SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' long-term rating on the University of Chicago Medical Center's (UCMC) outstanding debt, as listed at the end of the press release. In addition, Fitch has assigned a bank bond rating of 'AA-' related to the series 2011B variable-rate demand bonds supported by a letter of credit from Sumitomo Mitsui Banking Corporation.
The Rating Outlook is Stable.
SECURITY
Debt payments are secured by a pledge of unrestricted receivables.
KEY RATING DRIVERS
INTEGRAL RELATIONSHIP WITH THE UNIVERSITY: UCMC plays a fundamental role in the highly integrated clinical and research platform between UCMC and the University of Chicago's (the university; revenue bonds rated 'AA+') Biological Sciences Division, which includes the Pritzker School of Medicine. UCMC has consistently provided transfers to the university to support the academic programs in biology and medicine, which suppresses liquidity growth.
SOLID MARKET POSITION IN COMPETITIVE SERVICE AREA: UCMC is among the leading academic medical centers in the U.S. and maintains a strong reputation for clinical excellence in the provision of advanced high-acuity services. Its relationship with the university and focus on research differentiates it in a highly competitive and consolidating market.
STRATEGIC GROWTH: UCMC is in the process of growing its network and provider base and various initiatives are underway including partnering and affiliating with community hospitals, expanding its ambulatory presence, and aligning with community physicians.
CONSISTENT STRONG PROFITABILITY: Operating cash flow has remained strong driven by good volume growth and continued focus on expenses. Operating EBITDA margin was 13.1% in fiscal 2015 (June 30 year-end) compared to 12.9% the prior year and was 13.5% through the nine months ended March 31, 2016.
CONTINUED HEALTHY CAPITAL SPENDING: Strong volume growth and its strategic growth plan results in ongoing capital spending at almost 2x depreciation expense a year. The total 10-year capital plan is $1.56 billion and includes a new and expanded emergency room, the addition of 188 beds when an existing facility (Mitchell Hospital) is renovated and modernized, and growth in outpatient facilities. Only $200 million of the plan will be funded by additional debt and the rest will be from cash flow.
HIGH DEBT BURDEN: UCMC's debt burden is high and most debt metrics compare unfavorably to the 'AA' category medians.
RATING SENSITIVITIES
CONSISTENT FINANCIAL PROFILE: Fitch expects The University of Chicago Medical Center to maintain its consistent solid financial profile but notes that there is less cushion at the current rating level for a deviation in financial performance due to the execution risk of its strategic growth plans, additional debt, and ongoing capital spending. There would be negative rating pressure if there was a sustained deterioration in financial performance.
CREDIT PROFILE
UCMC currently operates 629 beds in four hospitals including the Center for Care and Discovery (CCD) , Bernard A. Mitchell Hospital (adult facility), Chicago Lying-in Hospital (women's hospital), and Comer Children's Hospital, which are all located in Chicago on the main campus of the university. Total revenue for the FYE June 30, 2015 was $1.5 billion.
Relationship with the University
The 'AA-' rating reflects UCMC's excellence and reputation in advanced high-acuity clinical services, the integral role of UCMC within the university, and its solid financial profile. Located on the main campus of the university, UCMC is the principal teaching affiliate of the university's Pritzker School of Medicine. UCMC provides a comprehensive array of services and its focus and clinical excellence is in quaternary care. The university is the sole corporate member of UCMC.
Strategic Growth
UCMC's strategic growth plans include growing its geographic presence and establishing an ambulatory and community physician affiliation strategy. UCMC signed a letter of intent with Ingalls Health System (Ingalls) in November 2015, which contemplates Ingalls joining UCMC through a member substitution. Ingalls is a community hospital in south suburban Chicago who was looking for a partner. Ingalls has a strong balance sheet but weak operating performance and its debt is expected to remain separately obligated.
UCMC has several joint ventures with other community hospitals in specific service lines, such as cancer with Silver Cross. These relationships continue to expand and a letter of intent was signed with Little Company of Mary related to a similar structure. The Silver Cross joint venture has been very successful with volume growth exceeding projections and the ability to provide care locally and in a lower cost setting.
Historically, UCMC's medical staff was all faculty physicians. Recently, UCMC formed a clinically integrated network (University of Chicago Medicine Care Network) to align with community physicians. The University of Chicago Medicine Care Network will include employed and affiliated non-faculty physicians. This physician base will be key to its ambulatory growth strategy and Fitch will monitor the growth and impact on financial performance.
UCMC has plans to grow its ambulatory presence and add multispecialty outpatient clinics in Orland Park and South Loop, which are expected to be staffed by the faculty and University of Chicago Medicine Care Network physicians.
