CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on approximately $952 million of bonds issued by the Missouri Health and Educational Facilities Authority, Wisconsin Health & Educational Facilities Authority, and the Oklahoma City Industrial & Cultural Facilities Trust on behalf of SSM Health Care (SSMHC).
The Rating Outlook is Stable.
KEY RATING DRIVERS
DIVERSE OPERATING PLATFORM: SSMHC's broad operating platform includes 18 hospitals across four states and 47% ownership of a managed care organization in Wisconsin. Fitch believes that SSMHC's large revenue base, geographic diversity and wide array of services mitigates the system's overall operating risk profile.
SOLID LIQUIDITY: Liquidity metrics remain solid as highlighted by a 22.8x cushion ratio relative to Fitch's 'AA' category median of 24.1x despite a period of heavy capital spending and a slow-down in collection of accounts receivable.
DECLINE IN OPERATING PERFORMANCE: Operating profitability declined in fiscal years 2011 and 2012 (Dec. 31 year end) due to a combination of recurring and non-recurring expenses. Management has implemented changes and expects to achieve its budgeted 3.1% operating margin in fiscal 2013.
MANAGEABLE DEBT BURDEN: The system's debt burden is manageable with MADS equal to 2.3% of revenue and compares favorably to Fitch's 'AA' category median of 2.5%.
RATING SENSITIVITIES
POTENTIAL ACQUISITION: SSMHC recently signed a letter of intent to acquire Dean Health Systems. With over $1 billion in revenue, Fitch believes this sizeable transaction should have positive strategic benefits. If finalized, Fitch will evaluate the impact of the transaction on SSMHC's rating at that time.
FURTHER WEAKENING IN PROFITABILITY: Given SSMHC's weakened operating performance over the last two years, a further deterioration in profitability and/or decline in liquidity or coverage metrics, (excluding the impact of the potential Dean Health Systems acquisition) may result in negative rating pressure.
SECURITY
Bond payments are general, unsecured obligations of the obligated group.
CREDIT PROFILE
The 'AA-' rating is supported by SSMHC's broad operating platform and solid liquidity. Operating profitability has declined for two consecutive years since Fitch's last rating review; however, profitability is expected to rebound within the next year.
The system's broad operating platform has historically provided a measure of credit stability and is viewed as a credit positive. SSMHC is a large, integrated healthcare system operating 18 hospitals across four states: Missouri, Wisconsin, Oklahoma and Illinois. Total operating revenues equaled $3.1 billion in fiscal 2012.
SSMHC announced that it entered into a letter of intent on April 16, 2013 to acquire Dean Health Systems (Dean), pending both Dean shareholder and regulatory approval. Headquartered in Madison, WI, Dean is a large multi-specialty physicians group operating over 60 clinics throughout southern Wisconsin with over 350 employed physicians. Additional operations include a pharmacy benefits management company and Dean Health Plan, a managed care organization with over 300,000 covered lives. SSMHC currently owns 5% of Dean and 47% of Dean Health Plan.
SSMHC continues to invest in and enhance each of its core markets. The system recently completed a new 50-bed hospital in Janesville, WI and a replacement hospital in Mt. Vernon, IL. A second replacement facility in Jefferson City, MO is scheduled to be completed in January 2015. Additionally, SSMHC began system-wide implementation of Epic's clinical information system and patient accounting platform in 2011. Implementation has been completed across the majority of the system.
Unrestricted cash and investments of $1.76 billion at Dec. 31, 2012 remained stable since Fitch's last review despite heavy capital spending and a slow-down in accounts receivables collection. Liquidity metrics are consistent with the 'AA' rating category with 206.4 DCOH, 22.8x cushion ratio and 133.3% cash to debt. Days in accounts receivable increased to 61.6 in fiscal 2012 from 56.8 in fiscal 2011 due to the Epic implementation. Management expects to collect approximately $50 million in additional cash in fiscal 2013 as days in accounts receivable decreases.
Operating profitability has been compressed due to a combination of recurring and non-recurring expenses with operating margin of 0.8% in fiscal 2012 and 1.3% in fiscal 2011 compared to 3.7% in fiscal 2010 and 3.8% in fiscal 2009. The compression was primarily due to increased bad debt, pension and benefits expenses. Management responded by changing the pension plan structure, proactively managing health benefit expenses and implementing revenue cycle enhancements. SSMHC expects to achieve its budgeted operating margin target of 3.1% in fiscal 2013.
Non-recurring expenses included approximately $7.1 million in fiscal 2011 related to construction of the new Janesville, WI hospital and $14.1 million in fiscal 2012 related to completion of the Janesville hospital, implementation of the Epic system and consolidation of patient business services.
SSMHC's debt burden is manageable with MADS comprising 2.3% of operating revenue and debt service coverage remains adequate with 3.9x MADS coverage in fiscal 2012 and 4.3x in fiscal 2011. Coverage is expected to improve as operations strengthen.
Credit concerns include relatively competitive markets in the St. Louis, Oklahoma and Wisconsin regions and the system's pension funding needs. SSMHC's pension plan was only 51.5% funded at Dec. 31, 2012. However, the plan is governed under church plan exemption and is not subject to ERISA funding requirements. The system implemented pension plan changes in fiscal 2012 which should benefit the system going forward, however the immediate benefit was offset by a decrease in the plan's discount rate.
The Stable Outlook reflects Fitch's expectation that SSMHC's operating profitability will improve in the near to midterm as a result of management's initiatives to control increased pension, benefits and bad debt expense.
SSMHC covenants to provide annual disclosure within 120 days of each fiscal year end and voluntarily provides quarterly disclosure typically within 60 days of each quarter end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the U.S. Revenue-Supported Rating Criteria information was received from the underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria'(July 23, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=788810
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.