Fitch Rates $90MM ThedaCare, Inc. (Wisconsin) 2008 Bonds 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA-' underlying rating to approximately $90 million of Wisconsin Health and Educational Facilities Authority revenue bonds, series 2008, issued on behalf of ThedaCare, Inc. (ThedaCare). Additionally, Fitch assigns an 'AA-' underlying rating to approximately $175 million of outstanding revenue bonds issued on behalf of ThedaCare. The Rating Outlook is Stable.

The bond proceeds will be used to convert beds at both of its flagship hospitals (Appleton Medical Center and Theda Clark Medical Center) to all-private status, and fund construction of new outpatient facilities and expansion projects for existing outpatient facilities. The bed conversion project, which involves construction of a new patient tower at the Appleton facility, is expected to cost a total of approximately $89.8 million, of which $52.6 million will be funded with the 2008 bond proceeds. The series 2008 bonds will be issued as fixed-rate bonds and are expected to price the week of Sept. 29. 2008.

The rationale for the 'AA-' rating centers on ThedaCare's consistently robust profitability, sound liquidity, organizational focus and commitment to management best practices leading to high-quality outcomes, excellent alignment with the area's primary care physicians (PCPs), and leading market share in its service area. ThedaCare has averaged an operating margin of 3.4% over the last five fiscal years (2003-2007) and has an operating margin of 3.2% through the first six months of fiscal 2008. The consistent operating margin, which has not dipped below 3.1% in the period, is largely due to a well-insured service area, positive utilization trends, and deep commitment to improving health care delivery processes by ThedaCare's board and management. The system has been nationally recognized for its improved operating results via its adoption of Lean management philosophy. The fruits of ThedaCare's organizational commitment to this philosophy resulted in its new 'Collaborative Care' patient care pilot at its Appleton Medical Center aimed at delivering better quality and more efficient care, which has been successful in decreasing errors, improving quality of care, and patient satisfaction; this care model and its ensuing physical layout will be duplicated in the construction of the new patient tower.

ThedaCare's liquidity, with 185.9 days cash on hand and pro forma cushion ratio of 14.3 times (x) as of June 30, 2008, is somewhat light compared to Fitch's 'AA' category medians of 237.4 days and 20.4x, respectively, but is considered ample by Fitch due to ThedaCare's historically stable profitability. ThedaCare employs 93 of the 118 primary care physicians on its active medical staff, which Fitch believes augurs well for sustaining quality outcomes for patient care, securing referral channels to ensure continued market share prominence, and largely mitigates potential threats from competitors. ThedaCare has the leading inpatient market share in its Fox Cities service area, capturing 47.2% of market admissions in fiscal 2007 compared to its nearest competitor, Affinity Health System, which captured 32.2%.

Credit concerns include ThedaCare's increasing debt burden and somewhat competitive service area. Although Fitch believes the use of ThedaCare's extant debt capacity is prudent and should further strengthen its credit profile, this borrowing does erode that capacity by increasing ThedaCare's debt burden above the 'AA' medians. This is demonstrated by its fiscal 2008 projected debt-to-EBITDA and maximum annual debt service (MADS) as percentage of revenues ratios of 3.2x and 3.1% compared to Fitch's 'AA' medians of 2.7x and 2.7%, respectively. Although ThedaCare is the market leader, significant competitive threats exist in both its primary and secondary service area. A free-standing orthopedic ambulatory surgery center has recently opened in Appleton, causing a modest decline in ThedaCare's year-over-year outpatient surgeries through June 30, 2008, which declined to 19,644 from 20,172. ThedaCare is countering this threat by investing in its own orthopedic ambulatory surgery center which is being staffed with the system's employed physicians.

Aurora Healthcare, Inc. (revenue bonds rated 'A' by Fitch), a large integrated health care system based in Milwaukee, entered ThedaCare's market in 2003 by building a hospital in Oshkosh, WI, and has successfully employed some physicians in the area. However, Fitch notes that to date, ThedaCare has actually increased its inpatient market share since Aurora's entry, with most of Aurora's gains in utilization and market share coming at the expense of Affinity Health System.

ThedCare is a four-hospital system operating in northeast Wisconsin with its two flagship hospitals, Appleton Medical Center (150-staffed beds) and Theda Clark Medical Center (167-staffed beds), located in Appleton, WI and Neenah, WI, respectively. ThedaCare is also the sole corporate member of ThedaCare Physicians, which operates 26 clinics throughout the service area and employs 141 physicians. ThedaCare's revenues in 2007 were $543 million. ThedaCare covenants to post its annual and quarterly disclosure onto the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) by no later than 150 days after the end of the fiscal year and 45 days after the of each quarter, respectively.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Contacts

Fitch Ratings
Alex Bumazhny, 212-908-0341, New York
Anthony Houston, 312-368-3180, Chicago
or
Media Relations:
Cindy Stoller, 212-908-0526, New York

Contacts

Fitch Ratings
Alex Bumazhny, 212-908-0341, New York
Anthony Houston, 312-368-3180, Chicago
or
Media Relations:
Cindy Stoller, 212-908-0526, New York