Strong Profitability and Volume Growth
Profitability has been consistently strong and aided by good volume growth and continued focus on lean initiatives. Multiple initiatives are underway regarding supply chain, pharmacy operations, lab operations and labor productivity. UCMC's operating margin was 6.1% through the nine months ended March 31, 2016 compared to 5.5% in fiscal 2015, 4.8% in fiscal 2014, and 5.9% in fiscal 2013. Performance through year-to-date fiscal 2016 is ahead of budget. UCMC has a financial target of maintaining operating margins above 4.5%.
Admissions have increased at a CAGR of 5.9% from FY 2011-2015 compared to a decline in the market of 2.3% over the same time period. Volume growth has also been strong in key specialty service lines. The growth has been due to physician relationships, better throughput in the emergency department, and added capacity (additional 49 beds since fiscal 2013).
Ongoing Capital Spending
UCMC completed a new hospital pavilion project (CCD) that opened in February 2013 and cost $700 million. The CCD was initially expected to move patient care out of the older hospital (Mitchell); however, due to capacity constraints, UCMC received approval to add back a net of 188 beds at Mitchell. Mitchell will need to be renovated and modernized and this will be done over a 5-6-year period at a cost of $187 million. Management also expects to consolidate cancer services at Mitchell. Another major project is a new and expanded emergency room, which is expected to open by Dec. 2017. The cost of the ER is $35 million and UCMC is also applying for Level I trauma designation.
The total 10-year capital plan is $1.56 billion and since the majority of the plan will be funded from cash flow, sustaining strong operating cash flow will be key to maintaining the rating. UCMC expects to issue $200 million of additional debt to fund a portion of the capital plan; however, this is expected to be issued over several years, which Fitch views favorably given UCMC's current high debt burden. Of the $200 million, $40 million is expected to be issued in fiscal 2017.
Pressured Liquidity
Liquidity metrics are mixed with good days cash on hand (DCOH) but weak cash-to-debt metrics. DCOH has been consistently above 300 days but dropped to 250.5 at March 31, 2016 due to unrealized investment losses, heavy capital spending (2.2x depreciation expense) and ongoing slow payments from the state on Medicaid receivables. Cash-to-debt is weak at 131% at June 30, 2015 and 112.2% at March 31, 2016, compared to Fitch's AA category median of 201.7%.
Fitch notes that liquidity growth is pressured due to ongoing transfers to the university in support of the School of Medicine and transfers have been around $70 million a year the last few years.
High Debt Burden
A credit concern is UCMC's above-average debt burden. MADS of $52.7 million accounted for 3.4% of total revenue in fiscal 2015, which has declined from 4.1% in fiscal 2012 but compares unfavorably to the 'AA' category median of 2.4%. Debt service coverage calculations do not include the transfers to the university, and debt service coverage has been adequate at 4.7x through the nine months ended March 31, 2016, 5.1x in fiscal 2015 and 4.3x in fiscal 2014.
Somewhat Aggressive Debt Portfolio
Total outstanding debt was $867.5 million at March 31, 2016 with 46% underlying fixed-rate and 54% underlying variable-rate ($325 million variable-rate demand bonds, $75 million indexed floating direct bank loan, $77.7 million commercial paper). UCMC's LOC exposure is diversified among five different banks, and the expiration dates range from 2017 to 2021. UCMC's cash-to-putable debt is solid at 2.4x. UCMC has a $325 million floating-to-fixed rate swap with JPMorgan and Wells Fargo. Collateral posting requirements are at a $50 million threshold for the JPMorgan swap at UCMC's current rating level and the Wells Fargo swap does not have collateral posting requirements unless UCMC's rating is downgraded to 'A+' or lower. As of March 31, 2016, UCMC was posting $27.3 million of collateral related to the JPMorgan swap.
Disclosure
UCMC covenants to provide annual audited financials within 150 days of fiscal year end and unaudited quarterly financials for the first three fiscal quarters within 60 days of quarter end.
Fitch affirms the following outstanding debt:
$68,535,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue bonds series 2012A
$90,000,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue bonds series 2011C
$46,250,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2011B (LOC: Sumitomo Mitsui Banking Corporation)
$46,250,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2011A (LOC: Bank of America, N.A.)
$46,250,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2010B (LOC: Wells Fargo Bank, N.A.)
$46,250,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2010A (LOC: Bank of America, N.A.)
$70,000,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2009 D-1, D-2 (LOC: PNC Bank)
University of Chicago Medical Center series 2009 D-1, D-2 bank bond rating
$70,000,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2009 E-1 and E-2 (LOC: Wells Fargo Bank, N.A.)
$60,900,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue bonds series 2009C
$148,480,000 Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue refunding bonds series 2009A&B
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=1005187
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005187
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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