Fitch Affirms Franciscan Alliance, IN Revs at 'AA'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'AA' rating on the following revenue bonds issued on behalf of Franciscan Alliance (Franciscan):

--$213,010,000 Indiana Finance Authority health system revenue bonds series 2009A;

--$154,345,000 Indiana Finance Authority health system revenue bonds series 2008F-H;

--$500,315,000 Indiana Finance Authority health system revenue refunding bonds series 2008A-C/I/J;

--$84,675,000 Indiana Health and Educational Facility Financing Authority health system revenue refunding bonds series 2006E.

The Rating Outlook is Stable.

SECURITY

Bond payments are secured by a pledge of the unrestricted receivables of the obligated group (OG).

KEY RATING DRIVERS

STRONG PROFITABILITY: Operating profitability rebounded strongly in fiscal 2014 with operating margin increasing to 7.8% in fiscal 2014 from 1.4% in fiscal 2013. Prior to the compression in fiscal 2013, profitability had been historically solid with operating margin averaging 4.8% between fiscal 2009 and 2012.

MODERATE DEBT BURDEN: Franciscan's debt burden remains moderate with MADS equal to 2.4% of fiscal 2014 operating revenue. The moderate debt burden combined with strong operating profitability produced robust 7.2x MADS coverage by EBITDA in fiscal 2014.

SOLID LIQUIDITY: Liquidity metrics are solid with 341.5 days cash on hand, 33.9x cushion ratio and 199.7% cash to debt, exceeding Fitch's 'AA' category medians of 277.1 days, 26.5x and 178.5%, respectively.

LEADING MARKET SHARE: All four operating regions maintain leading market positions, however operating regions remain competitive.

RATING SENSITIVITIES

MAINTAINED CREDIT PROFILE: Fitch expects that Franciscan will maintain its strong credit profile, including liquidity, profitability and coverage metrics that are consistent with the 'AA' category.

CREDIT PROFILE

Franciscan, headquartered in Mishawaka, IN, operates 13 hospitals in four distinct regional markets along the I-65 corridor between Chicago and Indianapolis. Total consolidated operating revenues equaled $2.7 billion in fiscal 2014. Fitch's analysis is based upon Franciscan's consolidated financial statements. The OG and obligated affiliates comprise over 90% of consolidated total assets and consolidated operating revenues. Audited financial statements were not yet available for fiscal 2014, and therefore Fitch's fiscal 2014 analysis is based upon the system's consolidated unaudited financial statements.

STRONG PROFITABILITY

After a compression in fiscal 2013, operating profitability rebounded in fiscal 2014 with operating and operating EBITDA margins increasing to a robust 7.8% and 14.8%, respectively, from 1.4% and 8.2% in fiscal 2013. Prior to fiscal 2013, operating profitability had been consistently strong with operating and operating EBITDA margins averaging 4.8% and 11.7% between fiscal years 2009 and 2012. The improvement in fiscal 2014 was primarily due to a performance improvement plan initiated in fiscal 2013 including labor productivity, revenue cycle, supply chain, clinical documentation and physician practice improvement initiatives which more than offset declining volume trends.

Fiscal 2014 profitability was bolstered by the resumption of Indiana's hospital assessment fee (HAF) program in fiscal 2014. The HAF program was first enacted in 2012 through July 1, 2013 and was renewed in 2014 retroactive back to July 2013. Franciscan received $37.2 million of HAF revenue in fiscal 2014, including $11.7 million related to fiscal 2013. Excluding the revenue related to fiscal 2013, operating profitability remained solid in fiscal 2014 with operating and operating EBITDA margins of 7.4% and 14.4%, exceeding Fitch's 'AA' category medians of 3.9% and 11%. Including the HAF revenue received in fiscal 2014 attributable to fiscal 2013 increases operating and operating EBITDA margins to 1.8% and 8.6% in fiscal 2013. Management is budgeting for operating and operating EBITDA margins of 4% and 12.3% in fiscal 2015 which Fitch views as reasonable.

MODERATE DEBT BURDEN

Franciscan's debt burden is relatively light with MADS equal to 2.4% of operating revenues in fiscal 2014 relative to Fitch's 'AA' category median of 2.6%. The moderate debt burden and strong cash flow generation produced solid debt service coverage with MADS coverage by EBITDA and operating EBITDA equal to 7.2x and 6.2x, respectively, in fiscal 2014, easily exceeding Fitch's 'AA' category medians of 5.4x and 4.4x.

SOLID LIQUIDITY

Liquidity metrics are solid relative to both operating expenses and debt burden. Unrestricted cash and investments increased 26% since fiscal 2012 to $2.2 billion at Dec. 31, 2014. This equates to 341.5 days cash on hand, 33.9x cushion ratio and 199.7% cash to debt, exceeding Fitch's 'AA' category medians of 277.1 days, 26.5x and 178.5%.

LEADING MARKET SHARE

Franciscan holds leading market share positions in each of its four regional markets. However, the regional markets remain competitive. The four regional markets include Central Indiana (CIR), Northern Indiana (NIR), Western Indiana (WIR) and South Suburban Chicago (SSCR). SSCR has historically been dilutive to consolidated performance, but management initiated a turnaround program that materially increased SSCR's profitability in fiscal 2014. Two of the operating regions, CIR and NIR, accounted for 71.3% of net patient revenue and 73.5% of operating EBITDA in fiscal 2014.

DEBT PROFILE

Franciscan had $1.1 billion of total debt outstanding at Dec. 31, 2014. The debt portfolio is comprised of 51% underlying fixed rate bonds, 37% variable rate demand bonds and 12% direct placement floating rate notes. The system is counterparty to four fixed payor swaps with a total notional amount of $406 million, effectively converting 39% of its bonds to synthetic fixed rate. Franciscan had $31 million of collateral posted at Dec. 31, 2014 related to the swaps.

DISCLOSURE

Franciscan covenants to provide annual disclosure within 120 days of fiscal year-end and quarterly disclosure within 45 days of fiscal quarter end. Disclosure is posted to the Municipal Securities Rulemaking Board's EMMA website.

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

Applicable Criteria and Related Research:

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

--'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

Not-for-Profit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=779548

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981642

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Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1 312-368-3180
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
James LeBuhn
Senior Director
+1 312-268-2059
or
Committee Chairperson
Eva Thein
Senior Director
+1 212-908-0674
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1 312-368-3180
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
James LeBuhn
Senior Director
+1 312-268-2059
or
Committee Chairperson
Eva Thein
Senior Director
+1 212-908-0674
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com