SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the $250 million Allina Health System taxable series 2015 bonds. In addition, Fitch has affirmed the 'AA-' on Allina Health System's (Allina) outstanding debt, listed at the end of this press release.
The series 2015 bonds will be fixed rate and expected to price the week of Sept. 7th. The bond proceeds will fund $150 million of capital expenditures and $100 million will remain on the balance sheet for general corporate purposes.
The Rating Outlook is Stable.
SECURITY
Bondholders have a security interest in pledged revenues and a negative lien pledge on property of the obligated group (OG).
KEY RATING DRIVERS
COMPREHENSIVE DELIVERY MODEL: Allina's main credit strength is its comprehensive delivery model and geographic reach in the competitive Twin Cities metropolitan area that has led to a leading and stable market position of 31.6% in 2014. Allina has 1,310 employed physicians and 82 clinics in the service area. Fitch believes Allina is well positioned for the changing healthcare environment as it has capitalized on its information technology investments with a focus of providing care in cost-effective settings and improving quality outcomes.
TRANSFORMATIONAL STRATEGIC INITIATIVES: Allina has committed to redesigning patient care, which focuses on identifying patients at risk and providing them with the resources necessary to manage their care. This is expected to enhance patient care, improve outcomes, and reduce costs. Allina has implemented several care models and is slowly phasing in performance risk into its managed care contracts. To date, these initiatives have generally added costs to the system while the benefits from these strategic investments are expected over a longer-term horizon.
CONTINUED LOW DEBT BURDEN: With a leadership transition, the philosophy on debt issuances has changed and Allina will likely fund capital needs with debt on a more routine basis. Allina has debt capacity at its current rating level and the $250 million of additional debt is easily absorbed. Proforma debt metrics remain favorable.
CONSISTENT PROFITABILITY: Allina has maintained consistent profitability driven by strong growth in clinic and ambulatory services in addition to proactive management of expenses. The organization continues to identify areas for cost savings and efficiency gains and it implemented a large operating cost reduction initiative, which included a reduction in FTEs, in the latter half of 2014 as performance in the first six months of 2014 was weaker than normal. However, management is projecting a compression in profitability due to top line revenue pressure.
STRONG LIQUIDITY: Solid cash flow and good investment returns has built strong liquidity metrics with 181.7 days cash on hand and 269.2% cash to debt as of June 30, 2015. Proforma cash to debt remains favorable at 204.4% compared to the AA category of 201.7%.
RATING SENSITIVITIES
STABILITY AT CURRENT RATING LEVEL: Fitch believes there is stability at the current rating level given Allina Health System's market position, operating profile and consistent financial performance.
CREDIT PROFILE
Allina is a comprehensive delivery system consisting of 13 hospitals, including its flagship hospital, Abbott Northwestern Hospital, and 1,310 employed physicians (750 primary care) with 82 outlying clinics in the Twin Cities metropolitan area. Total operating revenue for the consolidated system in 2014 (Dec. 31 fiscal year end) was $3.6 billion. The obligated group (OG) includes Allina's owned hospitals and other subsidiaries and accounted for 99% of the consolidated entity's revenue for fiscal 2014. Fitch's analysis is based on the consolidated entity. There was a CEO transition in January 2015 with the then Chief Clinical Officer promoted to the role of CEO. At the time of Fitch's last review in November 2014, the CFO announced that he would be departing the organization, but since the CEO transition, the CFO is remaining onboard.
STRATEGIC INITIATIVES
Allina has been focused on maximizing its market position and delivery network in the changing reimbursement environment. These efforts include continued acquisitions of smaller entities within the Twin Cities metropolitan market as well as investing in changing the delivery of care with the goal of providing quality care and improving affordability. Patient care redesign and care management initiatives include the development of care teams and use of predictive modeling to prevent adverse outcomes and high cost utilization. The cost of these initiatives has totaled $73 million for fiscal 2013, $84 million for fiscal 2014 and is expected to total $69 million in fiscal 2015. Fitch believes these strategies will benefit the system as the market transitions to a more value-based reimbursement environment, which has been slower than management expected.
Allina was an early adopter of the electronic medical record (Epic implemented in 2009) and had developed its own enterprise data warehouse. This was sold to Health Catalyst (company that provides data warehouse platform and analytics applications to more than 1,900 hospitals and clinics) in January 2015 to better leverage the growth and capabilities of the platform. Allina is focused on optimizing technology and solutions to accelerate outcomes improvement.
PAYMENT REFORM
Allina's market position is solidified by Allina Integrated Medical Network (AIMN), which is a physician-led organization that includes Allina's 1,310 employed physicians as well as 1,730 independent physicians. The AIMN governance structure allows physicians to have key decision-making powers and allowed Allina and AIMN to develop an exclusive narrow network contract with Blue Cross. Allina has a goal of significantly increasing its percentage of revenue tied to outcomes by 2018.
