CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to approximately $203 million of series 2016A revenue refunding bonds issued by the City of St. Cloud, Minnesota on behalf of CentraCare Health System (CentraCare).
Fitch has also affirmed the 'A+' rating on approximately $229 million of outstanding bonds issued by the City of St. Cloud, MN on behalf of CentraCare.
Bond proceeds will be used to advance refund CentraCare's $80 million of outstanding series 2008D bonds and a portion of the systems' series 2010A bonds, fund various capital projects and pay costs of issuance. Pro forma maximum annual debt service (MADS) is expected to equal approximately $30.9 million. The series 2016A bonds are expected to price the week of April 25 via negotiation.
The Rating Outlook is Stable.
SECURITY
Bond payments are secured by pledge of the obligated group's unrestricted receivables.
KEY RATING DRIVERS
STRONG OPERATING PROFITABILITY: Operating profitability has been consistently strong for the rating category. Operating EBITDA margin averaged 11.5% over the past six years and equaled 11.7% in fiscal 2015 and 10.8% in the six-month interim period ending Dec. 31, 2015 (the interim period), exceeding Fitch's 'A' category median of 10.3%.
SOLID LIQUIDITY: Liquidity metrics remain solid with 198.2 days cash on hand, 18.8x cushion ratio and 133.4% cash to pro forma debt at Dec. 31, 2015, despite unrealized investment losses, and are consistent with Fitch's 'A' category medians of 205.3 days, 18.5x and 143.7%, respectively.
STRONG MARKET POSITION: CentraCare increased its leading market share from 57.8% in 2012 to 63.9% in 2015. CentraCare's St. Cloud Hospital is the only hospital located in the system's primary service area.
MODERATE DEBT BURDEN: CentraCare's pro forma debt burden remains moderate with pro forma MADS equal to 2.7% of fiscal 2015 revenue. The moderate debt burden and strong profitability supported strong MADS coverage by EBITDA of 5.3x in fiscal 2015, exceeding Fitch's 'A' category median of 4.2x.
RATING SENSITIVITIES
STABLE CREDIT PROFILE: Fitch expects CentraCare Health System's credit profile to remain stable, with consistent profitability, coverage and liquidity metrics. Over the long term, increased liquidity metrics to levels that are more consistent with Fitch's 'AA' category medians could result in positive rating movement.
CREDIT PROFILE
CentraCare, founded in 1995 through the merger of St. Cloud Hospital and St. Cloud Clinic, is an integrated delivery system headquartered 65 miles northwest of Minneapolis in St. Cloud, MN. Operations include St. Cloud Hospital, a 489 licensed bed regional acute care hospital founded in 1886, five critical access hospitals, six long-term care facilities and a multi-specialty physicians group with 321 employed physicians and 19 clinics. Total consolidated operating revenues equaled $1.1 billion in fiscal 2015. Fitch's analysis is based upon CentraCare's consolidated financial statements. The obligated group accounted for 87% of consolidated total assets, 74% of consolidated total operating revenue and 100% of consolidated operating income in fiscal 2015.
STRONG OPERATING PROFITABILITY
Operating profitability has been consistently strong with operating and operating EBITDA margins averaging 5.5% and 11.5% since fiscal 2010 and equal to 5.6% and 11.7%, respectively, in fiscal 2015. Operating and operating EBITDA margins exceed Fitch's 'A' category medians of 3.6% and 10.3%, respectively.
The strong operating performance in Fiscal 2015 and the interim period reflects utilization growth, rate increases, changes in service mix and acuity as well as continued operating improvement initiatives. Fitch believes CentraCare's consistently strong operating performance over the past six years reflects the benefits of its integrated delivery model, a co-leadership management model with physicians and administration, an expanded ambulatory strategy and strong market position. The system's strong market share has grown in recent years, increasing from 57.8% in 2012 to 63.9% in 2015, due in part to continued hospital and physician affiliations and acquisitions.
SOLID LIQUIDITY
Unrestricted cash and investments decreased to $582.1 million at Dec. 31, 2015 from $618.2 million at June 30, 2015 due to adverse market conditions and associated unrealized losses. CentraCare's liquidity metrics remain solid despite the compression with 198.2 days cash on hand, 18.8x cushion ratio and 133.4% cash to pro forma debt at Dec. 31, 2015, and are consistent with Fitch's 'A' category medians of 205.3 days, 18.5x and 143.7%, respectively.
Capital spending is projected to increase but is not expected to materially impact CentraCare's liquidity metrics. The increase is primarily due to an addition to one of the system's critical access hospitals adding 14 private rooms and construction of a new medical campus and senior residential facility near another critical access hospital. The projects will be funded by $53 million of proceeds from the series 2016A bond issuance and cash flows. Fitch views the projects favorably as they should further strengthen CentraCare's competitive position.
MODERATE DEBT BURDEN
CentraCare's pro forma debt burden remains moderate with pro forma MADS equal to 2.7% of fiscal 2015 operating revenue. The system's moderate debt burden and solid profitability combined to provide strong coverage, with MADS coverage by EBITDA equal to 5.3x in fiscal 2015 and 5.7x in the interim period, exceeding Fitch's 'A' category median of 4.2x.
DEBT PROFILE
Subsequent to the series 2016A bond issuance, CentraCare will have approximately $436.4 million of total debt outstanding. In addition to the rated bonds, CentraCare has approximately $155 million of bonds directly placed with banks that Fitch does not rate but includes in its analysis. The pro forma debt portfolio will be comprised of 67% underlying fixed rate bonds and 33% underlying variable rate bonds. The system is counterparty to three fixed payor swaps with a total notional amount of $233 million at Dec. 31, 2015, converting 30% of the debt portfolio to synthetic fixed rate. CentraCare had $37.1 million of collateral posted related to the swaps at Dec. 31, 2015.
DISCLOSURE
CentraCare covenants to provide quarterly and annual disclosure. 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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002768
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002768
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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