NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to the following bonds that are expected to be issued on behalf of Lafayette General Health System, Inc. (LGHS):
-- $70,000,000 Louisiana Public Facilities Authority hospital revenue and refunding bonds (Lafayette General Health System Project) series 2016A;
-- $31,163,312 Louisiana Public Facilities Authority hospital revenue and refunding bonds (Lafayette General Health System Project) series 2016B.
Fitch has also affirmed the following parity debt at 'A-':
-- $84,840,000 Louisiana Public Facilities Authority hospital revenue bonds, series 2010.
The Rating Outlook is Stable.
Fitch expects the series 2016A bonds to be issued as tax-exempt, fixed-rate bonds and the 2016B bonds to be issued as taxable, variable-rate bonds. Approximately $40 million of the 2016A bonds and $10 million of the 2016B bonds will be used to refinance a $50 million bank loan taken out in November 2015. The remaining proceeds of the 2016A bonds will refinance approximately $30 million of series 2012A bonds, and the remaining proceeds of the 2016B bonds will refinance approximately $21.5 million of various outstanding capital leases and loans. Both series will price via negotiation the week of January 4th.
SECURITY
Debt payments are secured by gross revenues of the Obligated Group (OG) and a mortgage on LGHS's property.
Key Rating Drivers
STEADY FINANCIAL PERFORMANCE: Over the last five years, LGHS's operating margin has remained above Fitch's 'A' category median of 2.5%. Historical coverage of pro forma maximum annual debt service (MADS) was steady as well, averaging 3.2x over this time, but below the category median of 3.8x. Fitch notes that the steady performance was maintained throughout a large capital project that touched all areas of LGHS's main campus, Lafayette General Medical Center (LGMC), and as the system continued to grow through acquisition and affiliations.
HOSPITAL ACQUISITION: In 2015, LGHS acquired Regional Medical Center of Acadiana (RMCA) from HCA MidAmerica. The 128-bed hospital is five miles from LGHS's main campus and is now a part of LGMC and called Lafayette General South West. Fitch views the acquisition positively in spite of the $30 million in debt to acquire the hospital. The acquisition solidifies LGHS's market position in Lafayette and provides needed capacity at its main campus, which runs a high census, with the emergency room often on diversion. LGHS will also be able to coordinate services across both campuses, given their close proximity, helping to advance other strategic initiatives.
MIXED DEBT BURDEN: With this debt issuance and a further restructuring of debt in 2016, LGHS will create level debt service, which will allow it to absorb $50 million in new debt being issued while also lowering MADS by approximately $2.4 million to $14.5 million a year. As a result, MADS as percent of revenue at Sept. 30, 2015 dropped to 2.5% from 2.9%, relative to a median of 3.1%. However, pro forma debt-to-EBITDA of 4.6x was elevated relative to a median of 3.6x.
GROWING MARKET FOOTPRINT: Since 2013, LGHS has added two hospitals and two clinical affiliates, growing its system to six hospitals and six clinical affiliations. The additions have helped LGHS increase its primary and secondary market share to 26.4% in 2014 from 19.5% in 2011. Over this time, inpatient volumes have increased by 40% and revenue has nearly doubled.
ADEQUATE LIQUIDITY: At Sept. 30, 2015, LGHS had $154.6 million in unrestricted cash and investments, which equated to 103.6 days cash on hand (DCOH), a 9.2x pro forma cushion ratio, and 58.8% pro forma cash-to-debt, all of which trail their respective 'A' medians. Offsetting the lower liquidity levels has been the steady growth of LGHS's absolute liquidity, supported by the consistent cash flow, with unrestricted cash and investments growing 72% since fiscal year-end 2011 (Sept. 30 year-end), when they totaled $89.9 million.
