CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned 'AA' ratings to the following bonds expected to be issued on behalf of Indiana University Health (IU Health):
--$163,395,000 Indiana Finance Authority hospital revenue refunding bonds series 2016A; and
--$100,000,000 Indiana Finance Authority hospital revenue refunding bonds series 2016B/C.
Additionally, Fitch has upgraded the ratings on the following bonds issued on behalf of IU Health to 'AA':
Indiana Health and Educational Facility Financing Authority
--$327,100,000 hospital revenue refunding bonds series 2006B.
Indiana Finance Authority
--$287,395,000 hospital revenue bonds series 2015A;
--$69,945,000 hospital revenue bonds series 2014A;
--$186,345,000 hospital revenue refunding bonds series 2011 A-E;
--$155,060,000 hospital revenue bonds series 2011N.
Fitch also upgraded the bank bond ratings to 'AA' on the above referenced series 2011A-E bonds.
The series 2016A bonds are expected to be issued as fixed rate bonds and the series 2016B/C bonds are expected to be issued as variable rate bonds. Bond proceeds will be used to refund a majority of the series 2006B bonds and to pay costs of issuance. The remaining series 2006B bonds (approximately $32 million) are expected to be paid off by cash and a draw on a line of credit. The series 2016A bonds are expected to price the week of January 18 and the series 2016B/C bonds are expected to price the week of February 1, both through negotiation.
The Rating Outlook has been revised to Stable from Positive.
SECURITY
The bonds are secured by a pledge of the gross revenues of the IU Health obligated group.
KEY RATING DRIVERS
CLARIFIED CAPITAL PLANS: The upgrade to 'AA' reflects IU Health's strong liquidity metrics, strong operating profitability, robust coverage and clarification of large capital projects, including the consolidation of IU Health's two Indianapolis campuses and construction of a new hospital in Bloomington. The projects and related financing will be executed in incremental stages. Liquidity and coverage metrics are expected to remain consistent with the 'AA' rating.
BROAD OPERATING PLATFORM: IU Health operates a statewide integrated delivery system currently including 17 acute care hospitals, a rehabilitation hospital, the state's only academic medical center, the only Level 1 pediatrics trauma center, one of two level 1 adult trauma centers in the state and a health plan.
STRONG MARKET POSITION: IU Health has maintained its leading primary service area (PSA) market share while successfully expanding its statewide presence, creating diversification of revenue sources and adding further credit stability.
ROBUST OPERATING PROFITABILITY: Profitability has been consistently strong due to a combination of expense management initiatives and the enactment of Indiana's Medicaid hospital assessment fee (HAF) program. Operating EBITDA margin equaled a robust 19.3% in fiscal 2014 and 18.4% in the nine month interim period ending Sept. 30, 2015 (the interim period).
MODERATE DEBT BURDEN: IU Health's debt burden has significantly moderated with maximum annual debt service (MADS) decreasing from 5.1% of revenue in fiscal 2008 to 2.1% in fiscal 2014. Pro forma MADS coverage by EBITDA equaled 9.5x in fiscal 2014 and 9.1x in the interim period.
STRONG LIQUIDITY: Reflecting the strong cash flows, unrestricted cash and investments have increased 53.2% since fiscal 2012 to $3.95 billion at Sept. 30, 2015 equating to 291 days cash on hand, 32.1x cushion ratio and 235.2% cash to debt, all exceeding Fitch's 'AA' category medians of 289.4 days, 27.0x and 201.7%.
RATING SENSITIVITIES
SUCCESSFUL EXECUTION OF CAPITAL PLANS: Fitch expects Indiana University Health to successfully execute its large capital projects while maintaining liquidity and leverage metrics that are consistent with the 'AA' rating.
CREDIT PROFILE
IU Health, headquartered in Indianapolis, currently operates 17 acute care hospitals throughout Indiana and a rehabilitation hospital. Fitch's analysis is based on IU Health's consolidated financial statements. Total consolidated operating revenue equaled $5.7 billion in fiscal 2014 (Dec. 31 year end).
The system's board of directors approved a plan in October 2015 to enter into a joint venture with a subsidiary of Community Health Systems under which IU Health will transfer all of IU Health LaPorte, including IU Health Starke, to the joint venture. IU Health will own a 20% interest in the joint venture. The transaction is expected to close in fiscal 2016. IU Health LaPorte, including IU Health Starke, represents approximately 3.6% of consolidated operating revenue. Subsequent to the transaction, IU Health will operate 15 acute care hospitals. Fitch does not expect the transfer of the entities to materially impact IU Health's credit profile. In anticipation of the transaction, IU Health LaPorte was removed from the IU Health obligated group in 2015. Additionally, the system converted its IU Health Morgan hospital to an outpatient facility in April 2015.
CLARIFIED CAPITAL PLANS
Upward rating movement was previously precluded pending clarification of large contemplated capital projects and the potential impact on liquidity and leverage metrics. Large capital projects include a replacement hospital for IU Health Bloomington on the campus of Indiana University, consolidation of IU Health's two adult hospitals within the academic medical center in Indianapolis and relocation of women's services at or near the system's children's hospital.
The projects are expected to be completed and financed in incremental stages through a combination of cash flows and debt issuances. Given the incremental approach, the projects can be scaled down or drawn out in the event that future cash flows decrease. Management's current expectations are that the Bloomington hospital and women's services projects will be completed between 2016 and 2018 while the Indianapolis campus consolidation is expected to be completed between 2016 and 2024. However, plans are subject to change.
