NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an underlying 'A' rating to the Knox County Health, Educational and Housing Facility Board's expected issuance of up to $221.8 million in series 2011A and 2011B refunding bonds. The bonds are issued by for the benefit of Covenant Health (TN).
Fitch has also affirmed the following series of Covenant Health's (Covenant) outstanding hospital revenue refunding and improvement bonds at 'A'.
--Series 1993;
--Series 2002 A, B and D;
--Series 2006 A and B.
The Rating Outlook is Stable
RATING RATIONALE:
--Covenant holds a leading market share position of 39.4% in what is now a more consolidated and less over-bedded three-system market after the 2008 merger of Baptist and St. Mary's, now part of Mercy and the subsequent closure of Baptist Hospital of East Tennessee;
--System liquidity has historically been strong and exceeds Fitch's 'A' category medians. Liquidity was further aided by the sale of Cariten-PHP health plan in 2008, which also reduced the risk of potential liabilities related to ownership of a health plan;
--Covenant's operating performance is somewhat weaker that the category median, as are the debt metrics both as a result of the system's expansion and continued investment in growth strategies which have resulted in market share growth. The acquisition of Morristown-Hamblen Health System (Hamblen) in fiscal 2010 was the most recent addition to the system, which increased its coverage of the northeast quadrant of the service area;
--Debt burden has historically been higher than the Fitch 'A' category, but is mitigated by the very solid market position and strong liquidity metrics of 346 days cash on hand (DCOH), 22.5 times (x) cushion ratio and 128% cash to debt for the 11 months interim period ended Nov. 30, 2010.
RATING DRIVERS:
--Continuing to maintain the leading market share of the service area while focusing on retaining physician allegiance and strengthening the system's regional presence;
--Maintaining solid liquidity offsetting operating performance at lower end of the rating category.
SECURITY:
Debt payments are secured by a pledge of the gross revenues of the obligated group. There is also a springing mortgage on Fort Sanders Regional Medical Center and Parkwest Medical Center if debt service coverage is below 1.35x or days cash on hand (DCOH) are less than 90 days while the series 2002 bonds are outstanding.
CREDIT SUMMARY:
Covenant consists of seven hospitals with 1,705 licensed beds located throughout 16 counties that make up the Knoxville metropolitan service area, and several other health care related organizations. Covenant had total operating revenues of $1 billion in fiscal 2009. Through a continuing disclosure agreement Covenant agrees to provide annual audited and quarterly financial statements to the MSRB's EMMA system.
On Dec. 10, 2010 Covenant released a notice of a tender offer to the holders of the series 2002 D-1, D-2, D-3 D4 and D-5 auction rate securities issued by the Health and Educational and Housing Facility Board of the County of Knox. The 2011A and 2011B series are expected to be issued on or about March 24, 2011 as variable rate bonds initially in the weekly mode, with Bank of America, N.A. providing liquidity support via direct-pay letters of credit. Proceeds of the series 2011 bonds will refund the tendered bonds. The costs of issuance will be funded from Covenant's internal funds. The untendered bonds will remain in the auction rate mode.
The series 2011 bonds will be issued pursuant to a Restated Master Trust indenture, dated Dec. 1, 2010, as supplemented and security for the bonds is provided by the Obligated Group's pledge of gross receipts and a springing mortgage on certain facilities.
Additional information on Covenant can be found in Fitch's Feb. 16, 2011 report, available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Aug. 16, 2010);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (Dec. 29, 2009).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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