CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on approximately $1.6 billion of bonds issued by Allen County (OH), Lorrain County (OH) and Knox County Health, Educational & Housing Facility Board (TN) on behalf of Catholic Health Partners (CHP).
The Rating Outlook is Stable
Additionally, Fitch has affirmed its 'F1+' short-term rating on the following bonds issued on behalf of CHP and supported by CHP's internal liquidity.
--$100 million Allen County (OH) adjustable-rate hospital facilities revenue bonds series 2012B.
KEY RATING DRIVERS:
BROAD OPERATING PLATFORM: CHP is the largest health system in Ohio and holds the leading market share in the state. Operations include over 100 healthcare facilities, including 24 acute care hospitals, eight long-term care facilities, and a health plan. Fitch believes that the large operating platform mitigates the system's overall operating risk profile.
HISTORICALLY CONSISTENT OPERATING PROFITABILITY: Operating profitability has been historically consistent with operating EBITDA margin averaging 10.9% since fiscal 2008 and equal to 10.2% in fiscal 2013. However, operating EBITDA margin compressed to 7.5% in the three-month interim period ending March 31, 2014 (the interim period). Fitch expects profitability to return to historical levels.
ELEVATED DEBT BURDEN: CHP's debt burden is heavy with maximum annual debt service (MADS) equal to 3.6% of operating revenue. Despite solid operating profitability, MADS coverage by operating EBITDA of 2.8x in fiscal 2013 remains light for the rating category.
ADEQUATE LIQUIDITY: Despite loaning funds to HealthSpan Partners (HSP) in fiscal 2013 for HSP's $250 million minority investment in Summa Health System (Summa, rated 'BBB+' by Fitch), CHP's unrestricted liquidity increased 2.8% since fiscal 2012 to $2.2 billion at March 31, 2014. Liquidity metrics are adequate for the rating category given CHP's size and scope of operations with 121% cash-to-debt.
SHORT-TERM RATING: At May 31, 2014, CHP's eligible cash and investment position under Fitch's criteria would cover the maximum mandatory put on self-liquidity bonds on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating.
MAINTENANCE OF COVERAGE METRICS: Fitch expects CHP's large operating platform to provide consistent cash flows to maintain coverage metrics at or above levels achieved in fiscal 2013.
Bonds are general, unsecured obligations of CHP and its affiliates.
Headquartered in Cincinnati, OH, CHP is an integrated delivery system with operations in Ohio and Kentucky. In September 2013, HSP, a distinct nonprofit organization with the primary purpose of developing expanded provider networks and insurance products, invested $250 million in Summa for a 30% minority interest. HSP has overlapping governance with CHP and is consolidated in CHP's consolidated financial statements in accordance with U.S. generally accepted accounting principles. Additionally, HSP purchased Kaiser Health Plan of Ohio in September 2013. The purchase price will be funded through EBITDA over a five-year period with a minimum price of $50 million and maximum price of $100 million. Fitch views the acquisition and strategic partnership by HSP favorably as they both are expected to further strengthen CHP's market position in Ohio and provide opportunities to achieve economies of scale and synergies.
BROAD OPERATING PLATFORM
CHP's broad and diverse operating platform adds to its operating stability. With over 100 facilities, operations include 24 hospitals, 26 diagnostic imaging centers, 16 ambulatory surgical centers, eight long-term care facilities, eight home health agencies and two health plans. CHP is the largest healthcare system in Ohio, with $4 billion in revenue in fiscal 2013 and a leading 12% statewide market share. In addition, the system holds leading market share positions in four of its six regional markets in Ohio and the number two market share in its Kentucky market.
HISTORICALLY CONSISTENT OPERATING PROFITABILITY
Operating profitability has been historically consistent with operating EBITDA averaging 10.9% since fiscal 2008 and equal to 10.2% in fiscal 2013. Fiscal 2013 profitability was challenged by soft inpatient volumes, but the impact was partially mitigated by effective cost management practices and increased acuity. Operating profitability in the interim period compressed with operating EBITDA margin decreasing to 7.5%. The decrease was due to continued soft inpatient volumes which were exacerbated by extreme winter weather and a significant increase in observation stays. Management's strategic plan targets operating EBITDA margin to equal approximately 10% to 11% between fiscal years 2014 and 2018.
ELEVATED DEBT BURDEN
CHP's debt burden remains elevated with MADS equal to 3.6% of revenue in fiscal 2013 relative to Fitch's 'AA' category median of 2.5%. Despite the solid profitability, MADS coverage by operating EBITDA of 2.8x in fiscal 2013 remains light for the rating category. Coverage declined in the interim period to 2.3x. Fitch expects profitability and coverage to return to historical levels.
Despite loaning $250 million to HSP for HSP's minority investment in Summa in fiscal 2013, CHP's unrestricted liquidity increased 2.8% since fiscal 2012 to $2.2 billion at March 31, 2014. Given CHP's size and scope of operations, liquidity metrics remain adequate for the rating category with 202 days cash on hand, 15.7x cushion ratio and 121% cash-to-debt. However, liquidity metrics are light relative to Fitch's 'AA' category medians of 254.3 days cash on hand, 23.4x cushion ratio and 173.6% cash-to-debt.
The affirmation of the short-term 'F1+' rating is based on the sufficiency of CHP's liquid resources and written procedures to fund the purchase price on each mandatory tender date. CHP has a total of $100 million of series 2012B bonds supported by self-liquidity. Based on Fitch's Rating Criteria related to Self-Liquidity, CHP's eligible cash and investment position under this criteria would cover the maximum mandatory put on self-liquidity bonds on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating. CHP provides Fitch with monthly cash and investment reports.
CHP covenants to provide annual disclosure no later than 150 days after the end of each fiscal year and quarterly disclosure no later than 60 days after the end of each of the first three fiscal quarters. Disclosure is provided to bondholders via the Municipal Securities Rulemaking Board's EMMA system and its web site, 'www.health-partners.org'. Fitch views CHP's disclosure practices as one of the best in the industry.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria',
(May 30, 2014);
-'Rating U.S. Public Finance Short-Term Debt', (Dec. 9, 2013).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Rating U.S. Public Finance Short-Term Debt