Fitch Rates Resurrection Health Care (IL) 2009 Bonds 'BBB+' & Downgrades Outstanding; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Resurrection Health Care's expected issuance of approximately $114.7 million of series 2009 refunding revenue bonds through the Illinois Finance Authority. In addition, Fitch downgrades to 'BBB+' from 'A-' the ratings on Resurrection Health Care's (RHC), Illinois approximately $585.1 million of outstanding bonds.

The Rating Outlook is revised to Stable from Negative.

The series 2009 bonds are expected to be issued as fixed rate debt. Proceeds will be used to refund RHC's series 2008A&B variable rate demand bonds, fund a debt service reserve account and pay associated costs of issuance. The series 2009 are expected to be priced the week of Dec. 7 through negotiated sale.

The downgrade reflects RHC's sizable operating losses in fiscal 2008 and 2009, an erosion in inpatient volumes and payor mix and a sizable unfunded pension liability. In fiscal years 2008 and 2009, RHC posted operating losses of $81.1 million (-4.8% operating margin) and $68.7 million (-4% operating margin). However, cash flow from operations of $105.4 million (6.1% cash flow margin) and $90.1 million (5.3% cash flow margin) indicate light but adequate cash generation from operations. The erosion in RHC's inpatient volumes and payor mix has continued since Fitch's last rating action reflecting the service area demographics of the northwest side of Chicago. RHC has experienced a 3.8% decline in acute inpatient admissions (including observation stays) from 99,296 in 2007 to 95,563 in 2009. Governmental payors (Medicare and Medicaid) as a percentage of gross revenues increased to a high 68.3% in fiscal 2009 from 64.8% in fiscal 2008 and 65% in fiscal 2007. At June 30, 2009 RHC's unfunded pension liability increased to $245.7 million from $152.1 million at fiscal year end 2008 which reflects negative investment returns and a $30 million drop in employer contributions. At June 30, 2009 RHC's pension funding status was just 35% of the accumulated benefit obligation. As a church-sponsored plan RHC is not subject to ERISA funding requirements. However, management has stated its intention to make annual contributions to reduce the pension liability.

A further downgrade is precluded due to RHC's solid balance sheet position combined with the positive changes at the management and governance levels. At Sept. 30, 2009 RHC's unrestricted cash and investments totaled $793.7 million which translates into 199 days cash on hand, a cushion ratio (based on pro forma MADS) of 18.3 times (x) and approximately 135% of total debt outstanding all of which exceed Fitch's respective 2009 'BBB' medians of 114, 8.1 x and 62%. (Fitch notes that RHC does not restrict a portion of its investment portfolio for its self-insurance liabilities which would have the effect of reducing its liquidity ratios).

In November 2008, RHC appointed Sandra Bruce as the system CEO. Ms. Bruce previously served as CEO of St Alphonsus Health System in Boise, ID and a member of Trinity Health (revenue bonds rated 'AA' by Fitch). In addition, the system recently staffed newly created Chief Medical Officer and VP of Strategic Integration positions. The new management team has begun to affect a system-wide cost management and revenue enhancement program to achieve a long term goal of sustainable operating margins greater than 2% annually. Management has implemented $45 million of cost savings that will be realized in fiscal 2010 and is conducting a comprehensive strategic review of system assets to determine fit and value within the long term mission of the system. Through the first quarter of fiscal 2010, RHC operating loss narrowed to $5.8 million as compared to a $16.5 million loss from operations in the year earlier period. Moreover, the Board of Directors has been substantially recomposed with eight of the 17 member board having been appointed since July 1, 2009. The new board members include the current CFO of the University of Colorado Hospital Authority (revenue bonds rated 'A' by Fitch) and the CEO of Catholic Healthcare Partners (revenue bonds rated 'AA-' by Fitch). Fitch views the recent appointments at the board and management positively and believes it signals a fundamental, directional change by the sponsors.

The Outlook revision to Stable from Negative reflects Fitch's belief that the cost saving initiative will improve operating performance in 2010 and that greater clinical coordination between the facilities can further drive improvement over the medium term. RHC's balance sheet strength and conservative investment program provide adequate bondholder protection as the system executes its operational improvement plan and conducts a thorough strategic review of its facilities and their position in the market place and the system.

As of Sept. 30, Resurrection Health Care consisted of eight hospitals (1,673 staffed beds), 14 long-term care facilities and other related health care entities. In fiscal 2009, RHC had total operating revenues of $1.7 billion. Under a Continuing Disclosure Agreement, RHC is expected to disclose quarterly unaudited for the first three fiscal quarters within 60 days of each quarter-end and annual audited financial statements within 180 days of each fiscal year-end to the Municipal Securities Rulemaking Board's EMMA system.

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