NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'A-' rating on the following Louisiana Public Facilities Authority bonds issued on behalf of Ochsner Clinic Foundation (OCF; Obligated Group (OG) entity within the Ochsner Health System):
--$150,000,000 Refunding Revenue Bonds (Ochsner Clinic Foundation Project) Series 2016
In addition, Fitch has upgraded to 'A-' from 'BBB+' the following parity debt also issued on behalf of OCF :
--$252,800,000 Ochsner Clinic Foundation Taxable Bonds Series 2015;
--$114,800,000 Louisiana Public Facilities Authority Refunding Revenue Bonds (Ochsner Clinic Foundation Project) Series 2015;
--$150,000,000 Louisiana Public Facilities Authority Revenue Bonds (Ochsner Clinic Foundation Project) Series 2011;
--$255,345,000 Louisiana Public Facilities Authority fixed rate revenue bonds (Ochsner Clinic Foundation), Series 2007A;
--$53,660,000 Louisiana Public Facilities Authority fixed rate revenue bonds (Ochsner Community Hospitals), Series 2007B
Proceeds from the bonds will be used to refund the 2011 bonds and pay for cost of issuance. OCF will be releasing the debt service reserve funds associated with the refunded bonds. Maximum annual debt service (MADS), as provided by management, will be approximately $77.9 million. Bonds are expected to sell via negotiated sale the week of May 4.
The Rating Outlook is revised to Stable from Positive.
SECURITY
Gross revenue pledge of the OG and a mortgage on certain properties.
KEY RATING DRIVERS
STRONG SYSTEM GROWTH: The upgrade reflects OCF's transformation from a New Orleans based hospital to the largest integrated health system in Louisiana, with more than 1,000 employed physicians. OCF is a leading referral center for health care services, with regional referrals and patient discharges from more than 25 miles away from New Orleans, growing by double digits each year from 2012 to 2015. Over this time, total operating revenue growth has been strong with a CAGR of 12.1%.
REDUCED OPERATING RISK: The 'A-' rating incorporates OCF's lower operating risk profile due to its growing market share position, increased regional footprint, and large base of employed physicians, which allows for greater variance to 'A' category medians and peers.
PERFORMANCE IMPROVEMENT SUSTAINED: OCF showed financial improvement for the third consecutive year. OCF had 2.6% operating margin and 8.5% operating EBITDA margin in fiscal 2015 (unaudited). This was the strongest financial results over the four year historical period. Pro forma maximum annual debt service (MADS) coverage was good at 3x.
THIN LIQUIDITY AT HIGHER RATING LEVEL: Continued cash flow and a taxable bond issue have helped shore up liquidity, but OCF's unrestricted liquidity ratios are thin for the rating level.
CAPITAL PROJECTS REFLECTING GROWTH: OCF is undertaking a number of projects -- the largest of which is a tower expansion on its main campus -- that will provide additional capacity to meet the increasing demand for services. The projects are expected to be funded by already issued debt, cash flow, and philanthropy.}
RATING SENSITIVITIES
STABILITY EXPECTED: Fitch expects Ochsner Clinic Foundation's operations to remain stable, its unrestricted cash and investments to show modest growth, and its debt metrics to improve as the debt burden begins to moderate.
CREDIT PROFILE
Located in New Orleans, LA, OCF is a large regional academic, multi-specialty, healthcare delivery system with 11 owned and managed hospitals and over 60 health centers in Louisiana. Ochsner employs more than 1,000 physicians in over 90 medical specialties and subspecialties and conducts over 1,000 clinical research trials annually. In 2015 (unaudited), OCF reported approximately $2.6 billion in operating revenue.
SYSTEM FINANCIAL IMPROVEMENT AND GROWTH
OCF's 2.6% operating margin and 8.5% operating EBITDA margin in fiscal 2015 (unaudited) was improved over 2014's 1.8% operating margin and 7.8% operating EBITDA margin. The 2015 unaudited results reflect the ongoing success of a number of growth and efficiency initiatives that OCF has put in place. First quarter 2016 results show revenue growth continuing, and operating EBITDA margins and operating EBITDA coverage holding steady at 7.8% and 2.7x. The first quarter has historically been OCF's weakest quarter.
The overall improvement in results distance the organization further from 2012, when a series of one-time events, including hurricane Isaac and a system-wide EPIC implementation, resulted in a negative operating margin and a drop in liquidity. EPIC now has become a key strategic driver for OCF, helping to grow and retain its patients and physicians.
