NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued by the Illinois Finance Authority on behalf of Silver Cross Health System (Silver Cross):
--$283 million revenue refunding bonds, series 2015C;
--$82 million revenue refunding bonds, series 2008A.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a gross revenue pledge and a mortgage on certain property.
KEY RATING DRIVERS
STEADILY IMPROVING OPERATING PERFORMANCE: Silver Cross has improved profitability and operating cash flow over the past three years mostly as a result of volume growth, efficiencies gained from the replacement hospital, and strict attention to productivity measures. The operating margin and operating EBITDA margins improved in each of the past three fiscal years and amounted to 1.4% and 15.9%, respectively, in fiscal 2015 (Sept. 30 year-end). These levels are favorably above Fitch's 'BBB' category medians of 0.6% and 7.7%, respectively.
FAVORABLE BUSINESS GROWTH: Driven by good service area demographics, medical staff additions and successful clinical partnerships, volume growth has been strong. Since moving into its replacement hospital during fiscal 2012, admissions and observation cases increased a very healthy 29% and 54%, respectively, from fiscal 2012-2015.
HIGH DEBT POSITION: Silver Cross' debt burden is high with maximum annual debt service (MADS) at 7.7% of fiscal 2015 revenue compared to the 'BBB' category median of 3.6%. Additionally, debt to EBITDA (6.6x) and debt to capitalization (70.8%) remain elevated for the rating category.
IMPROVED LIQUIDITY: Liquidity continued to grow during the past few years due to the better cash flows and modest capital spending. As of Dec. 31, 2015, unrestricted cash and investments of $155.4 million amount to 177 days operating expenses which compares well to Fitch's 'BBB' category median of 161.5 days. However, Silver Cross' elevated debt position produces a cushion ratio (5.8x) and cash to debt (36.6%) that are well below similarly rated credits.
RATING SENSITIVITIES
CONTINUED STRONG OPERATING PERFORMANCE: Fitch expects Silver Cross Health System to maintain its improved profitability and cash flow results and continue to moderate its high debt burden. Upward rating movement is limited until the debt position is reduced and capital-related metrics improve.
CREDIT PROFILE
Silver Cross operates an acute care facility with 295 staffed beds in New Lenox, IL, located about 35 miles southwest of downtown Chicago. Silver Cross had total operating revenues of $348.8 million in fiscal 2015. Silver Cross successfully transitioned into its replacement hospital in New Lenox, IL, which is located in Will County during February 2012. Fitch views the location and move to the new facility favorably, as it has allowed Silver Cross to capitalize on a growing market, improve efficiencies, and enhance service offerings through its various clinical partnerships.
GOOD AND IMPROVING OPERATING PERFORMANCE
Operating profitability and cash flow continue to improve as a result of strong volume growth, clinical efficiencies and positive shift in payor mix after the new hospital opening. In fiscal 2015, Silver Cross produced positive operating income for the first time since fiscal 2011, with an operating margin of 1.4%. The operating EBITDA margin remains robust at 15.9% in fiscal 2015 and 14.3% through the first quarter of fiscal 2016. The improved cash flow and lower debt service costs from last year's bond refinancing helped increase MADS coverage to 2.4x in fiscal 2015 and 2.8x for the three-month period ending Dec. 31, 2015. These MADS coverage levels are in-line with Fitch's 'BBB' category median of 2.7x.
Volume growth continues to be very strong with inpatient admissions up 29% over the last three fiscal years. In addition, outpatient volume trends are also healthy with ambulatory surgeries increasing 22.2% and outpatient visits jumping 19.7% from fiscal 2012-2015. The payor mix has also improved since the opening of the new hospital with 45.4% of gross revenues from commercial health plans in fiscal 2015, compared to 39.3% in fiscal 2011. Governmental payors comprised 52.2% of gross revenue in fiscal 2015 (41.1% Medicare and 11.1% Medicaid) compared to 54.8% in fiscal 2011 (42.4% Medicare and 12.4% Medicaid). Medicaid expansion has helped reduce self-payors to 2.4% of gross revenue in fiscal 2015 from 5.1% three years earlier. Additionally, the Illinois provider assessment program and supplemental funding under the Affordable Care Act has boosted enhanced Medicaid funding to about $14 million per year. While not immaterial, these supplemental funding levels are not a concern at the current rating level.
MARKET POSITION
The total service area is somewhat crowded and the primary service area (PSA) includes two hospitals. However, Silver Cross' market share continues to grow at the expense of its nearest competitor. Silver Cross had 36.4% inpatient market share in its PSA in 2015 (nine months January-September), up from 28.8% in 2011. Its main competitor, Presence Saint Joseph Medical Center (part of Presence Health; rated 'BBB+'/Stable Outlook), had 29.5% inpatient market share, down from 32.8% in 2011. Silver Cross has also been successful at taking inpatient market share from the PSA's next leading provider, Palos Community Hospital. Moreover, Silver Cross' inpatient market share in its secondary service area continues to grow and was 7.9% in 2015 (January-September period), up from 4.4% in 2011.
Market share growth has been driven by strategic affiliations and medical staff additions. Silver Cross has clinical partnerships with several Chicago-area health care systems, including Rehabilitation Institute of Chicago (rated 'A-'/Stable Outlook), a top-ranking provider in the country; a joint venture with University of Chicago Medical Center (rated 'AA-'/Stable Outlook) for cancer services; a partnership with Northwestern Medicine for neurology, and a partnership with Lurie Children's Hospital of Chicago (rated 'AA-'/Stable Outlook). All of these clinical partnerships have attracted physicians and patients to Silver Cross.
On Jan. 1, 2015, Silver Cross commenced an affiliation with Advocate Health Care (Advocate) to partner with Advocate Physician Partners (APP), which has more than 4,400 physician members in their clinical integration program. As a result, about 400 practicing Silver Cross physicians joined APP and Silver Cross became a member of APP's governing body and Advocate's health outcomes council. Although Blue Cross and Blue Shield of Illinois, a significant health plan in the Chicago-area market, does not include this arrangement for joint managed care contracting with Advocate, Fitch still views this affiliation favorably as it assists Silver Cross in transitioning to value-based reimbursement programs and population health management.
Physician recruitment continues to be strong with an increase in Silver Cross' total medical staff to 722 at the end of fiscal 2015, up from 602 in fiscal 2011. While most Will County physicians remain in private practice and small groups, Silver Cross started to employ physicians in 2012 when strategically necessary and had 10 employed primary care physicians at the end of fiscal 2015.
DISCLOSURE
Annual audited financial statements and utilization statistics within 120 days of each fiscal year end. Quarterly unaudited financial statements including a balance sheet, income and cash flow statements, and utilization statistics for the first three fiscal quarters within 60 days of each quarter end.
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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