Fitch Rates Indianapolis Local Public Improv Bond Bank, IN Lease Revs 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the following Indianapolis Local Public Improvement Bond Bank bonds:

--$42,460,000 lease revenue bonds, series 2013A (the bonds).

The bonds are expected to be sold through negotiation during the week of April 15.

The bonds will be used to fund a portion of the Wishard Hospital Project (the project). The project entails the replacement of Wishard Hospital, an ambulatory clinic, an office building, parking garage and power plant.

In addition, Fitch affirms the following ratings:

--Approximately $216.9 million unlimited tax general obligation bonds (ULTGOs), series 2005D, 2010A-1 and 2010A-2 at 'AA+';

--Approximately $465 million lease revenue bonds, series 2010B-1 and 2010B-2, at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the Indianapolis Local Public Improvement Bond Bank (the bond bank) which under Indiana law is empowered to buy and sell securities of 'qualified entities'. The bond bank itself has no taxing power.

Pursuant to Indiana Code, the Indianapolis-Marion County Building Authority (the authority) and the Health and Hospital Corporation of Marion County (HHC) are qualified entities that can issue 'qualified obligations' to be purchased by the bond bank. Each series of bonds is secured by the trust estates established under the bond bank indentures.

The authority is being used as a conduit. HHC will lease the facilities to the authority, which will lease them back to HHC through a lease-leaseback arrangement. The bonds are payable from fixed rental payments (due 15 days prior to debt service payments) made by HHC through a master lease under which the authority is the lessor and HHC is the lessee.

Lease payments are supported by an unlimited property tax pledge, not subject to the Circuit Breaker Tax Credit or annual appropriation. The lease payments are subject to abatement if the leased premises are not available for use. Abatement risk is offset by the requirement that the authority or HHC obtain property and casualty insurance in an amount equal to the greater of the cost of defeasing the then-outstanding series 2010B and 2013A bonds, or 100% of the replacement cost of the leased premises. This requirement can be met with self-insurance, which Fitch believes weakens it. Additionally, the authority or HHC must obtain rental interruption insurance equal to full rental value for 2 1/2 years.

The bonds will also be secured by a common cash-funded debt service reserve fund (DSRF) with the series 2010B-1 and 2010B-2 lease revenue bonds sized at maximum annual debt service (MADS), reduced by the 35% interest subsidy to be received from the U.S. Treasury for the series 2010B-2 Build America Bonds.

The series 2005D, 2010A-1 and 2010A-2 bonds are secured by an ULTGO pledge of HHC. The series 2010A-1 and A-2 bonds are also secured by a DSRF funded to MADS.

KEY RATING DRIVERS

SAFETY NET DESIGNATION: As the only public hospital in Marion County, Wishard Hospital fulfills an essential role in the service area, providing safety net healthcare services to Marion County's Medicaid and indigent care population.

NEW FACILITY TO IMPROVE EFFICIENCES: The new facility, whose financing was approved by a high percent of voters, should increase efficiency and effectiveness of healthcare delivery as the exisiting hospital is more than 100 years old.

STRONG QUALITATIVE MEASURES: Several of Wishard's qualitative measures (including quality, cost effectiveness of care, relationship to Indiana University School of Medicine) are positive credit factors.

WEAK HOSPITAL FINANCIAL OPERATIONS: Financial operations of Wishard Hospital are weak and vulnerable to changes to state and federal funding given the large number of Medicaid, Medicare and indigent patients.

JOINT MANAGEMENT SERVICES AGREEMENT VIEWED POSITIVELY: HHC's joint management services agreement (JMSA) with Community Health Network is viewed positively by Fitch as it better positions both systems for health care reform by improving access and quality care in their service areas.

STRONG SECURITY: Debt service on the bonds is secured by an unlimited ad valorem tax pledge of HHC, a component unit of the consolidated city of Indianapolis-Marion County.

DIVERSE TAX BASE AND ECONOMY: The service area has a large and diverse tax and economic base and continues to experience growth through new commercial development.

RATING SENSITIVITIES

STRENGTH OF THE SERVICE AREA ECONOMY: The rating is sensitive to shifts in fundamental credit characteristics including the strong service area economy and tax base. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

JOINT MANAGEMENT SERVICES AGREEMENT: The rating will be reviewed if the final JMSA is materially different than what Fitch expected.

CREDIT PROFILE

HHC is co-terminus with Marion County and Indianapolis (Fitch GO rating of 'AAA' with a Stable Outlook). The county is the most populous in the state with a 2010 population of 903,393, a 5% increase from 2000. The city, the state capital, is the largest in the state.

As of Feb. 18, 2013, HHC entered into an agreement with Community Health Network (CHS; revenue bonds rated 'A+'; Stable Outlook). The agreement has been approved by the boards of both organizations and each provider is currently in the due diligence phase of the process. The agreement is intended to allow the organizations to create and enter a JMSA to implement various parts of federal healthcare reform (Patient Protection and Affordable Care Act), while expanding care access throughout each of their service areas. The JMSA is neither an acquisition of one party of the other nor a full asset merger. Each entity will remain obligated on its own outstanding debt.

SERVICES AND GOVERNANCE

HHC provides health services including preventive, acute care, and long-term care to county residents through three main departments: Wishard Health Services which operates the 340-bed Wishard Hospital; Marion County Health Department; and the Division of Long-Term Care which operates over 59 nursing home facilities. Wishard Hospital is Marion County's only public, general acute care facility, providing 65%-75% of all uncompensated care in the county.

