Fitch Affirms Aurora Health Care's (WI) Revs at 'A'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating for the expected re-marketing of:
--$65 million Wisconsin Health and Educational Facilities Authority (WHEFA) refunding revenue bonds, series 2009B, issued on behalf of Aurora Health Care
In addition, Fitch affirms the 'A' rating for approximately $1.3 billion in other revenue bonds issued through WHEFA on behalf of Aurora Health Care, Inc. (AHC).
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues, a first mortgage lien, and a debt service reserve fund.
KEY RATING DRIVERS
STEADY OPERATING PERFORMANCE: AHC's profitability margins have been very consistent over the past four years, with 10.4% operating EBITDA and 11.6% EBITDA achieved in 2013. Despite its large base of over 1,500 employed physicians, AHC has generated operating and operating EBITDA margins that are consistent with rating category medians. Stable performance is expected for 2014.
LIMITED OPERATING RISK: The 'A' rating incorporates AHC's lower operating risk profile resulting from its leading market share position and large base of employed physicians which allows for greater variance when compared to Fitch's median 'A' category financial ratios.
IMPROVING LIQUIDITY METRICS: As expected, AHC's liquidity profile improved moderately to $1.3 billion at fiscal 2013 (Dec. 31 year-end) equal to 125.2 days of cash on hand (DCOH) and 80% cash to debt; improved from 106.3 DCOH and 64.3% cash to debt at fiscal 2012. While AHC's liquidity metrics remain weak relative to Fitch's 'A' category medians, further incremental improvement over the near term is expected via steady cash flow. Fitch also notes that a significant improvement in AHC's pension liability further reduces balance sheet risk going forward.
MANAGEABLE LEVERAGE: With the remarketing of its $65 million of series 2009B-1 to a three-year-term mode (Aug. 15, 2017), AHC maintains a manageable 33.6% variable rate debt mix. While AHC's overall debt burden remains somewhat elevated, leverage has moderated significantly over the past four years. AHC has maintained steady coverage of maximum annual debt service (MADS), which was 3.3x by operating EBITDA in 2013, equal to Fitch's 'A' category median. MADS as a percent of revenue was 3.1% in 2013, equal to Fitch's 'A' category median, and down significantly from 3.8% in 2008.
LEADING MARKET POSITION: AHC's market leading position and geographic reach allow it to mitigate some of the economic pressures of its service by enabling good physician recruitment, steady volumes, and solid payor contracts. In 2013 AHC maintained a leading 38.2% share against the Wheaton Franciscan System with 20.9%, and Froedtert & Community Health System (rated 'AA-'/Stable Outlook by Fitch) with 18.4%.
SUSTAINED CASH FLOW: Fitch expects AHC to maintain its current level of operating profitability, which should provide sufficient cash flow to finance its capital needs and support balance sheet levels.
AHC is an integrated healthcare system consisting of 14 acute care hospitals and one psychiatric hospital (3,145 licensed beds), over 1,500 employed physicians, 153 clinic sites, and approximately 70 retail pharmacies located in the eastern third of Wisconsin. In 2013 (fiscal year ended Dec. 31) AHC had total operating revenues of $4.25 billion.
Fitch's analysis is based on the consolidated system. Through March 31, 2014, total revenue of the Obligated Group (OG) was $713 million, representing approximately 70.4% of the consolidated total revenue of the system. At March 31, 2014, the total assets of the OG represented 84% of consolidated assets.
STEADY CASH FLOW
Despite its large base of employed physicians, AHC has been able to generate operating and operating EBITDA margins consistent with the rating category. In fiscal 2013, AHC continued its solid operating profitability trend with operating and net EBITDA margins of 10.4% and 11.6%, respectively. Through the first quarter of 2014, AHC had a $23 million physician accrual which inflates operating income positively, as well as some old receivables (reserved for in 2013), which will be adjusted at fiscal year-end. As such, AHC is budgeting for a stable operating EBITDA margin for 2014, below the 14% generated through the March interim period.
BALANCE SHEET IMPROVEMENT
Overall, AHC's liquidity metrics are light for the rating category, which management has worked to offset via efforts to reduce balance sheet risk within its capital structure and treasury. Fitch notes that liquidity at March 31, 2014 (113.7 DCOH) was impacted by AHC's annual pension contribution, following an improved year-end balance in 2013 of 125.2 DCOH. Fitch believes liquidity should continue to demonstrate modest improvement over time as AHC's capital needs wane and pension expense declines.
Management expects steady cash levels in 2014 as capital needs remain manageable and steady cash flow is maintained. Capital spending below $300 million in 2014 and beyond should allow for nominal balance sheet replenishment at current operating cash flow levels over the next few years.
LEVERAGE IS MANAGEABLE
Despite elevated debt levels for the category, AHC's steady operating performance results in consistent debt service coverage that is adequate for the rating. Debt-to-capitalization fell to 55.3% in 2013 from 74.5% in 2008, and coverage of MADS at 3.8x by EBITDA in 2013 is commensurate for the rating level. Fitch notes that AHC's covenant calculation was 4.1x in 2013, which is based on OG performance and was well ahead of the 1.0x requirement.
On behalf of AHC, Bank of America Merrill Lynch (BAML) will re-market $65 million in series 2009B-1 bonds to a new long-term rate mode, with a mandatory tender at Aug. 15, 2017. This will stretch the current mandatory put out by three years. Pro forma MADS is measured at $131.7 million, which represents a small decrease from $132.3 million under current measurement.
AHC has worked to diversify its bank and letter of credit (LOC) renewal risk over the prior few years. Currently, AHC has three different LOC banks extending commitments into 2015. Fitch views AHC's counterparty diversification positively, and its overall variable rate debt exposure is manageable (33%) with cash-to-demand debt of 255.5% as of March 31, 2014. AHC has one swap outstanding, with a notional value of $91.1 million, and a net fair value of $2.7 million as of March 31, 2014. AHC is not currently required to post collateral, and the swap expires in February 2018.
AHC covenants to provide annual and quarterly disclosure for the first three quarters of each fiscal year through the Municipal Securities Rulemaking Board's EMMA system. The content of AHC's quarterly disclosure is viewed favorably and includes a management discussion, a balance sheet, an income statement, a cash flow statement, and utilization statistics.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria