CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded to 'AA-' from 'A+' the ratings on approximately $564.3 million revenue bonds issued by University of Colorado Hospital Authority (UCHA) and $270 million of Colorado Health Facilities Authority revenue bonds issued on behalf of Poudre Valley Health Care, Inc. (PVHS):
The Rating Outlook is Stable.
SECURITY
All of the revenues of the UCHA and PVHS are pledged to secure all obligations under both the UCHA Master Indenture and the PVHS Master Indentures.
KEY RATING DRIVERS
SUCCESSFUL INTEGRATION: The rating upgrade to 'AA-' reflects the moderation of 'integration risk' in combining UCHA, PVHS and Memorial Health System (which is operated by UCHA) to create University of Colorado Health (UCHealth) in 2012. Led by the strong performance of UCHA and PVHS, the system generated improved financial performance in fiscal 2013 and the six month interim period, reflecting strong volume growth. While there remain further areas of clinical and financial integration, Fitch believes UC Health has successfully integrated major areas in governance, human resources, corporate services and IT.
ROBUST OPERATING PROFITABILITY: For the fiscal year ended June 30, 2013, UCHealth posted a 9.4% operating margin and a 16.8% operating EBITDA margin which are well in excess of the respective 'A' category medians of 3.3% and 10.7%. The strong profitability reflects year over year growth in volumes, good expense control and integration savings.
UNIQUE MARKET PRESENCE: UCHealth is unique among health care providers in the state as it covers a 15 county primary service area along the front range of the Rocky Mountains from the Wyoming border south to the City of Pueblo. UCHealth benefits from its close affiliation with the University of Colorado's School of Medicine, its position as the only academic medical center in the state and the excellent clinical results of UCHA and PVHS. Fitch believes the system is uniquely positioned among providers to coordinate and deliver clinical services to a large and growing population.
SOLID LIQUIDITY POSITION: At Dec. 31, 2013, UCHealth had $1.65 billion in unrestricted cash and investments which equated to 269 days cash on hand, a 21.8 times (x) cushion ratio and 112.6% cash-to-debt. Despite heavy capital spending, liquidity growth has been strong with unrestricted cash and investments up 14% from fiscal year end (FYE) 2013 and 33% from FYE 2012.
SOLID DEBT SERVICE COVERAGE: Certain of UCHealth's debt metrics are elevated when compared to 'AA' category medians reflecting heavy capital necessitated by strong utilization growth. However, maximum annual debt service (MADS) coverage by operating EBITDA is solid at 5.1x and 4.7x in fiscal 2013 and 2012, respectively, which well exceeds the 'AA' category median of 4.3x.
RATING SENSITIVITIES
SUSTAINED PROFITABILITY: Certain of UCHealth's liquidity and leverage metrics are light relative to Fitch's 'AA' category medians. Thus, maintaining strong profitability and solid coverage are important factors as Fitch expects liquidity to build and leverage to moderate.
ADDITIONAL DEBT: Although not expected, issuance of additional debt to add clinical capacity to meet strong demand for services could pressure the rating.
CREDIT PROFILE
UCHealth is a recently-formed health system combining an academic medical center and two community hospital systems. The new system consists of five acute care hospitals in the Denver, Colorado Springs and Fort Collins areas, with a combined 1,507 licensed beds. UCHealth combines the facilities and services of The University of Colorado Hospital Authority (UCHA), Poudre Valley Health System (PVHS) and the Colorado Springs Memorial Health System (MHS). In fiscal 2013, UC Health generated total revenues of $2.3 billion.
SUCCESSFUL INTEGRATION
In Fitch's Sept 2012 rating action commentary, Fitch identified the execution risk attendant in bringing together three independent hospital systems to become a single economic and clinical entity as a primary credit concern. Since that time, UC Health has successfully consolidated the human resources and benefits platform across the system, integrated the IT systems for electronic health record, HR, payroll, finance, supply chain and revenue cycle and standardized capital and operating budgeting protocols. Clinical integration and sharing of clinical 'best practices' have been developed in the areas of stroke, oncology and emergency services. The rating upgrade to 'AA-' reflects, in part, the successful integration of the governance, managerial and clinical areas of the UCHealth system.
ROBUST OPERATING PROFITABILITY
UCHealth's historical operating profitability has been consistently robust. In fiscal 2013, UCHealth further improved its operating performance generating income from operations of $218 million on total revenues of $2.3 billion. The 9.4% operating margin in fiscal 2013 (audited) is improved over operating margins of 7.6% and 6.6% (combined) generated in fiscal 2012 and 2011, respectively. Further, operating EBITDA margins of 16.8% and 15.8% in fiscal 2013 and 2012, respectively, are very strong and are well in excess of the 'AA' category median of 11.8%. Through the six month interim period ended Dec. 31, 2013, UCHealth generated operating and operating EBITDA margins of 7.3% and 14.9%, respectively.
Revenue generation and profitability is fueled by UCHA and PVHS. In fiscal 2013, UCHA and PVHS accounted for roughly 50% and 36% of total system revenues, respectively. In fiscal 2013, UCHA generated operating and operating EBITDA margins of 14.2% and 21.8% respectively on total revenues of $1.06 billion. PVHS generated operating and operating EBITDA margins of 9.4% and 17.5%, respectively, in fiscal 2013 on total revenues of $832.5 million. Revenue growth and profitability have been bolstered by excellent growth in clinical volumes. Admissions, inpatient surgeries and outpatient surgeries at UCHA and PVHS combined increased 6.5%, 9.1% and 9.9%, respectively from 2012 to 2013. Similarly, through the six month interim period, admissions, inpatient and outpatient surgeries at UCHA and PVHS combined were up 10.5%, 11.6% and 7.8%, respectively, compared to the prior year period.
UNIQUE MARKET PRESENCE
The formation of UCHealth creates a unique health system that can coordinate the delivery of clinical services across a large primary service area (PSA). UCHealth's PSA follows Colorado's I-25 corridor, an expansive area ranging from Colorado's Wyoming border to the City of Pueblo, CO (roughly 200 miles). The PSA's population of 4.2 million accounts for approximately 82% of Colorado's total population. From 2000-2010, the PSA population grew by more than 16% and is expected to continue to grow above national averages in the future. In UCHealth's combined 15 county PSA, the system had a 20.1% market share in 2012 compared to Centura at 22.7% and HealthOne at 21.9%.
UCHealth benefits from the strong clinical reputations developed independently by UCHA and PVHS. UCHealth benefits from its close affiliation with the University of Colorado's School of Medicine. As the only academic medical center in the state and as the primary teaching hospital for the School of Medicine, University of Colorado Hospital has been recognized for clinical excellence in several clinical services by U.S. News and World Reports and has ranked in the top 10 academic medical centers for quality four years by the University HealthSystem Consortium. Similarly, PVHS was awarded the Malcolm Baldrige National Quality Award in 2008 in recognition of its operational and clinical achievements. Furthermore, Fitch believes branding the system 'University of Colorado Health' ties the new system to a trusted, highly regarded institution that is recognized throughout the region by patients, physicians, and employers.
SOLID LIQUIDITY POSITION
UCHealth's liquidity metrics are mixed relative to Fitch's 'AA' category medians. At Dec. 31, 2013, UC Health had $1.65 billion of unrestricted cash and investments. While days cash of hand of 269 and cushion ratio of 21.8x are in line with the respective 'AA' medians of 254.3 and 23.4 cash-to-debt of 112.6% is light relative to the 'AA' median of 173.6%. However, Fitch notes that liquidity growth has been strong with unrestricted cash and investments up 14% from FYE 2013 and 33% from FYE 2012. Pursuant to the 2012 MHS lease agreement, the City of Colorado Springs retained the cash and investments of MHS and used a portion of those monies, along with the proceeds from the purchase price by UCHA to refund debt related to MHS. Thus, the cash and investment position of the system reflects the liquidity built by UCHA and PVHS.
SOLID DEBT SERVICE COVERAGE
The system's strong cash flow generation results in strong coverage of MADS by operating EBITDA of 5.1x and 4.7x in fiscal 2013 and 2012, respectively, which exceeds the 'AA' category median of 4.3x. Through the six month interim period, MADS coverage by operating EBITDA was 5.1x
DISCLOSURE
UCHealth covenants to provide bondholders with audited annual information within 150 days of fiscal year-end and unaudited quarterly statements within 60 days of quarter-end to the national recognized municipal securities information repositories. The content of UCHealth's disclosure includes a balance sheet, income statement, cash flow statement, utilization statistics, and management discussion and analysis and viewed favorably by Fitch.
Additional information is available at 'www.fitchratings.com'.
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823547
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