Fitch Affirms Elmhurst Memorial Healthcare (IL)'s Ratings at 'BBB'; Outlook Revised to Positive

NEW YORK--()--Fitch Ratings has affirmed the 'BBB' rating on the following bonds issued by the Illinois Finance Authority on behalf of Elmhurst Memorial Healthcare (Elmhurst):

--$76.03 million taxable revenue bonds series 2013A;

--$31.75 million taxable revenue bonds series 2013B;

--$124.8 million revenue bonds series 2008A;

--$50 million revenue bonds series 2008D*.

*Underlying Rating. The series 2008D bonds are supported by a letter of credit from BMO Harris Bank.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by a pledge of the Elmhurst obligated group's gross revenues.

KEY RATING DRIVERS

GROWING MARKET PRESENCE: The Outlook revision to Positive from Stable reflects Elmhurst's growing market presence and the operational benefits it's realizing from the consolidation with Edward Healthcare Services (Edward). Elmhurst and Edward finalized their merger on July 1, 2013. The parent organization, Edward-Elmhurst Healthcare (EEH), is the sole corporate member of both institutions and holds reserve powers. The combined management team is primarily from Edward and has been highly successful at implementing strategic growth initiatives for business expansion and larger physician and outpatient networks. Despite a competitive service area, both volume and market share growth has been very strong over the last two fiscal years.

IMPROVED FINANCIAL PERFORMANCE: Although Elmhurst's financial profile remains moderately weak for the rating category, Elmhurst is realizing the benefits of the consolidation with Edward. Most financial ratios improved over the last two years as a result of volume gains and expense saving programs. Fitch expects the financial profile to continue to improve over the near term. The debt for each organization remains separately obligated and Fitch does not rate Edward's debt.

MIXED LIQUIDITY METRICS: Elmhurst's liquidity position is mixed. Unrestricted cash and investments at June 30, 2015 (fiscal year-end) were $256 million, amounting to 215.3 days cash on hand and 10.2x cushion ratio. These levels compare to Fitch 'BBB' category medians of 161.5 days and 11.1x cushion ratio. Cash to debt of 54.1% is very light against the 'BBB' median of 89.5%, but improved from 45% at the end of fiscal 2013.

HEAVY DEBT POSITION: Elmhurst's $473 million of debt remains high, reflecting the borrowings related to the construction of its replacement hospital project that opened in 2011. As a result, Elmhurst's debt burden is significant with maximum annual debt service (MADS) as a percentage of fiscal 2015 revenue of 5.6% compared to the 'BBB' category median of 3.6%. MADS coverage by EBITDA of 2.0x is light for the category but improved from 1.2x during fiscal 2013.

RATING SENSITIVITIES

CONTINUED FINANCIAL IMPROVEMENT: The Positive rating Outlook reflects Fitch's expectation that volume growth will be sustained and translates into improved profitability with strengthening of liquidity and moderation in debt burden and leverage. Assuming Elmhurst Memorial Healthcare's financial profile continues to improve, positive rating action is possible over the next 24 months.

MARKET POSITION: Maintenance of Elmhurst Memorial Healthcare's growing market presence and continued strengthening of physician relationships could result in positive rating pressure.

CREDIT PROFILE

EEH, which includes Edward, is located in Naperville, IL, approximately 30 miles west from downtown Chicago and had nearly $1.2 billion in total revenue in fiscal 2015 (June 30 year-end), while Elmhurst, located in the city of Elmhurst, IL, approximately 17 miles west from downtown Chicago, had $447 million in total revenue in fiscal 2015. The system has 721 beds across three hospitals (Edward Hospital 354, Linden Oaks Hospital 108 and Elmhurst Memorial Hospital 259). Fitch used the EEH audit with consolidating statements for Edward and Elmhurst for this review. Fitch's financial analysis and ratios are based on Elmhurst's results.

GROWING MARKET PRESENCE, DESPITE A COMPETITIVE SERVICE AREA

Elmhurst operates in the suburban area directly west of Chicago. Economic and demographic characteristics are strong, which is reflected in a favorable payor mix. However, the service area is very fragmented, with several significant competitors including Good Samaritan Hospital, part of Advocate Health Care Network (rated 'AA'; Stable Outlook by Fitch), Alexian Brothers Health System (rated 'A-'; Stable Outlook and a member of Ascension Heath that is rated 'AA+'; Stable), Vanguard Westlake Hospital (not rated by Fitch) and Hinsdale Hospital, part of Adventist Health System- Sunbelt (rated 'AA'; Stable Outlook). Despite this competition, Elmhurst has increased its leading primary service area inpatient market share to 28.1% through the third quarter of fiscal 2015, from 25.6% two years earlier. Additionally, secondary service area inpatient market share is also experiencing good trends. Market share growth is being driven by medical staff increases and service line additions and enhancements, particularly in neurosciences, orthopedics, and children's programs that have resulted in strong volume gains and lower patient outmigration.

