CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' long-term ratings on the following outstanding revenue bonds issued on behalf of Hospital Sisters Services, Inc., IL (HSSI):
--$180 million Wisconsin Health & Educational Facilities Authority revenue bonds, series 2014A;
--$$69.8 million Wisconsin Health & Educational Facilities Authority revenue bonds, series 2012B;
--$62.4 million Illinois Finance Authority (IL) revenue refunding bonds, series 2012C;
--$31.6 million Illinois Finance Authority, series 2012G*;
--$72 million Illinois Finance Authority, series 2007A.
*Underlying rating. The bonds are supported by an irrevocable direct pay letter of credit issued by the Bank of Montreal, N.A.
In addition, Fitch has affirmed the 'AA-/F1+' ratings to the following variable-rate demand revenue bonds issued on behalf of HSSI. The 'F1+' is based on the sufficiency of the self-liquidity provided by HSSI:
--$65.9 million Illinois Finance Authority, series 2012H;
--$89.5 million Illinois Finance Authority, series 2012I.
The Rating Outlook is Stable.
SECURITY
The bonds are a joint and several liability of each member of the obligated group.
KEY RATING DRIVERS
ROBUST LIQUIDITY POSITION: HSSI's consistently healthy liquidity position provides a strong financial cushion, which mitigates the system's modest operating profitability for the 'AA' category, and offsets the risks associated with a 40% variable-rate debt structure and defined benefit pension liability.
MAJOR PROJECTS AHEAD: HSSI's five year capital plan includes a $244 million replacement facility and $112 million electronic health record investment and will likely be financed in part with additional debt. A currently modest debt burden coupled with healthy liquidity should allow HSSI some additional debt capacity at the 'AA-' rating level.
LIGHT BUT IMPROVING PROFITABILITY: HSSI maintained a 9.1% operating EBITDA margin in fiscal 2015, which has improved steadily from a low of 4.4% in fiscal 2011. Performance was supported in part by supplemental Medicaid funding which helped to offset elevated pension and depreciation expense. Profitability is expected to continue to incrementally improve going forward.
SOLID DEBT SERVICE COVERAGE: Coverage of pro forma maximum annual debt service (MADS) by operating EBITDA has been consistent, at 5.2x through the six month interim period ended Dec. 31, 2015 and at 5.1x in fiscal 2015, versus Fitch's 'AA' category median of 4.4x. Further, HSSI's modest debt burden should allow for additional debt while still generating coverage at levels sufficient for the rating.
CHALLENGING SERVICE AREAS: HSSI's location in midsized markets with mixed economic profiles and its reliance on governmental payors remain credit concern. Still, a growing and well-aligned physician network is expected to support both targeted clinical expansion into favorable markets, and HSSI's ongoing transition to value-based care.
AMPLE LIQUID RESOURCES: The 'F1+' rating reflects HSSI's long-term credit quality, as well as the adequacy of internal liquidity resources to meet optional tenders on its outstanding series 2012 variable rate demand bonds. Such resources include cash and cash equivalents and highly liquid, highly rated investments. Investments are discounted based on Fitch's criteria. At Sept. 30, 2015, HSSI maintained highly liquid resources sufficient to cover the maximum mandatory put on any given date in excess of Fitch's expected level of 1.25x.
RATING SENSITIVITIES
STEADY CASH FLOW: Sustained operating cash flow will be necessary for Hospital Sisters Services to undertake the expected large capital projects, which will likely include additional debt within the next 12-18 months. A failure to preserve cash flow and liquidity could result in negative rating pressure.
CREDIT PROFILE
HSSI is currently composed of 13 inpatient hospitals, with seven facilities in Illinois and six facilities in Wisconsin. Effective Jan. 4, 2016, HSSI transferred operations of its St. Mary's hospital in Streator, IL reducing its inpatient hospital total from 14 to 13. In fiscal 2015 (June 30 year-end), the system had 2,810 licensed and 1,947 staffed beds in operation and total revenue of $2.2 billion. The obligated group represented 91.2% of total revenues and 90.1% of total assets of the consolidated entity. Fitch's analysis is based on the consolidated entity.
FINANCIAL PROFILE
HSSI's liquidity position and balance sheet strength is the primary credit strength which mitigates generally light and somewhat volatile profitability for the 'AA' rating category. At Dec. 31, 2015, HSSI had 313.5 days of cash on hand, 266.4% cash to debt, and 46.1x cushion ratio, all favorable to Fitch's 'AA' category medians.
HSSI continues to demonstrate improved operating performance and profitability since fiscal year 2011 (FY11) when the system posted a $44.8 million loss from operations (-2.4% operating margin). HSSI produced a 0.9% operating margin in fiscal 2015, which has improved to 1.4% through the three-month interim period.
OPERATING CHALLENGES
Still, operating performance continues to be challenged by HSSI's market dynamics, which are generally weaker in Illinois where the majority of its revenue is sourced (declining population and unfavorable income levels), though healthier in Wisconsin. A 65% of gross revenue concentration in governmental payors also presents concern, despite beneficial recent supplemental funding. During fiscal 2015, HSSI recognized over $46 million in Illinois and Wisconsin provider tax and enhanced hospital assessment payments (net of assessments), which is expected to be pressured going forward.
HSSI's well-aligned medical staff coupled with ongoing strategic alignment, growth efforts and push into value-based care arrangements should position HSSI well, particularly as it reaches beyond its current markets. The five year capital plan totals $849 million and includes the expected replacement of its St. Elizabeth's facility in its Southern Illinois market, which is expected to result in stronger positioning in that market, once it comes on line in late 2017.
DEBT PROFILE
HSSI has approximately $687 million in long-term debt, of which approximately $370 million (60%) is fixed rate and $237 million (40%) is variable rate debt. Of the $237 million in variable rate debt, $155 million is supported by self-liquidity. Total debt also includes $80.5 million in unamortized premium and other long-term obligations.
The LOC supporting the series 2012G bonds currently expires July 31, 2017. As of Dec. 31 2015, HSSI had four interest rate swaps outstanding for an aggregate notional amount of $368.5 million; three totaling $218.5 million are floating-to-fixed with hedge designation, while the remaining $150 million swap is a basis swap. The mark-to-market was negative $57.6 million, but no collateral posting was required based on HSSI's current 'AA-' rating.
DISCLOSURE
HSSI covenants to provide bondholders with audited annual information within 120 days of fiscal year-end and unaudited quarterly statements within 45 days of quarter-end to the Municipal Securities Rulemaking Board's 'EMMA' System. Disclosure to-date has been timely and includes a balance sheet, income statement, cash flow statement, utilization statistics, and management discussion and analysis.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508
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=998984
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998984
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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