Fitch Rates CentraCare (MN) Series 2014B Revs 'A+'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned an 'A+' rating to the approximately $42.4 million, series 2014B revenue refunding bonds issued by the City of St. Cloud, Minnesota on behalf of CentraCare Health System (CentraCare):

In addition, Fitch has affirmed the 'A+' rating on the following City of St. Cloud, MN revenue bonds issued on behalf of CentraCare:

--$147.1 million, series 2010A;

--$15.5 million, series 2010B;

--$80 million, series 2008D.

The Rating Outlook is Stable.

Bond proceeds will be used to advance refund approximately $47.8 million of CentraCare's series 2010A outstanding bonds for savings and pay certain costs of issuance. The series 2014B bonds are expected to price the week of October 15 via negotiation.

SECURITY

Security for all bonds is a pledge of the obligated group's unrestricted receivables.

KEY RATING DRIVERS

STRATEGIC INVESTMENT CONTRIBUTING TO SOLID OPERATIONS: CentraCare's strong physician employment model, dyad structure of management, focus on regional wellness and expanding service lines have supported consistently strong operating profitability. In fiscal 2014, CentraCare generated a 4.2% operating margin and 10.6% operating EBITDA margin, both ahead of Fitch's respective 'A' category medians of 2.5% and 9.5%.

LIQUIDITY GROWTH CONTINUES: Because of strong cash flow generation, solid investment returns and more moderate capital spending, CentraCare has continued to bolster its balance sheet and liquidity metrics, which now meet or exceed Fitch's 'A' category medians.

STRONG MARKET SHARE POSITION: CentraCare maintains a controlling market share position, capturing about 52.7% of all inpatient discharges in its primary service area while expanding its statewide presence with recent affiliations with three critical access hospitals and ambulatory access.

HEALTHY DEBT SERVICE COVERAGE: Pro forma maximum annual debt service (MADS) coverage of 4.9x in fiscal 2014 is very healthy for the rating. Additionally, CentraCare's debt burden remains manageable, as reflected in pro forma MADS equal to 2.7% of fiscal 2014 revenue, lower than the median of 3.1%.

RATING SENSITIVITIES

CONTINUED GROWTH IN LIQUDITY: Continued improvement to the balance sheet combined with sustained strong operating performance and debt service coverage levels could result in positive rating movement over the next 24 to 36 months.

CREDIT PROFILE

CentraCare Health System, located in St. Cloud, MN (about 65 miles northwest of Minneapolis), operates a 489-licensed bed hospital, a 313-member multi-specialty physician and advanced practice providers clinic, five critical access hospitals, six long-term care facilities, and other related entities. CentraCare had total operating revenue of approximately $1.01 billion in fiscal 2014. Fitch's analysis is based on the consolidated financial statements of CentraCare, which includes certain non-obligated entities including the CentraCare Clinic.

ROBUST OPERATING PROFITABILITY

Operating profitability has been historically strong and operating margin and operating EBITDA margin in fiscal 2014 were 4.2% and 10.6%, respectively, down slightly from fiscal 2013's 5% and 11.3%, but mostly a function of accrual adjustments rather than fundamental changes to operations. Several accrual-related estimate changes resulted in about $5.6 million in adjustments. Without these modifications, operating margin in fiscal 2014 would be 4.7% and operating EBITDA would be 11.2%.

Fitch believes CentraCare's strong operating results reflect the benefits of its integrated delivery model, focus on co-leadership, dyad management model, its expanded ambulatory strategy and a dominant market share position. Additionally, CentraCare's integrated delivery model and its information technology outreach program (EPIC Connect) has broadened its geographic reach and increased its market share in total service area and improved referrals of high-acuity cases to St. Cloud Hospital.

GROWING LIQUIDITY POSITION

At fiscal 2014 year-end CentraCare's unrestricted cash and investments totaled $591.5 million, which equals 225.9 days cash on hand, 20.8x pro forma cushion ratio and 139.1% pro forma cash-to-debt, all exceeding the respective 'A' category medians of 199.2 days, 17x and 131.2%. Cash has grown significantly over the past five years and is almost double the cash position at fiscal 2009 despite collateral posting of $21.3 million. Fitch expects liquidity to continue to grow, as future capital needs are manageable. If certain key liquidity indicators continue to improve, positive rating movement would be considered.

MODERATE DEBT BURDEN

Coverage of pro forma MADS by EBITDA of 4.9x in fiscal 2014 well exceeds Fitch's 'A' category median of 2.5x. Pro Forma MADS as a percent of revenue is a moderate 2.7% of fiscal 2014 revenues compared to the 'A' category median of 3.1%.

CentraCare has restructured its debt portfolio over the last few years and now includes about $153.6 million in direct placements that Fitch was not asked to rate but considered in its analysis. Pro forma MADS is expected to be $28.4 million and was calculated by the underwriter. Total outstanding debt after the series 2014B issuance will be $428.9 and will be 64% underlying fixed rate and 36% underlying variable rate (synthetically fixed). CentraCare has five swaps outstanding with a total mark-to-market valuation of negative $46.8 million as of June 30, 2014 resulting in collateral posting of $21.3 million. Fitch views CentraCare's debt portfolio as fairly aggressive due to its derivative contracts.

DISCLOSURE

CentraCare has covenanted to provide quarterly and annual disclosure of financial statements to bondholders. Recent quarterly disclosure to Fitch and bondholders has been timely and includes a balance sheet, income statement and utilization statistics.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 16, 2014);

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=888954

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Dana S. Ringer, +1-312-368-3215
Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Adam Kates, +1-312-368-3180
Director
or
Committee Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Dana S. Ringer, +1-312-368-3215
Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Adam Kates, +1-312-368-3180
Director
or
Committee Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com