OCF's regional referral strategy continues to see growth as well. Regional referrals increased by 35% in 2015 over 2014, building on a period from 2010 to 2014, when regional transfers grew by about 20% a year. In addition, discharges from patients more than 25 miles away grew by 10%, in 2015 over 2014.
OCF's strategy has involved a variety of affiliation strategies including clinical affiliations, management agreements, joint ventures, and acquisitions. Over the last two years these partnerships include St. Charles Parish Hospital, St. Tammany Parish Hospital, the River Parishes Hospital, Lafayette General Health, CHRISTUS Health Louisiana, Terrebonne General Medical Center, and Slidell Memorial Hospital. In late March, OCF announced the signing of a letter of intent to form a strategic partnership with General health System in Baton Rouge.
Further supporting the strong performance is a number of efficiency initiatives that OCF has undertaken to manage expenses. OCF management reports margin improvement of $26 million in 2015 and $54 million in 2014 due to these efforts. These initiatives have helped to blunt the effect of Medicaid cuts that Oschner has absorbed over the years.
The rating also factors in OCF's other underlying credit strengths that include a growing market position in its primary service area, a large base of employed physicians, and experience with population health management. OCF continues to increase the number of lives it manages, with approximately 35,000 lives in Southeast Louisiana under full risk contracts through capitated payments. OCF performs well under these contracts and continues to show the ability to bend the cost curve for the care of these patients while maintaining high quality.
Lastly, Louisiana has announced it will expand Medicaid. This should bring further reimbursement to OCF from patients who are currently self-pay. This further adds to the stable operating results Fitch expects over the next two years.
LIQUIDITY CONTINUES TO STRENGTHEN
At Dec. 31, 2015 unrestricted cash and investments was $858.1 million (reduced by a $52.4 million draw on a line of credit). The unrestricted liquidity equated to 129.2 days cash on hand (DCOH) and cash to debt of 81.7%. All these trail 'A' medians. The unrestricted liquidity includes $250 million from a taxable bond issue in 2015; however, OCF's liquidity shows growth even when removing those funds and that is due to improved cash flow, which is expected to continue.
OCF anticipates that its cash flow over the next few years will keep the balance sheet stable as it draws down these taxable funds for projects. Given the current levels of performance Fitch believes this is achievable.
GROWTH DRIVING CAPITAL PROJECTS
With the 2015 debt issuance, OCF is moving forward on approximately $200 to $250 million of capital projects focused on meeting an increase in the demand for services across the system. The largest of these will be tower expansion at OCF's flagship hospital, Ochsner Medical Center (OMC), in New Orleans. The $104 million project will add six floors to the main building, with 66 beds added as part of a Phase 1 and a potential 100 beds added as part of a Phase II.
The remaining projects include a cancer center expansion, an operating room expansion at Elmwood Hospital, and an expansion at the Elmwood Clinic. The tower project is expected to be completed by first quarter 2018 and the other projects are expected to be completed at various times through 2019.
While the projects bring construction risk, Fitch notes that the need for the project is being driven by the demand for and growth in OCF's services. Further mitigating concerns is OCF's recent completion of a number of capital projects that have proved accretive to its operating performance, including a primary care medical office building.
Fitch recently toured the primary care building, which opened on the OMC main campus in 2014. Fitch was impressed with the design of the space, the leadership, the approach to care, and other unique features, such as an onsite pharmacy and IT assistance for patients, related to health care apps and other health care technology. The primary care center has become a strategic driver of OCF's market share growth in its PSA.
Additionally, a $50 million capital project that moved women services and the NICU off the OMC campus to Ochsner Baptist Medical has increased NICU utilization and opened capacity at the main campus. Part of the need for the current expansion is the high utilization at OMC even after this increase in capacity. Separately, a 60-bed expansion at OMC-Jefferson Highway has led to increased volumes at that campus.
DEBT PROFILE
After issuance, OCF will have approximately $1.1 billion in long term debt. The vast majority of the debt will be fixed rate, of which approximately $850 million will be fixed rate revenue bonds and the rest various notes and loans payable. Excluded from total long term debt calculation is a $52.4 million in borrowing under a line of credit agreement, which is classified as short term debt and netted out of unrestricted cash and investments.
An analysis of the debt at the end of fiscal 2015 shows MADS as a percentage of revenue of 3%, near the 'A" median of 2.8%, and debt-to-EBITDA of 4.4x above the 'A' median of 3x. MADS coverage was 3x. MADS of $77.9 million occurs in 2016 and MADS will fall to around $70M by 2018, which should further improve debt metrics.
DISCLOSURE
OCF has covenanted to provide annual and quarterly
disclosure through the Municipal Securities Rule Making 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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