rulemaking Board's EMMA system. Fitch reports that SCH has provided consistent disclosure with very good access to management.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun
2015)
https://www.fitchratings.com/site/re/866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013550
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013550
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https://www.fitchratings.com/regulatory
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