NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned its 'AA' rating to the approximately $398.8 million series 2016A, B and C revenue bonds issued by Colorado Health Facilities Authority on behalf of Adventist Health System Sunbelt Obligated Group, FL (AHS) as follows:
--$200,000,000 Colorado Health Facilities Authority series 2016A;
--$62,000,000 Colorado Health Facilities Authority series 2016B;
--$136,840,000 Colorado Health Facilities Authority series 2016C.
In addition, Fitch affirms the 'AA' long-term rating on AHS's rated outstanding debt listed at the end of the release and affirms AHS's Short-Term rating based on self-liquidity at 'F1+.
The Rating Outlook is Stable.
AHS plans to issue three series of bonds, expected to price via negotiation the week of June 20. Proceeds of the fixed-rate series 2016A will be used to fund various capital projects of the system. The fixed-rate series 2016B will be a partial refunding of the system's Kansas Development Finance Authority Hospital revenue bonds series 2009D. The series 2016C, expected to be issued as fixed rate put bonds, will be used to refund in full the outstanding Highlands County Health Facilities Authority hospital revenue bonds series 2006C (series 2006C).
SECURITY
The bonds will be secured by a pledge of the obligated group's (OG) gross revenues and notes under a 2014 Master Trust Indenture. The OG accounted for 95% of the consolidated system's revenues in fiscal 2015 (year-end Dec. 31).
KEY RATING DRIVERS
STRONG AND CONSISTENT OPERATING RESULTS TREND: AHS continues to produce strong and sustained operating profitability margins which consistently exceed the 'AA' medians and are considered a key credit strength. AHS's operating margin has averaged 7% over the last four years, most recently 7.8% in fiscal 2015, while operating EBITDA margin averaged slightly higher than 14% during the same period. For the first quarter of fiscal 2016 ended March 31, 2016 (the interim period), operating and operating EBITDA margins continued to be robust at 8.1% AND 14.2%, respectively.
COMPLETION OF A MAJOR DEBT RESTRUCTURING PLAN: With the current transaction, AHS is completing their major debt restructuring plan initiated in 2012, which was intended to reduce dependence on letters of credit (LOCs), eliminate swap exposure and pay off high coupon debt. Including the series 2006C, AHS will have restructured a total $890 million of outstanding debt using internal funds, while significantly reducing interest expense.
RETURN TO MODERATE DEBT BURDEN: After initial increase in debt metrics due to the issuance of close to $700 million of debt to fund projects since 2013, leverage retuned to a moderate level. Coverage of pro forma maximum annual debt service (MADS) of $220.6 million was 5.6x in fiscal 2015 based on the Master Trust Indenture (MTI) calculation and MADS represented a 2.3% of total system revenues, both in line with Fitch's 'AA' category medians.
STABLE LIQUIDITY: Historically strong cash flow has enabled the system to maintain days cash on hand (DCOH) at or above 220 days despite significant investment in facilities and programs. The system's $5.01 billion of unrestricted cash and investments at March 31, 2016 equated to 222 DCOH, 22.7x cushion ratio and 169% cash to pro forma debt.
STRONG AND STABLE MANAGEMENT TEAM: Fitch views favorably AHS's long-tenured, strongly committed management team with a demonstrated ability to strategically expand the system's footprint while maintaining strong operating results with a high degree of predictability.
GEOGRAPHIC DIVERSITY AND REVENUE SIZE: The consolidated system has a significant degree of geographic dispersion and size, operating 43 hospitals in 10 states and generating $9.12 billion in revenue in fiscal 2015. The Florida division accounts for a high 66% of the system operating revenues, but includes three distinct markets, with Orlando and Tampa being the largest. In 2015 AHS created a joint operating company combining their four Chicago area hospitals with five hospitals owned by Alexian Brothers, a subsidiary of Ascension Health (rated 'AA+').
SUFFICIENT INTERNAL LIQUIDITY: The affirmation of the Short-Term 'F1+' rating is based on the sufficiency of AHS's liquid resources and written procedures to fund the purchase price on each mandatory tender date. Based on Fitch's rating criteria related to self-liquidity, AHS's eligible cash and investment position covers the maximum mandatory tender exposure of $834.1 million of bonds supported by self-liquidity on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' rating.
RATING SENSITIVITIES
CONSISTENT OPERATING PERFORMANCE: Fitch expects Adventist Health System Sunbelt to continue to sustain solid operating results and liquidity while investing in further system growth and implementation of efficiencies and competencies needed for population health management.
