Fitch Rates UnityPoint Health (Iowa Health System) Series 2014 Revs 'AA-'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned an 'AA-' rating to the following bonds expected to be on behalf of UnityPoint Health:

--$93,095,000 Wisconsin Health and Educational Facilities Authority health facilities revenue bonds, series 2014A;

--$85,470,000 Wisconsin Health and Educational Facilities Authority variable rate health facilities revenue bonds, series 2014B-1/2;

--$69,905,000 Iowa Finance Authority health facilities revenue bonds, series 2014C.

Fitch has also assigned an 'AA-' rating to $7.6 million of series 1992A bonds previously issued by the Wisconsin Health and Educational Facilities Authority on behalf of Meriter Health Services (Meriter) which was acquired by UnityPoint Health on Jan. 1, 2014.

Fitch has assigned an 'F1+' short-term rating on the series 2014B1/2 variable bonds that will be supported by UnityPoint Health's self-liquidity.

Additionally, Fitch has affirmed the 'AA-' rating on the approximately $731.8 million of Iowa Finance Authority and Illinois Finance Authority revenue bonds issued on behalf of UnityPoint Health and its predecessor organizations.

The Rating Outlook is Stable.

The series 2014A and C bonds will be fixed rate bonds and the series 2014B1/2 bonds will be variable rate demand bonds operating in a Windows mode and supported by UnityPoint Health's self-liquidity. Proceeds of the series 2014 bonds will be used to refinance approximately $171.6 million of bonds issued on behalf of Meriter, to refund approximately $69.4 million of UnityPoint's series 2005A bonds and to pay costs of issuance. The series 2014 bonds are expected to price the week of May 5 via negotiation.

Pro forma maximum annual debt service (MADS) is expected to equal $97.2 million, including a $23 million series 1985B bullet maturity in 2015. Previous MADS calculations assumed that the bullet amortizes per the master trust indenture. UnityPoint Health intends to pay off the series 1985B bullet in 2015 and has more than sufficient resources to do so without negatively impacting liquidity metrics. Excluding the bullet maturity, MADS would equal $75.6 million and is front loaded, decreasing incrementally to $73 million in fiscal 2020 and $68 million in fiscal 2022.

SECURITY

Bond payments are secured by a pledge of the gross receipts of the obligated group.

KEY RATING DRIVERS

BROAD OPERATING FOOTPRINT: Through a series of acquisitions since 2011, UnityPoint Health has broadened an already large operating footprint and now includes 17 hospitals located across nine operating regions in three states and over $3.6 billion in annual operating revenues (including Meriter). UnityPoint Health's broad operating platform provides for additional credit stability.

SOLID LIQUIDITY: Unrestricted liquidity continues to strengthen, with 236.3 days cash on hand, 197.5% cash-to-pro forma debt and 28.0x cushion ratio at Dec. 31, 2013 and compares favorably to Fitch's 'AA' category medians of 254.3 days, 173.6% and 23.4x, respectively.

STABLE OPERATING PROFITABILITY: Operating profitability has remained stable with operating EBITDA margin averaging 9.8% since fiscal 2010 and equal to 9.9% in fiscal 2013. The Meriter acquisition is expected to be dilutive in the near term and would have compressed operating EBITDA margin to 9.1% in fiscal 2013. Given the systems size and scope of operations, operating profitability is consistent with the 'AA-' rating.

LIGHT DEBT BURDEN: UnityPoint Health's pro forma debt burden remains light with pro forma MADS equal to 2.1% of fiscal 2013 revenue (excluding the bullet maturity and including Meriter). The light debt burden and solid profitability result in strong pro forma MADS coverage by EBITDA of 6.3x in fiscal 2013, exceeding Fitch's 'AA' category median of 5.0x. Including the bullet maturity, pro forma MADS coverage of 4.3x remains consistent with the rating category.

RATING SENSITIVITIES

MAINTENANCE OF CURRENT PROFILE: Fitch expects that UnityPoint Health will successfully integrate Meriter and will maintain its historically stable operating profitability and solid liquidity metrics, while maintaining its low debt burden.

CREDIT PROFILE

UnityPoint Health, headquartered in Des Moines, Iowa, operates 17 hospitals and over 280 physician clinics across nine operating regions in Iowa, Illinois and Wisconsin. The system acquired Meriter on Jan. 1, 2014. Total operating revenues equaled $2.8 billion in fiscal 2013. If Meriter had been part of the system in 2013, total operating revenues would have equaled $3.6 billion.

