NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to approximately $83,735,000 of series 2016 hospital facilities revenue refunding bonds to be issued by the Kentucky Bond Development Corporation on behalf of St. Elizabeth Medical Center (SEMC).
In addition, Fitch affirms its 'AA' rating on the following outstanding debt issued by the Kentucky Economic Development Finance Authority on behalf of SEMC:
--$89,000,000 fixed rate bonds, series 2009A;
--$31,250,000 variable rate bonds, series 2009B.
The Rating Outlook is Stable.
The series 2009B bonds are supported by a standby bond purchase agreement from US Bank. The 'AA' rating is an underlying rating. SEMC also has outstanding $50 million in series 2015A and $10 million (to be drawn up to $50 million by 2017) in 2015B private placements, which Fitch does not rate but incorporates into the analysis.
The series 2016 bonds are expected to be issued as fixed rate. Proceeds will be used to advance refund the series 2009A bonds and pay associated costs of issuance. The sale is expected via negotiation during the week of April 18, 2016.
SECURITY
The bonds are secured by a revenue pledge of the hospital and a negative mortgage pledge.
KEY RATING DRIVERS
EXCELLENT FINANCIAL PROFILE: The 'AA' rating reflects over five years of outstanding financial results supported by SEMC's strong operating platform and management practices. In the fiscal year ended Dec. 31, 2015, nearly all key metrics measuring profitability, liquidity, and debt well exceeded Fitch's 'AA' medians despite a sizable debt issuance.
MARKET DOMINANCE: SEMC is supported by its excellent operating platform as the sole acute care provider in its primary service area of Northern Kentucky with a network of facilities and a highly integrated physician network. SEMC's inpatient market share has been consistently above 77% in its primary service area (PSA), where 86% of 2015 admissions were generated.
ELEVATED BUT MANAGEABLE CAPITAL PLANS: Capital spending in the next four years is budgeted at 156% of depreciation expense. Given SEMC's strong cash flow and balance sheet, Fitch believes there is plenty of room at this rating level to sufficiently fund the expenditures through either cash flow or additional debt issuance.
RATING SENSITIVITIES
STABILITY EXPECTED: Given the organization's market position, operating platform, history of strong cash flow generation, projected profitability, and manageable capital plans, Fitch expects the overall financial position to be maintained in support of the 'AA' rating. Due to the limited revenue diversity operating in a single market, upward rating pressure is unlikely in the foreseeable future.
CREDIT PROFILE
Saint Elizabeth Medical Center, Inc. consists of Saint Elizabeth Hospitals, St. Elizabeth Physicians, and other health care related entities. The organization has facilities in Covington, Edgewood, Florence, Fort Thomas, Falmouth, and Williamstown, KY, with additional outpatient and ancillary services throughout Northern Kentucky. SEMC operates six major facilities with approximately 1,187 licensed beds and more than 900 physicians on staff in over 100 primary care and specialty office locations in Kentucky, Indiana, and Ohio. Total operating revenue in fiscal 2015 was $1.1 billion.
STRONG MARKET LEADERSHIP
SEMC is the dominant regional provider of acute care services in Northern Kentucky with an inpatient market share of over 77%. SEMC employs approximately 95% of the primary care physicians in its service area and has an excellent reputation for quality. As a result, the hospital is well positioned to compete in the greater Cincinnati/Northern Kentucky market which includes a number of strong hospital systems.
SEMC's integrated clinical platform also positions the organization to pursue population health management and alternative forms of reimbursement models. Fitch believes the evolution of value-based reimbursement, combined with the Kentucky Certificate of Need (CON) restrictions, will continue to protect SEMC's operating platform and allow for continued market dominance.
ROBUST PROFITABILITY
Continued decline in uninsured patient base bolstered SEMC's fiscal 2015 profitability, with Medicaid exposure (as a % of gross revenues) increasing to 19.8% in 2015 from 11% in 2013 with a corresponding decrease in self-pay. Considerable bad debt decline and volume growth led to strong operating and operating EBITDA margins of 6.8% and 13.1% in 2015, compared to the respective 'AA' medians of 4.9% and 11.5%.
ROBUST LIQUIDITY GROWTH
Unrestricted cash and investments continue to grow, and totaled $781.4 million at Dec. 31, 2015. Days cash on hand of 294 and 439.9% cash-to-debt compare very well against the 'AA' medians of 289 days and 201.7%. Cash to debt assuming a full draw on the 2015B bonds is still robust at 359%. Maximum annual debt service assuming a full draw on the series 2015B bonds produce a cushion ratio of 55.8x, more than double the 'AA' median of 27x.
Capital spending is expected to rise to 156% of depreciation over the next four years. Fitch believes future capital plans are manageable whether SEMC chooses to spend cash or issue more debt to fund projects.
DEBT PROFILE
At Dec. 31, 2015, SEMC had $177.6 million in long-term debt outstanding, consisting of $86 million of series 2009A fixed rate bonds, $31 million series 2009B variable rate bonds secured by a standby bond purchase agreement with US Bank (expiring September 2018), $50 million of series 2015A fixed rate private placement (Fifth Third Bank with a 12-year initial term), and $10 million of series 2015B variable rate private placement (Commerce Bank with a 10-year initial term). The 2015B bonds are being drawn in $10 million increments every six months until December 2017, at which point $50 million will be outstanding. Underlying interest mix assuming a full draw is 63% fixed and 37% floating.
SEMC has two floating- to fixed-rate swaps with a total notional value of $41.3 million and a mark to market of negative $4.8 million at Dec. 31, 2015. The notional value will increase by another $40 million in conjunction with the series 2015B draw schedule. SEMC is not required to post collateral at the current rating level.
SEMC's leverage and coverage metrics are very strong, due to the light debt burden. MADS increased to $14 million (assuming full draw) from $9.4 million following the 2015 issuances, but still equates to a low 1.3% of total revenues compared to the 'AA' median of 2.4%. Debt to capitalization of 16.6% at FYE 2015 is also favorable against the median of 28.1%. Due to strong cash flow and low MADS, coverage was very good at 12.5x in 2015 and 12x in 2014.
DISCLOSURE
The hospital has covenanted to disclose annual results within 180 days of year-end and quarterly results within 60 days of quarter-end to bondholders through the Municipal Securities Rulemaking Board 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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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001699
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