Credit Profile
AHS is a large multistate health care organization, with 43 hospitals, 15 long-term care facilities and various other health-related businesses in 10 states (Kansas, Colorado, Florida, Georgia, Illinois Kentucky, North Carolina, Tennessee, Texas and Wisconsin). The consolidated system had revenues of $9.12 billion in fiscal 2015, a 20% increase since fiscal 2013. The OG represented 95% of the consolidated system's revenues and 86% of consolidated system assets in fiscal 2015. Fitch analyzes the performance of the consolidated system.
Based on a review of the hospital portfolio in AHS's Southeast Region, system management is in the process of disposing of two hospitals in Tennessee: selling Takoma Regional Hospital (84-acute care beds) back to Wellmont Health System (BB+', Rating Watch Evolving,) under an existing put option and has already transferred Jellico Community Hospital (54-beds) to Community Hospital Corporation. Neither transaction is viewed as material to AHS's credit profile.
New Issue Details
Proceeds of the fixed-rate series 2016A, which will have a 2046 final maturity, and principal due in the last eight years, will be used to fund various capital projects. The fixed-rate series 2016B, with a 2030 final maturity and principal due starting with 2021, will be a partial refunding of the system's Kansas Development Finance Authority hospital revenue bonds series 2009D. The series 2016C will be issued as fixed-rate put bonds with a mandatory put date between 5-10 years, subject to market conditions at the time of sale and final maturity in 2036, with proceeds applied to refund in full the outstanding Highlands County Health Facilities Authority hospital revenue bonds series 2006C. Maximum annual debt service (MADS) of $220.6 million, provided by the Underwriters, occurs in 2024.
The bonds will be issued under the New Master Trust Indenture (MTI) which became effective Aug. 1, 2014, and secured by a pledge of the OG's gross revenues. AHS sells a portion of its accounts receivable, $409.2 million as of Dec. 31, 2015, which is not included in the gross revenue pledge and which reduce bondholders' security interest.
System Expansion in the Chicago Market
In February 2015, AHS entered into an Affiliation Agreement with Ascension Health, creating a joint operating company (JOC), integrating the JOC's nine hospitals in the suburban Chicago area under a common governance structure with equal representation on the board by both partners, while each party to the JOC retains ownership of its assets. The joint entity's hospitals have combined revenues of $1.7 billion, have brought together 3,000 physicians and the integration facilitates efforts directed at cost reduction and population care management. AHS has faced challenges in this market, particularly with the Bolingbrook facility, and the JOC has created opportunities for cost reduction and rationalization of services to offset the declining utilization trend in this market.
Strong and Consistent Operating Performance
Fitch views AHS's consistent and highly predictable operations, together with the geographic diversity and presence in several favorable markets such as Florida and central Colorado, as chief credit strengths. Operating margin has increased from 6.6% in fiscal 2013 to 7.8% in fiscal 2015, and operating margin has further improved through the interim period ended March 31, 2016 to 8.1%. Operating EBITDA margins averaged 14.2%, and both the operating and operating EBITDA margins comfortably exceed Fitch 'AA' category medians of 4.9% and 11.5%, respectively. These results were accomplished despite continued significant investment in facilities and expansion in new and existing markets. AHS invested $2.4 billion in their enterprise between 2012 and 2015; capital expenditures as a percent of depreciation averaged 152% over the last four years and the investment is reflected by a low average age of plant of under 10 years.
Operating profitability was accomplished through a dedicated effort at expense management and supported by solid volumes: admissions on a same-store basis increased by 2.4% in 2015 and surgery volumes were 3.9% ahead of the prior year. Management has a clearly articulated five-year vision statement, which is continually being revised, addressing system goals and initiatives, and local management is held accountable for performance. Several high visibility initiatives include supply cost management with a goal of a $100 million cost reduction in 24 months, improvement in physician practice management, which is expected to generate between $25 million-40 million in efficiencies, as well as a plan to more optimally use hospitalists throughout the system to both improve quality and manage expenses.
Stable Liquidity
The $5.01 billion of unrestricted cash and investments at March 31, 2016, equating to 222 DCOH, 22.7x cushion ratio and 169% cash to pro forma long-term indebtedness, provide a degree of flexibility, while liquidity has been maintained due to robust cash-flow from operations despite the heavy investment in facilities (which to a large degree has been accomplished from internal sources).