RATING SENSITIVITIES
OPERATING STABILITY: Fitch expects Lafayette General Health System, Inc. (LGHS) to maintain its current levels of operating performance and debt service coverage. Maintenance of current levels of performance and liquidity numbers closer to the median could lead to positive rating pressure. A longer trend of weaker performance or a drop in absolute liquidity could pressure the rating.
SUPPLEMENTAL FUNDING EXPOSURE: Given LGHS's level of state and federal supplemental funding, especially with addition of University Medical Center, reductions in these funding streams could put negative pressure on the rating.
CREDIT PROFILE
LGHS is the corporate parent of the OG, which includes six entities: LGMC; St. Martin Hospital, Inc.; Abrom Kaplan Memorial Hospital; Acadia General Hospital; University Hospital & Clinics; and Lafayette Health Services, Inc., which mainly employs physicians. LGMC is the system's flagship hospital and has a 299-licensed bed acute care hospital facility located in Lafayette, LA (approximately 133 miles west of New Orleans and 133 miles east of Beaumont, TX).
Fitch's analysis is based on the consolidated system results. In 2014, the OG made up 94.6% of the system's assets and 93.6% of its revenues. Total unaudited consolidated operating revenues were $585.1 million in fiscal 2014.
STABLE FINANCIAL PROFILE
After a negative operating margin in fiscal 2009, LGHS has produced six consecutive years of positive operating margins generally above the 'A' category median. Unaudited year-end fiscal 2015 results show a 3.2% operating margin and an 8.2% operating EBTIDA margin, relative to the 'A' medians of 2.5% and 9.5%.
Contributing to the solid performance over the last few years has been LGHS's service line expansions, including a cancer center, and the continued growth in its hub-and-spoke strategy that utilizes clinical affiliations with regional community hospitals to provide opportunities for tertiary referrals to its main campus. LGHS currently has six of these affiliations in place.
The operating performance has also been helped by significant growth in revenue, largely driven by system growth through acquisition. From fiscal 2011 to 2014, total operating revenue grew 96%.
While liquidity metrics are thin for the category, Fitch views liquidity as adequate at the rating category given Lafayette's stable operating performance. Moreover, the growth in absolute cash has been solid, increasing 62% since FYE 2012 (growing to $154.7 million from $94.9 million) and exceeded the growth in debt. Fitch expects LGHS's liquidity to remain stable and grow moderately over the next few years. However, a drop in liquidity could pressure the rating.
DEBT PROFILE/CAPITAL SPENDING
To acquire RMCA, LGHS took out a one-year $50 million bank loan from Bank of America Merrill Lynch that closed in early November. That bank loan is being refinanced with the current debt issuance.
After the 2016A and B bonds are issued, LGHS will have approximately $260 million in long-term debt. A minimum of $155 million or approximately 70% will be fixed rate long-term bonds. The remaining 30% will likely be variable, but could change, as the 2016B bonds will be a one-year private placement, and LGHS plans to revisit the structure of the 2016B bonds later in 2016.
The pay down of short-term capital leases with longer-term debt enabled LGHS to smooth its debt amortization, helping to lower MADS by approximately $2.4 million. As a result, LGHS's pro forma MADS as a percent of revenue is now comfortably below the 'A' median. Unaudited FY2015 year-end results show pro forma MADS coverage of 4x, above the median of 3.8x.
At Sept. 30, 2015, debt-to-EBITDA remained elevated but those figures do not include any EBITDA from the newly acquired RMCA.
With the major capital project at LGHS's main hospital campus complete, Fitch expects LGHS's debt burden to continue to moderate and expects that any acquisitions or partnerships will be financially strong enough to offset any associated borrowings. The acquisition of RMCA is an example, as Fitch expects the $30 million borrowed to acquire RMCA to be offset by the gains in EBITDA. LGHS has a strategic plan in place to improve operations on the RMCA campus, which had low utilization prior to the acquisition.
DISCLOSURE
LGHS covenants to supply bondholders with quarterly disclosure of financial and operating statements.
Applicable criteria available on Fitch's website 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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