Fitch's analysis is based upon UnityPoint Health's consolidated financial statements. The obligated group accounted for 93.7% of consolidated operating revenues and 92.6% of consolidated total assets in fiscal 2013. The system plans to add Meriter to the obligated group upon the closing of the series 2014 bond issuance (excluding Meriter Medical Group and Physicians Plus Insurance Corporation [PPCI]). Including Meriter, the obligated group would have accounted for 86% of consolidated operating revenues and 91.5% of consolidated total assets in fiscal 2013.

BROAD OPERATING FOOTPRINT

UnityPoint Health has transitioned from a large, predominantly single state healthcare system to a larger multi-state healthcare system with acquisitions of Methodist Medical Center (Peoria, IL) in 2011, Proctor Hospital (Peoria, IL) in 2013 and, most recently, Meriter on Jan. 1, 2014. Meriter operates a 443 licensed bed hospital in Madison, WI, a multi-specialty medical group with 117 employed physicians and PPIC, a for-profit managed care organization with $264 million in total operating revenue in fiscal 2013 and approximately 65,000 covered lives, primarily in Dane County, WI. Meriter's total operating revenue equaled $721 million in fiscal 2013.

Iowa Health System began doing business as UnityPoint Health in April 2013 to reflect its broadened operating platform and increased operations outside of Iowa.

UnityPoint Health has maintained a stable system-wide inpatient market share of approximately 38% and maintains the first or second market share position in each region. However, each region is highly competitive. Prior to the Meriter acquisition, over 75% of the system's operating revenue had been generated by five regions. This amount decreased to 64% post acquisition as the system's revenue base was further diversified. However, operating income remains concentrated with 76% derived from the system's top three performing regions. The high degree of competition and concentration of operating income remain credit concerns.

Overall, Fitch views UnityPoint Health's broadened operating platform favorably. The addition of Meriter and PPIC further diversifies the system's operations while enhancing UnityPoint Health's capabilities in population health management.

SOLID LIQUIDITY

Unrestricted liquidity continues to strengthen, increasing 31.3% from $1.4 billion at Dec. 31, 2012 to $1.9 billion at Dec. 31, 2013. If Meriter had been part of the system at Dec. 31, 2013, unrestricted liquidity would have equaled $2.1 billion. Including Meriter, cash-to-pro forma debt of 197.5% and cushion ratio of 28.0x (excluding the bullet maturity, 21.8x including the bullet maturity) exceed Fitch's 'AA' category medians of 173.6% and 23.4x, respectively. Capital spending is expected to remain consistent with levels and is not expected to negatively impact unrestricted liquidity.

STABLE OPERATING PROFITABILITY

Operating profitability has remained stable and is consistent with the rating category given UnityPoint Health's size and scale. Operating EBITDA margin averaged 9.6% since fiscal 2010 and equaled 9.9% in fiscal 2013 relative to Fitch's 'AA' category median of 11.8%. The addition of Meriter will initially compress profitability metrics. Meriter's operating EBITDA margin equaled 5.9% in fiscal 2013. However, management has identified $9.5 million of initial integration improvement initiatives and expects to additional performance improvement opportunities. If Meriter had been included in the system's fiscal 2013 operating results, operating EBITDA would have equaled 9.1%

LIGHT DEBT BURDEN

Post issuance, UnityPoint Health will have $1.1 billion of total debt outstanding. Pro forma leverage and debt burden remain light with pro forma debt-to- capitalization equal to 29.1% and pro forma MADS equal to 2.1% of fiscal 2013 revenue (excluding the bullet maturity and including Meriter) relative to Fitch's respective 'AA' category medians of 32.7% and 2.6%.

The light debt burden and solid operating profitability produced strong pro forma MADS coverage by EBITDA of 6.3x in fiscal 2013 (including Meriter and excluding the bullet maturity), easily exceeding Fitch's 'AA' category median of 5.0x. Including the bullet maturity, pro forma MADS coverage by EBITDA remains solid at 4.9x.

SHORT-TERM RATING

The 'F1+' rating reflects the strength of UnityPoint Health's cash and investment position to pay the mandatory tender on the series 2014B-1/2 puttable bonds backed by self-liquidity. At Dec. 31, 2013, UnityPoint Health's eligible cash and investment position under Fitch's criteria would cover the maximum mandatory put on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating.

DISCLOSURE

UnityPoint Health covenants to provide annual disclosure within 120 days after the end of the fiscal year and quarterly disclosure within 60 days of the end of the first three fiscal quarters. Disclosure is provided through the UnityPoint Health website and the Municipal Securities Rulemaking Board's EMMA System.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.

-'Rating U.S. Public Finance Short-Term Debt', Dec. 9, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827533

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Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jennifer Kim
Associate Director
+1-212-908-0740
or
Committee Chairperson
James 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
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jennifer Kim
Associate Director
+1-212-908-0740
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com