Fitch views the Bloomington project and consolidation plans favorably, as the consolidation is expected to result in the elimination of redundant services and increased operating efficiencies. Given the system's robust cash flows, moderate debt burden and strong liquidity metrics, Fitch believes that IU Health can absorb the capital plans with credit metrics remaining consistent with the 'AA' rating.
BROAD OPERATING PLATFORM
IU Health completed a rapid growth phase between 1997 and 2010, increasing from six hospitals with approximately $1 billion in operating revenue in 2000 to 17 acute care hospitals and a rehabilitation hospital with $5.7 billion in operating revenue in fiscal 2014. Operations include one of two level 1 adult trauma centers in Indiana, the state's only level 1 pediatric trauma center, one of the nation's largest transplant programs and the only academic medical center in Indiana through an affiliation with the IU School of Medicine. Additionally, IU Health operates a health plan with approximately 180,000 covered lives, an accountable care organization with approximately 39,500 lives and employed physicians groups with over 2,500 physicians.
The formation of a statewide academic integrated delivery system with a substantial operating platform is viewed favorably by Fitch and should increase credit stability through diversification of service areas and revenue sources. The integrated delivery system, with a health plan, should position IU Health well for health care reform and population health management related initiatives.
STRONG MARKET POSITION
Concurrent with its statewide growth, IU Health has maintained a leading 27% market share in its PSA which is defined as the nine county Indianapolis metropolitan area. Primary competitors include St. Vincent's (part of Ascension Health, rated 'AA+' by Fitch) with 20.2% market share, Community Health Network with 22.7% and Franciscan Alliance (rated 'AA' by Fitch) with 10.3% market share. No other hospital system holds greater than 10% market share in the PSA.
ROBUST OPERATING PROFITABILITY
Following the period of heavy growth, management turned its focus to implementing efficiencies through the larger organization. Operating profitability has significantly strengthened due to IU Health's continued consolidation, integration, labor productivity, revenue cycle and other expense management initiatives as well as enactment of Indiana's Hospital Assessment Fee (HAF) program. Additionally, interim profitability benefited from Indiana's expansion of Medicaid in February 2015 while health plan revenue was bolstered in both fiscal 2014 and the interim period from PPACA health plan exchange enrollment.
The HAF program was first enacted in 2012 through July 1, 2013 and was renewed in 2014 retroactive back to July 2013. IU Health received $514.7 million of HAF revenue in fiscal 2014, including $166.7 million related to fiscal 2013.
Normalizing the net benefit of the HAF and disproportionate share (DSH) programs to the appropriate years, operating margin increased to 13.6% in fiscal 2014 and 12.0% in the interim period from 7.6% in fiscal 2013 while operating EBITDA margin increased to 19.1% and 17.2% from 13.3% in fiscal 2013. Both metrics easily exceed Fitch's 'AA' category medians of 4.9% and 11.5%, respectively.
MODERATE DEBT BURDEN
A significant portion of IU Health's earlier expansion was funded through debt issuance resulting in increased leverage. IU Health's leverage and debt burden continues to moderate with debt to capitalization decreasing from 51.6% in fiscal 2008 to 24.7% at September 30, 2015. Additionally, MADS as a percent of revenue decreased from 5.1% in fiscal 2008 to a moderate pro forma 2.0% in the interim period.
Pro forma MADS is expected to decrease to $123 million from $127 million. Pro forma MADS occurs in fiscal 2016 and decreases to $120 million in fiscal 2017, remaining relatively level thereafter. Additionally, MADS had previously declined from $161 million in fiscal 2014 primarily due to the payment of a bullet maturity.
Strong cash flow and the moderate debt burden combine to provide for solid pro forma MADS coverage by EBITDA of 9.5x in fiscal 2014 and 9.1x in the interim period. Normalizing the HAF and DSH revenue and expenses received in fiscal 2014 and the interim period attributable to the appropriate periods, pro forma MADS coverage by EBITDA remains strong at 9.3x and 8.4x, respectively.
STRONG LIQUIDITY
Unrestricted liquidity has continued to strengthen, increasing 52.3% since fiscal 2012 to $3.95 billion at September 30, 2015. The continued improvement is due to strong cash flow, solid investment returns, moderate capital spending and receipt of the retroactive HAF. With 290.5 days cash on hand, 32.1x cushion ratio and 235.2% cash to debt, liquidity ratios exceed Fitch's 'AA' category medians of 289.4 days, 27.0x and 201.7%, respectively.
DEBT PROFILE
IU Health had $1.68 billion of total debt outstanding at September 30, 2015. Subsequent to the series 2016 refunding, the debt portfolio will be comprised of 53% underlying fixed rate, 26% synthetic fixed rate and 21% variable rate bonds. The obligated group is counterparty to nine fixed payor swaps with a total notional amount of $424 million. Additionally, IU Health is counterparty to five forward starting basis swaps with a future total notional amount of $1.3 billion in 2021. However, the current notional amount is $0. IU Health has not had to post collateral related to its swaps since 2011.
DISCLOSURE
IU Health covenants to provide annual disclosure within 120 days of fiscal year end and quarterly disclosure within 45 days of each fiscal quarter end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
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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