CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on approximately $1.3 billion in Wisconsin Health and Educational Facilities Authority Bonds issued on behalf of Aurora Health Care (AHC).
The Rating Outlook is revised to Positive from Stable.
SECURITY
The bonds are secured by a limited pledge of gross revenues and a first mortgage lien on Aurora St. Luke's Medical Center. A debt service reserve fund provides additional security on the series 2009 and 2010 bonds.
KEY RATING DRIVERS
IMPROVED OPERATING PERFORMANCE: The Outlook revision to Positive reflects better than expected operating profitability in fiscal 2014 which has been sustained in 2015. While some softening is expected, cash flow is expected to remain above median levels going forward, driven by steady leading market position and growing clinical volumes, as well as the significant completion of information system updates and related costs.
LEADING MARKET POSITION: AHC's market leading position and geographic reach allow it to mitigate some of the economic pressures of its service area by enabling good physician recruitment, steady volumes, and solid payor contracts.
LIMITED OPERATING RISK: The 'A' rating reflects AHC's favorable operating risk profile resulting from its leading market share position and large base of employed physicians which allows for greater variance when compared to Fitch's median 'A' category financial ratios.
GROWING LIQUIDITY METRICS: AHC's liquidity profile continues to incrementally improve, as expected. At June 30, 2015, AHC had $1.5 billion in unrestricted liquidity, equal to 134.9 days of cash on hand (DCOH) and 94.7% cash to debt, versus Fitch's 'A' category medians of 205.3 DCOH and 143.7% cash to debt.
MANAGEABLE LEVERAGE: While AHC's overall debt burden remains somewhat elevated, leverage has consistently moderated over the past four years and is expected to continue to do so. Coverage of maximum annual debt service (MADS) by EBITDA was robust at 5.1x in 2014 and 5.0x through the six months ended June 30, and is expected to remain in line with Fitch's 'A' category median going forward.
RATING SENSITIVITIES
IMPROVING LIQUIDITY: Upward rating movement is likely should AHC continue to generate healthy cash flows, leading to further liquidity growth and solid coverage over the next 18-24 months.
CREDIT PROFILE
AHC is an integrated healthcare system consisting of 14 acute care hospitals (3,153 licensed beds), one psychiatric hospital, over 1,500 employed physicians, 153 clinic sites, and approximately 70 retail pharmacies located in the eastern third of Wisconsin. In 2015, AHC maintained a leading 38.7% share against the Wheaton-All Saints System with 20.2%, and Froedtert & Community Health System (rated 'AA-'/Stable Outlook by Fitch) with 19.1%.In 2014 (fiscal year ended Dec. 31), AHC had total operating revenues of $4.7 billion.
Fitch's analysis is based on the consolidated system. Through June 30, 2015, AHC reported $1.7 billion in total revenue of the Obligated Group, representing approximately 73% of the consolidated total revenue of the system. At June 30, 2015, the total assets of the obligated group represented 85% of consolidated assets.
PROFITABILITY IMPROVEMENT
The Outlook revision to Positive is supported in large part by AHC's improved operating profitability, coupled with an expectation of cash flow and coverage at or above Fitch's 'A' category median going forward.
After years of steady results, AHC's profitability margins have improved materially to a very healthy 16.3% operating EBITDA margin in 2014, maintained at 15.5% through the six month interim period ended June 30, 2015. During 2014, AHC benefitted from meaningful clinical volume increases due to successful exchange enrollment, Medicaid coverage expansion, and incremental market share improvement.
Due primarily to improved payor mix, higher charity care write-offs, and increased discounts to self-pay patients, bad debt expense decreased significantly, to $56.4 million in 2014 from $221.1 million in 2013, a 74% decrease. Further, accounts receivable increased by 18% to $614 million at FYE 2014, due to increased clinical volume and revenue growth. Though slightly elevated, days in accounts receivable was manageable at 52.1 days and is consistent with prior years. Lastly, sizeable expenses related to AHC's electronic health record rollout across the system in 2013 substantially declined in 2014.
Going forward, AHC is budgeting for a 5%-6% operating margin, and is well ahead of that target through the six month interim period ended June 30, 2015 with a 9.9% operating margin. While current levels of profitability are likely to wane, upward rating movement is likely should AHC meet its budgeted cash flow targets allowing for further incremental balance sheet growth to levels more consistent with Fitch's 'A' category median levels over the next 18-24 months.
MODERATING LEVERAGE
AHC's debt burden remains somewhat elevated, with debt to capitalization of 45.2% at June 30, 2015 ahead of Fitch's 'A' category median of 36.2%. Still, manageable capital needs near $200 million should be supported by operating cash flow with no additional debt currently planned. With operating EBITDA averaging nearly $500 million since 2011, AHC is expected to continue to incrementally improve liquidity going forward.
DEBT PROFILE
AHC has approximately $1.6 billion in total long-term debt, of which $1.3 billion is bond debt, with a relatively conservative 62% fixed to 37% variable mix. AHC's $457 million in variable rate demand bonds are supported by letters of credit with staggered expirations, the next of which is Dec. 9, 2016. AHC has one swap, which is subject to collateral posting requirements, but no collateral was required as of June 30, 2015.
DISCLOSURE
AHC covenants to provide annual and quarterly disclosure for the first three quarters of each fiscal year through the Municipal Securities Rulemaking Board's EMMA system. The content of AHC's quarterly disclosure is viewed favorably and includes a management discussion, a balance sheet, an income statement, a cash flow statement, and utilization statistics.
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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991510
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991510
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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