CONSISTENT OPERATING PERFORMANCE
Operating margin was 3.5% in fiscal 2012, 3.5% in fiscal 2013 and 4% in fiscal 2014. Through the six months ended June 30, 2015, operating margin was 3.5%. Due to continued top line revenue pressure, management expects operating margin to be around 3% going forward.
Despite a favorable service area with good demographics and socio-economic indicators, the environment is competitive with the potential for further consolidation among Allina's competitors. In addition, other operating pressures include a strong nurses union and dominance of three main managed care payors. The nurses union, Minnesota Nurses Association (MNA), negotiates with all the hospitals in the Twin Cities at the same time and has bargaining clout. The MNA contract extends through 2016. Allina is part of a multi-employer defined benefit pension plan for the MNA, which is underfunded and Allina's liability is approximately $69.9 million.
MARKET LEADER
Allina is the largest health system in Minnesota with a leading 31.6% inpatient market share in the highly competitive Minneapolis-St. Paul metropolitan area in 2014. Market share has remained stable. The next closest competitor is Fairview Health System at 20.3% then HealthPartners with 15%.
STRONG LIQUIDITY
Allina's liquidity has steadily grown over the last few years and at June 30, 2015, Allina had $1.7 billion of unrestricted cash and investments, which translates to 181.7 days cash on hand and 269.2% of debt compared to the respective 'AA' category medians of 289.4 and 201.7%. Liquidity metrics are expected to remain stable to slightly improve as more capital may be funded by debt. In addition, Fitch views favorably Allina's ability to terminate its defined benefit pension plan, and assets were dispersed in November 2013.
CAPITAL NEEDS
Capital spending is projected to be approximately $300 million a year (2x depreciation expense) with a focus on strategic investments. The projects funded with the series 2015 bonds include various projects include a mother and baby unit at United Hospital, infrastructure improvements at Abbott Northwestern Hospital, clinic expansions and renovations as well as investment in its Mercy and Unity campuses. Allina is evaluating its infrastructure needs, which may include a larger project on the horizon at Abbott Northwestern to improve efficiency as well as best utilization of resources between its Mercy and Unity campuses (8 miles apart).
LOW DEBT BURDEN
Allina's debt burden is low even with the additional debt with maximum annual debt service (MADS) increasing to $62.8 million from $50.2 million and equating to a still light 1.7% of 2014 revenue, compared with Fitch's 'AA' rating category median of 2.4%. According to Fitch's calculations, MADS coverage by EBITDA is solid at 5.4x for the six months ended June 30, 2015 compared to 5.8x in fiscal 2014 and 6.4x in fiscal 2013. Allina's operating leases are high due to the number of clinics it has. Operating lease expense in 2014 was $27.6 million and when included as debt, adjusted MADS coverage is 4.3x for 2014.
DEBT PORTFOLIO
Total proforma debt after the series 2015 issuance is $884 million with 62% fixed rate, 34% synthetic fixed rate and 3% variable rate. Of Allina's variable-rate exposure, $285.8 million are VRDBs supported by letters of credit (LOC) and $39.5 million are auction rate. Fitch believes the risks related to the VRDBs are manageable due to the solid cash-to-putable debt of 6x at June 30, 2015. The LOCs associated with the VRDBs all expire in January 2017. Allina has $350.9 million of floating- to fixed-rate swaps outstanding with four different counterparties. Collateral posting requirements vary for the five swaps and Allina was posting $2.5 million of collateral as of June 30, 2015.
DISCLOSURE
Allina covenants to disclose annual and quarterly financial information to bondholders. Fitch notes that Allina's disclosure is one of the best in its rated portfolio because of the quality of the information provided. All of Allina's disclosure documents are posted on EMMA. Quarterly and annual financial information consists of a balance sheet, income statement, and statement of cash flows and is supplemented by a management discussion and analysis plus updated market share information, utilization statistics, debt and investment summaries and general organizational information.
Outstanding Debt Rated by Fitch:
--$50,000,000 Minneapolis & St Paul Housing & Redevelopment Authority (MN) (Allina Health System) health system variable-rate revenue bonds series 2009C (LOC: Wells Fargo Bank, N.A.);
--$114,525,000 Minneapolis & St Paul Housing & Redevelopment Authority (MN) (Allina Health System) health system variable-rate revenue bonds series 2009 B-1 & B-2 (LOC: JPMorgan Chase Bank, N.A.);
--$175,275,000 Minneapolis & St Paul Housing & Redevelopment Authority (MN) (Allina Health System) health care system revenue bonds series 2009 A-1& A-2;
--$121,250,000 Minneapolis & St Paul Housing & Redevelopment Authority (MN) (Allina Health System) health system variable-rate revenue bonds series 2007C-1&C-2;
--$105,415,000 Minneapolis (MN) (Allina Health System) health care system revenue bonds series 2007A (insured: MBIA Insurance Corp.);
--$14,575,000 Minneapolis (MN) (Allina Health System) variable-rate revenue bonds series 1998A.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
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