Since the merger with Edward, Elmhurst's medical staff grew by about 230 physicians, driving a healthy increase in business volumes over the past few years. For instance, discharges, outpatient visits, and total surgeries increased a robust 12.5%, 5.7%, and 4.9%, respectively, in fiscal 2015 from prior year levels. Most of the physician growth is due to an expanded and more integrated relationship with the large and influential DuPage Medical Group (a multi-specialty group practice with approximately 450 doctors), which Fitch views as a positive rating factor. In addition, Elmhurst participates in Illinois Health Partners, a joint venture physician-hospital organization formed between EEH and DuPage Medical Group, which manages nearly 250,000 covered lives.

FINANCIAL PROGRESS

Elmhurst's financial results in fiscal 2015 were slightly improved from last year, but below budgeted expectations mostly due to unforeseen prior period contractual allowance adjustments. The operating loss decreased from $25.8 million in fiscal 2014 to $23.4 million in fiscal 2015. This resulted in an operating margin of negative 5.3% and an operating EBITDA margin of 6.0% in fiscal 2015 compared to a negative 6.1% operating margin and a 7.3% operating EBITDA margin in fiscal 2014. Fiscal 2015's operating profitability ratios exclude a non-recurring $7 million pension settlement cost. Elmhurst is managed by the prior Edward leadership team, which has taken action to reduce expenses, including freezing the defined benefit plan, combining management functions, consolidating certain shared services and modifying the group purchasing organization. The financial improvement is also supported by increasing patient volumes as a result of the aforementioned medical staff additions and service line enhancements. Despite the volume growth, staffing efficiencies have improved as evidenced by full-time equivalent employees per adjusted occupied bed declining to 5.74 in fiscal 2015, from 6.30 in fiscal 2013. Management has budgeted for the operating loss to narrow further to negative $13.7 million in fiscal 2016, which Fitch believes is attainable based on management's good track record at meeting financial targets.

MIXED LIQUIDITY METRICS

At June 30, 2015, Elmhurst's unrestricted cash and investments totaled $256 million, which is improved from the prior year but still not at pre-replacement hospital project levels. Liquidity relative to expenses is above the 'BBB' category median with days cash on hand of 215.3 compared to the 'BBB' category median of 161.5. The cushion ratio of 10.2x and cash to debt of 54.1% are below the respective 'BBB' category medians of 11.1x and 89.5%, but improved from prior year levels. Elmhurst completed its cancer center in the fall 2013 and Fitch expects the organization to continue to strengthen its balance sheet over the next several years as debt is repaid and capital spending is moderate. However, capital expenditures are expected to jump by about $20 million in fiscal 2016 as Elmhurst invests in an information technology platform that conforms with Edward's systems.

HEAVY DEBT POSITION

Elmhurst's substantial debt burden remains a credit concern with maximum annual debt service (MADS) a significant 5.6% of fiscal 2015 revenue compared to the 'BBB' category median of 3.6%. Additionally, MADS of $25.2 million excludes a $76 million balloon payment due in 2019. MADS coverage by EBITDA remains low for the rating category at 2.0x in fiscal 2015, compared to the 'BBB' median of 2.7x, but improved from 1.2x in fiscal 2013. Debt to EBITDA and debt to capitalization also remain elevated at 9.3x and 66.1%, respectively, in fiscal 2015. While both metrics have moderated over the past several years, they remain in excess of Fitch's 'BBB' category medians of 4.4x and 48.1%, respectively.

Fitch views Elmhurst's capital structure as being relatively aggressive in light of its liquidity position, consisting of about 58% variable-rate debt. Furthermore, Elmhurst is party to nine interest rate swaps with a total notional amount of $430 million with five different counterparties. The hospital has provisions in its swap agreements requiring collateral posting when the mark-to-market valuation results in a liability ranging from greater than $0 to greater than $3 million. As of June 30, 2015, the mark-to-market for all of Elmhurst's swaps was a negative $13.5 million, with Elmhurst posting $14.5 million of collateral. In 2013, Elmhurst refinanced a significant portion of its LOC-backed debt with direct placements (including five-year terms) and the hospital has one LOC outstanding with an expiration of February 2017. Fitch views the reduced put risk favorably.

DISCLOSURE

Elmhurst covenants to provide annual audited financial statements within 150 days of fiscal year-end and unaudited quarterly statements within 60 days of quarter end to bondholders. Quarterly disclosure has been timely and includes a balance sheet, income statement, statement of cash flows, utilization statistics, and a management discussion and analysis. In addition, Elmhurst's disclosure on its derivative instruments is very detailed and thorough, which Fitch views positively.

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=992012

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992012

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Paul Rizzo
Director
+1-212-612-7875
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Paul Rizzo
Director
+1-212-612-7875
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com