HHC is governed by a seven-member Board, three of whom are appointed by the mayor of the city, two by the Board of Commissioners of the County, and two by the City-County Council. The Board levies its own taxes, adopts its own ordinances and issues its own general obligation bonds through the bond bank, subject to approval of the Indiana Department of Local Government Finance.

STRONG COMMUNITY SUPPORT FOR REPLACEMENT FACILITY

In 2009 voters approved the issuance of up to $703 million in tax-supported debt for the replacement of HHC's Wishard Hospital. Fitch believes that the bonds' approval by a high 85% of voters indicates solid support for the project, although turnout was light and management conveyed its expectation to voters that a property tax increase would not be needed to fund the project.

HHC is legally obligated to fund the annual debt service on the 2010 A and B bonds using a dedicated property tax if other revenues are not sufficient to fully repay the bonds in any given year.

The replacement project is on time and ahead of budget, with full completion and opening expected in December 2013. The new facility will comprise a new 11-story, 1.2 million square foot replacement hospital with 327-bed inpatient hospital,17 operating rooms, 4 interventional labs and 12 labor delivery rooms, and an adjacent six-story, 175,000 square foot structure with 110 exam rooms which houses the outpatient clinic facilities. The replacement facilities also include a five-story administrative office building; a six-story, 2,700-car parking garage which was completed in January 2012; and a consolidated utility plant.

In June 2011, $40 million was donated towards the project. In recognition of the donation, the project will be named the Sidney and Lois Eskenazi Hospital and Eskenazi Health. Fund raising to date totals $74.6 million.

DEBT SERVICE CURRENTLY BEING PAID FROM OPERATIONS

HHC is legally obligated to fund the annual debt service on the series 2013A, 2010A, and 2010B bonds using a dedicated property tax if other revenues are not sufficient to fully pay the bonds in any given year; however, HHC currently funds 100% of debt service through operating revenues and plans to continue to do so. Property taxes represent 8.5% of total projected 2012 revenue of $1.1 billion with MADS on all debt, including the 2013A bonds, at a modest 4.0% of revenues. Additionally, HHC will contribute $150 million ($92 million to date) in accumulated reserves to the project, leaving approximately $150 million in reserves, which Fitch considers an adequate operating cushion.

STRONG QUALITATIVE FACTORS BUT WEAK FINANCIAL OPERATIONS

Hospital utilization has risen in recent years due to the recession; occupancy has been as high as 98%, compared to the 80% generally considered by Fitch to be full occupancy. Wishard's qualitative performance measures are strong, while weak financial operations reflect in part the very high 38% of patients with no form of insurance or government subsidy.

Management's goal is to maintain break-even operations (after interfund transfers). However, Wishard generates substantial operating losses due to poor payor mix. Management has implemented various collection and pre-qualification programs to maximize revenue collection and is strategically focused on providing low-cost care. Despite these measures, its operating performance continues to be weak and Fitch expects operating profitability to continue to be weak despite the above-mentioned modifications.

In 2011 (year-end Dec. 31), the hospital incurred an operating loss of approximately $236 million. This was offset by the $195 million in transfers from the general fund and additional sources of revenues. The hospital ended the year with a negative $41 million from operations after transfers compared to a negative $35 million in 2010.

The general fund, which includes property and income tax support as well as intergovernmental payments, has experienced consistent operating surpluses, including a $95.7 million surplus in 2011. The surpluses are used to bolster hospital operations. After transfers, including $195 million in support of Wishard, the net deficit totalled $17.6 million in 2011. The unrestricted (sum of committed, assigned and unassigned) general fund balance totalled $135 million or a strong 44.2% of general fund spending. When proprietary expenditures are added, the unrestricted balance drops to an adequate 11.9%.

For 2012, on an unaudited budgeted basis, management reports results were break-even with general fund net income totaling $104,496.

MANAGEABLE LONG-TERM LIABILITIES

Overall debt levels are mixed with overall debt per capita moderate at $1,849 and debt-to-full value at 4.7%. Approximately 29% reflects overlapping debt of Indianapolis and school districts within the county. Principal amortization is slow, with only 36% retired in 10 years, somewhat typical for hospital financing. Other than the Wishard replacement, HHC's capital needs are minimal.

HHC contributes to the Indiana Public Employees Retirement Fund (PERF), an agent multiple-employer retirement system. For 2010 and 2011 the corporation contributed $15.3 million and $19.3 million, or 92% and 81%, respectively, of the annual pension cost. For 2011, corporation pension costs represented a modest 1.7% of general and proprietary fund expenditures. Carrying cost including debt service and pension costs were manageable at 6.3%.

DIVERSE ECONOMY AND TAX BASE

The strength of the service area economy is an important factor in the 'AA' rating on the bonds.

The economy and tax base are strong and well diversified and includes pharmaceutical production, health services, life and sciences companies, manufacturing and other business and professional services companies which continue to lead the employment and city's industrial output. The unemployment rate for the city has historically been below state and national levels. For December 2012 the city recorded an unemployment rate of 8.0%, compared to 8.2% and 8.1% for the state and U.S., respectively.

Taxable assessed value has been fairly stable over the last few years, totalling $35.7 billion in 2012, a slight decrease from 2011. The top 10 taxpayers comprise a modest 6.7% of 2011 taxable value. Property tax collections, which have historically been strong, decreased in 2011 due to the application of the state's circuit breaker tax credit.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and IHS Global.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings
Primary Analyst
Karen Wagner, +1 212-908-0230
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Burger, +1 212-908-0555
Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Wagner, +1 212-908-0230
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Burger, +1 212-908-0555
Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com