Debt Profile
The current financing, which includes the refunding of the series 2006C, represents the culmination of a debt restructuring plan designed to eliminate swap exposure and pay-off high coupon debt when bonds become callable or when able to be purchased on the open market. As part of the plan, all swaps were eliminated in 2012 and variable-rate debt backed by LOCs has gradually been replaced by direct-purchase bank bonds with staggered terms. Including the refunding in the series 2016C AHS will have restructured $890 million of debt, with a resulting reduction in average cost of capital to 3.2%. Post issuance, including the $200 million of new money, long-term debt will increase to approximately $2.96 billion. The pro forma debt portfolio will be composed of approximately 87% of either fixed-rate bonds or direct bank put bonds that are in a fixed rate for the initial periods.
The debt burden, which was temporarily elevated as the system executed its debt restructuring plan, has returned to a moderate level. Coverage of pro forma MADS was a strong 5.6x in fiscal 2015, in line with the 'AA' median, and MADS as percent of revenues at 2.3% is also consistent with the median. Debt to capitalization, once very high, is now a very manageable 27.9% on a pro forma basis.
Short-Term Rating
The affirmation of the 'F1+' Short-Term rating reflects the adequacy of AHS's liquidity position and management's procedures to access funds in case of an unremarketed put of any of its outstanding variable-rate debt supported by self-liquidity. Fitch's adjusted funds available for an unremarketed put for AHS at March 31, 2016 are $3.5 billion, which would cover the maximum possible tender exposure of $834.1 million of debt supported by self-liquidity on any given date by 3.49x, exceeding Fitch's criteria for assigning short-term ratings of 1.25x coverage. The maximum tender exposure includes up to $500 million of commercial paper (CP). Management actually intends to pay off the currently outstanding $199.9 million of CP notes prior to the execution of the 2016 transaction.
DISCLOSURE
AHS discloses annual financial statements within 150 days and quarterly financial statements within 60 days through MSRB's EMMA website. The MTI only requires annual financial statements submission.
Fitch affirms the following outstanding debt at 'AA':
Colorado Health Facilities Authority (CO) (Adventist Health System/Sunbelt Obligated Group) hosp rev bonds ser 2014E
Highlands County Health Facilities Authority (FL) (Adventist Health System/Sunbelt Obligated Group) hosp rev bonds ser 2005I
Highlands County Health Facilities Authority (FL) (Adventist Health System/Sunbelt Obligated Group) hosp rev bonds ser 2006C
Highlands County Health Facilities Authority (FL) (Adventist Health System/Sunbelt Obligated Group) hosp rev bonds ser 2008B
Highlands County Health Facilities Authority (FL) (Adventist Health System/Sunbelt Obligated Group) hosp rev rfdg bonds ser 2009E
Illinois Development Finance Authority (IL) (Adventist Health System/Sunbelt Obligated Group) rev bonds ser 2000B
Kansas Development Finance Authority (KS) (Adventist Health System/Sunbelt Obligated Group) fixed rate rev bonds ser 2009D
Kansas Development Finance Authority (KS) (Adventist Health System/Sunbelt Obligated Group) hosp rev bonds ser 2009C
Kansas Development Finance Authority (KS) (Adventist Health System/Sunbelt Obligated Group) hosp rev rfdg bonds ser 2012A
Liquidity Supported Debt:
Highlands County Health Facilities Authority (FL) (Adventist Health System/Sunbelt Obligated Group) hosp rev rfdg bonds ser 2012I-1
Highlands County Health Facilities Authority (FL) (Adventist Health System/Sunbelt Obligated Group) hosp rev rfdg bonds ser 2012I-2
Highlands County Health Facilities Authority (FL) (Adventist Health System/Sunbelt Obligated Group) hosp rev rfdg bonds ser 2012I-3
Highlands County Health Facilities Authority (FL) (Adventist Health System/Sunbelt Obligated Group) hosp rev rfdg bonds ser 2012I-4
Highlands County Health Facilities Authority (FL) (Adventist Health System/Sunbelt Obligated Group) hosp rev rfdg bonds ser 2012I-5
Highlands County Health Facilities Authority (FL) (Adventist Health System/Sunbelt Obligated Group) var-rate demand bonds ser 2007A
Additional information is available at www.fitchratings.com
Applicable Criteria
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508
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=1006043
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