Fitch Rates Owensboro Health (KY) Series 2015 Bonds 'BBB+'; Affirms Outstanding

CHICAGO--()--Fitch Ratings has assigned a 'BBB+' rating to the following Kentucky Economic Development Finance Authority bonds, issued on behalf of Owensboro Health (Owensboro):

--$68.1 million hospital revenue bonds, series 2015A;

--$25.1 million hospital refunding revenue bonds, series 2015B.

The bonds will be used to fund capital expenditures, to partially refund outstanding indebtedness, to fund a debt service reserve, and to pay costs of issuance. The bonds are expected to price the week of July 27.

In addition, Fitch affirms the 'BBB+' ratings on the following Kentucky Economic Development Finance Authority bonds, issued on behalf of Owensboro Medical Health System (dba Owensboro Health; Owensboro):

--$451.3 million hospital revenue bonds, series 2010A;

--$64.6 million hospital revenue bonds, series 2010B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a security interest in net revenues and receivables of the obligated group, a mortgage lien, and a debt service reserve.

KEY RATING DRIVERS

SIGNIFICANT DEBT BURDEN: With the series 2015 new issuance, Owensboro's leverage will remain very elevated relative to the 'BBB' category medians but in line with historical metrics. Pro forma maximum annual debt service (MADS) of $41.6 million increases marginally from prior MADS of $37.9 million, and equates to a high 8.4% of annualized fiscal 2015 revenues. Coverage of pro forma MADS was 2.1x through the 10 months ended March 31, 2015 and is expected to remain sufficient near 2x going forward.

DOMINANT MARKET POSITION: The bonds are being issued to support Owensboro's regional platform strategy, which Fitch believes is integral to preserving its leading market position in the region. The series 2015 bonds will be used in part to construct five care centers around the region, to provide mainly primary and urgent care services. Fitch believes this will be key to maintaining Owensboro's dominant market position (92% share) and support its population health strategy going forward.

SUSTAINED CASH FLOW IMPROVEMENT: Following weaker results in fiscal 2014 (May 31 year-end) Owensboro generated a 15.8% operating EBITDA margin and a 17.2% EBITDA margin through the 10-month interim period ended March 31, 2015. Results were supported by better clinical volumes and strong expense management. Owensboro is ahead of its 2015 budget, which called for a more modest 13% operating EBITDA margin.

WEAK LIQUIDITY AGAINST DEBT: As expected, Owensboro's balance sheet reflects pressure from sizeable debt issuance, as well as approximately $35 million in equity contributions towards its hospital project during fiscal 2014 (year ended May 30). At March 31, 2015, unrestricted cash and investments of $211.2 million, equated to 170.7 days cash on hand (DCOH), a 5.1x pro forma cushion ratio and 37.5% cash to pro forma debt. While DCOH compares favorably to the 'BBB' category median of 145 DCOH, Owensboro's cushion and cash to debt metrics are not consistent with 'BBB' category medians of 10.5x and 93.6%, respectively.

RATING SENSITIVITIES

STEADY PROFITABILITY; IMPROVED LIQUIDITY: Fitch expects Owensboro to sustain recent profitability allowing for adequate debt service coverage of near 2x. In addition, liquidity metrics are expected to improve supported by strong cash flow and limited routine capital spending near $15 million annually. Failure to maintain current cash flow levels or to strengthen liquidity metrics could pressure the rating over the near term.

CREDIT PROFILE

Owensboro Health is a 447-licensed-bed health system located in Owensboro, KY, approximately 100 miles southwest of Louisville, KY. Total revenues for fiscal 2014 were $448.2 million (year ended May 31).

Fitch's analysis is based on the consolidated entity. The obligated group (OG) includes Owensboro Health Inc. (OHI; corporate parent, operating acute facilities) and Owensboro Health Medical Group (OHMG; owned & employed physician groups and MOB's). In fiscal 2014, total assets and revenues of the OG were $965 million and $440.8 million, respectively, or 99.5% of total assets and 98% of total revenues all of the consolidated organization.

REGIONAL STRATEGY

Approximately $65 million in series 2015 bond proceeds will be used to fund the construction of five separate ambulatory care sites located in Owensboro's service area. While Owensboro maintains leading 92% inpatient share in Daviess County, and over 70% share in McLean and Hancock Counties, the system has an ongoing need for a solid regional platform for ambulatory services. The five sites will be located in key target markets to meet demand and minimize outmigration. Fitch believes this will be integral to preserving Owensboro's market position as a regional referral center over the longer term, and key to its efforts in population health going forward.

STEADIED OPERATIONS

Better clinical volume coupled with expense controls has supported sustained improvements in operating cash flow in 2015. Through the 10 month interim period ended March 31, 2015, Owensboro had a 4% increase in admissions and commensurate increase in patient revenue, coupled with reduction in bad debt due in part to the state's successful Medicaid expansion. Owensboro expects to finish ahead of its 2015 budget, and is focused on rebuilding liquidity via profitability and ongoing expense management. Owensboro's low 5.1 year average age of plant at March 31, 2015 signals minimal routine capital outlays near $15 million going forward.

DEBT PROFILE

Post issuance, Owensboro will have approximately $563 million in long-term debt outstanding, including the partial refunding of the series 2010B bonds. Debt is 100% fixed rate, with no swaps. MADS is measured at $41.6 million per the underwriter, and debt service is level through 2045.

DISCLOSURE

Owensboro covenants to provide annual audited disclosure no later than 180 days following fiscal year end and quarterly disclosure no later than 45 days after quarter end for the first three quarters, and no later than 60 days following the fourth quarter. Disclosure is provided via the Municipal Securities Rulemaking Board's EMMA System. Fitch has received timely and thorough disclosure and maintained good access to management.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

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

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987567

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987567

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Emily Wadhwani, +1-312-368-3347
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Stephen Friday, +1-212-908-0384
Associate Director
or
Committee Chairperson
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Emily Wadhwani, +1-312-368-3347
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Stephen Friday, +1-212-908-0384
Associate Director
or
Committee Chairperson
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com