CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A- ' rating to the following bonds expected to be issued by the Wisconsin Health & Educational Facilities Authority (the authority) on behalf of Beloit Health System (BHS):
--$14,710,000 revenue bonds series 2016.
Additionally, Fitch has affirmed the 'A-' rating on approximately $35 million of revenue bonds issued by the authority on behalf of BHS.
The series 2016 bonds will be issued as tax-exempt fixed-rate bonds. Bond proceeds will be used to fund certain capital projects and pay costs of issuance. Pro forma MADS is expected to equal approximately $6.6 million. The series 2016 bonds are expected to price the week of May 9 through negotiation.
The Rating Outlook is Stable.
SECURITY
Bond payments are secured by the pledged revenues of the obligated group, a mortgage lien and a debt service reserve fund.
KEY RATING DRIVERS
STRONG MARKET POSITION: The system's strong leading market share in its primary service area (PSA) and its highly aligned medical staff are primary credit strengths and enhance BHS' overall credit profile.
CONSISTENT OPERATING PROFITABILITY: Operating profitability has been very consistent over the past four years with operating EBITDA margin averaging 9.3% since fiscal 2012 and equal to 9.3% in fiscal 2015. However, operating profitability is light relative to Fitch's 'A' category medians.
MODERATE DEBT BURDEN: BHS' moderate pro forma debt burden and consistent operating profitability combine to provide for solid coverage for the 'A-' rating with maximum annual debt service (MADS) coverage by operating EBITDA of 3.1x in fiscal 2015.
LIGHT LIQUIDITY: Liquidity metrics remain light with 151.6 days cash on hand, 94.2% cash to pro forma debt and 12.7x cushion ratio at Dec. 31, 2015.
RATING SENSITIVITIES
CONSISTENT OPERATING CASH FLOW: Fitch expects that current operating cash flow levels will be maintained and that Beloit Health System will successfully execute the planned capital projects.
CREDIT PROFILE:
BHS operates a 256 licensed bed acute care hospital and a multi-specialty physician group in Beloit, Wisconsin, approximately 100 miles northwest of Chicago. Additional operations include home care, independent and assisted living, urgent care, and related ancillary services. Total operating revenues equaled $218.6 million in fiscal 2015.
STRONG MARKET POSITION
The system's strong market position and highly aligned medical staff are primary credit strengths, bolstering credit stability. BHS holds a strong leading 60% market share in its PSA. No other hospital holds greater than a 20% market share.
The system's competitive position has been bolstered by the acquisition of the Beloit Clinic in 2010 and various service line affiliations with other health systems. The clinic is the area's largest multi-specialty physician group with 65 employed physicians. BHS has entered into service line affiliations with other hospital systems including University of Wisconsin Health and Aurora Healthcare, bringing increased access to specialty care in the service area.
The system's competitive position could be impacted by construction of a new hospital in BHS' secondary service area in Rockford, IL, approximately 18 miles south of Beloit. The new hospital will be built by MercyRockford Health System and is expected to open in 2019. Fitch will monitor any changes to the competitive environment.
CONSISTENT OPERATING PROFITABILITY
Operating profitability has been consistent over the past four years, with operating EBITDA margin averaging 9.3% between fiscal years 2012 and 2015 and equal to 9.3% in fiscal 2015 and 8.9% in the interim period. However, operating EBITDA margin is light relative to Fitch's 'A' category median of 10.3%. Operating profitability has been somewhat compressed relative to historical levels subsequent to the acquisition of the Beloit Clinic. The benefit of the increased physician alignment currently mitigates concerns related to the decreased, but solid, operating profitability.
MODERATE DEBT BURDEN
BHS' pro forma debt burden remains moderate with pro forma MADS equal to 3% of fiscal 2015 operating revenue. MADS coverage by operating EBITDA of 3.1x in fiscal 2015 and the interim period remain solid for the 'A-' rating category and relative to Fitch's 'A' category median of 3.5x. However, MADS coverage by EBITDA of 3.3x in fiscal 2015 and 3.0x in the interim period is light relative to Fitch's 'A' category median of 4.2x. MADS coverage by EBITDA was negatively impacted by approximately $2 million of realized investment losses in the interim period.
Series 2016 bond proceeds will be primarily used to fund two capital projects: (1) the renovation of the hospital's fourth floor to create a 'Heart Hospital within a Hospital' and (2) construction of an ambulatory surgical center on the system's NorthPointe campus in northern Illinois. The two projects are estimated to cost a total of approximately $30 million. Funding will be provided by a combination of bond proceeds, philanthropy and cash flow.
Fitch views the projects favorably as both should further solidify BHS' strong market position.
LIGHT LIQUIDITY
Unrestricted cash and investments increased approximately 20% since June 30, 2014, at the time of Fitch's last review to $83.8 million at Dec. 31, 2015. The substantial increase was due to a decrease in accounts receivable subsequent to a slow down related to the implementation of a new IT system. However, unrestricted cash and investments have remained relatively stable at the current level since fiscal year end 2014. Liquidity metrics remain light for the rating category with 151.6 days cash on hand, 12.7x cushion ratio and 94.2% cash to pro forma debt at Dec. 31, 2015, relative to Fitch's 'A' category medians of 205.3 days, 18.5x and 143.7%.
DEBT PROFILE
BHS will have approximately $92.7 million of total debt outstanding subsequent to the series 2016 bond issuance. The pro forma debt portfolio will consist of approximately 49% underlying fixed rate bonds and 51% underlying variable rate bonds. The variable rate bonds are effectively converted to synthetic fixed rates through two fixed payor swaps. There are no collateral posting requirements associated with the swaps.
DISCLOSURE
BHS covenants to provide annual audited disclosure within 150 days of fiscal year end and quarterly disclosure within 60 days of the first three quarters end and within 90 days of the end of the fourth quarter. 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
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003741
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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