CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to the following revenue bonds issued by the Louisiana Public Facilities Authority (LPFA) on behalf of Willis Knighton Medical Center (WK):
--$77.6 million series 1997;
--$39.8 million series 1995;
--$27.1 million series 1993.
The Rating Outlook is Stable
SECURITY
The bonds are secured by a pledge of gross receipts of WK, a negative mortgage pledge and a debt service reserve fund on each series of bonds.
KEY RATING DRIVERS
LEADING MARKET POSITION: Willis-Knighton Health System (WK) is a highly integrated, multi-facility system that has a leading market share position over two times that of its nearest competitor in the Shreveport, LA metropolitan area, a service area population of more than 400,000. With four acute care hospitals, 493 employed physicians, as well as outpatient and sub-acute facilities, Fitch believes WK's strong market position portends a stable financial profile going forward.
ROBUST PROFITABILITY: WK's operating profitability has been robust despite its large employed physician staff. Over the last three fiscal years, WK has posted annual improvements in operating margins from 8.2% in FY 2013 to 9.3% in FY 2015. Through the six months ended March 31, operating and operating EBITDA margins of 9.9% and 15.4%, respectively, well exceed the respective 'AA' medians of 4.9% and 11.5%
LIGHT DEBT BURDEN/ SOLID DEBT COVERAGE: WK's debt and leverage metrics are light as indicated by maximum annual debt service (MADS) of just 2.4% of fiscal 2015 total revenues and debt-to-capitalization of 17%. WK's light debt burden combined with robust profitability results in solid coverage of MADS by EBITDA of 5.5x and 6.4x in FY 2014 and FY 2015, respectively.
MIXED LIQUIDITY POSITION: At Mar. 31, 2016, WK had $373.1 million of unrestricted cash and investments that equates to 143.6 days cash on hand, a 15.2x cushion ratio and 226% cash-to-debt. WK's liquidity metrics are mixed as compared to the 'AA' category medians of 289.4 DCOH, 27x cushion ratio and 201.7% cash-to-debt. Unrestricted cash and investments have grown 50% since FYE 2013 (year ending Sept. 30) despite strong capital spending funded from cash flow.
LIMITED CAPITAL NEEDS: WK's capital spending has been consistent, ranging between $68 million and $76 million annually over the last three years or an average of 135% of depreciation. While the capital budget indicates a lower level of capital spending over the next three years, WK's strong cash flow generation should allow for a strong reinvestment in operations without the need for additional debt.
RATING SENSITIVITIES
MAINTENANCE OF FINANCIAL PROFILE: Fitch believes that Willis-Knighton Health System can maintain its current financial performance going forward. At the current rating level, the system can absorb some compression in profitability due to its adequate liquidity position and light leverage position, with no additional debt expected to be issued over the medium term (i.e. 3-4 years).
CREDIT PROFILE
Located in Shreveport, LA., Willis Knighton Health System consists of four acute care hospital facilities with a total of 727 available acute care beds, three skilled nursing facilities with a total of 305 beds, two independent living facilities with 241 apartments, and a 172-unit apartment building to house families of extended stay patients. In fiscal 2015, WK generated total revenues of $1.18 billion.
LEADING MARKET POSITION
WK is a highly integrated, multi-facility system that has a leading market share position over two times that of its nearest competitor in the Shreveport, LA metropolitan area. With four acute care hospitals, 493 employed physicians as well as outpatient and sub-acute facilities, Fitch believes WK's strong market position portends a stable financial profile going forward.
From 2013-2015, WK maintained an average inpatient market share of 63% in the Shreveport metropolitan service area compared to University Health at 25% and Christus Health at 11%. WK's long-term growth in market share reflects management's early adoption and creation of a hub-and-spoke model in the Shreveport metropolitan service area. WK South (152 available beds) opened in 1982, WK Bossier Health Center (152 available beds) opened in 1996, and WK Pierremont (183 available beds) opened in 1999. The main campus, WK Medical Center, has 230 available acute care beds. These facilities were developed and situated in the community to improve access to medical and emergency services. According to management, each household in the primary area can access a WK emergency department within eight minutes. Additionally, WK utilizes the clinical institute model in an effort to provide high-quality care in the most efficient environment. Thus, WK South houses the Center for Women's Health and the Institute for Behavioral Health. The main campus (WK Medical Center) houses the WK Cancer Center, the WK Heart and Vascular Institute, the Spine Institute, the Center for Fertility and Reproductive Health, and the John C. McDonald Regional Transplant Center and Eye Surgery Center. WK also has management contracts with 25-bed North Caddo Medical Center, 38-bed DeSoto Regional Health and 58-bed Springhill Medical Center.
At March 31, 2016, the total medical staff numbered over 900 physicians, of which, active medical staff totaled 592. Growth of the active medical staff has been positive, growing from 575 at Sept. 30, 2015 and 502 at Sept. 30, 2014. Furthermore, 493 or 83% of the active medical staff were employed. Fitch views the growth in medical staff and large percentage of employed physicians as a positive credit factor which serves to reduce overall operating volatility.
ROBUST PROFITABILITY
WK's operating profitability has been robust despite its large employed physician staff. WK has posted year-over-year improvements in operating margins growing from 8.2% in fiscal 2013 to 8.8% in fiscal 2014 and 9.3% in fiscal 2015. Similarly, operating EBITDA margins have improved from 13.5% in fiscal 2013 to 15.1% in fiscal 2015. WK operating and operating EBITDA margins well exceed the respective 'AA' category medians of 4.9% and 11.5%. WK's strong profitability reflects the system's improving volume trends, good managed care contracts and a very lean management structure. Through the six months ended March 31, operating and operating EBITDA margins were 9.9% and 15.4%, respectively.
WK's robust profitability combined with a light debt burden generated strong coverage of MADS by EBITDA of 5.5x and 6.4x in FY 2014 and FY 2015, respectively. MADS is estimated at $24.5 million, which includes bonded MADS of $17.3 million plus capital leases and notes payable. MADS equates to a moderate 2.4% of fiscal 2015 total revenues, which is consistent with the 'AA' category median of 2.4%. Moreover, Fitch views this MADS as conservative and reflects the very short amortization of WK's outstanding debt, which will fully amortize by 2027.
STRONG LIQUIDITY POSITION
At March 31, 2016, WK had $373.1 million of unrestricted cash and investments that equates to 143.6 days cash on hand, a 15.2x cushion ratio and 226% cash-to-debt. Unrestricted cash and investments have grown 50% since FYE 2013 (year ending Sept. 30) despite strong capital spending funded from cash flow. Additionally, WK's liquidity position and metrics reflect the impact of its highly conservative investment approach with 95% investments allocated to U.S. Treasury securities and just 5% allocated to U.S. equities.
DEBT PROFILE
WK has approximately $144.5 million of revenue bonds outstanding consisting of $27.1 million series 1993, $39.8 million series 1995, and $77.6 million series 1997 revenue bonds all issued through the Louisiana Public Finance Authority. In 2002, WK converted the mode on all its bonds to an auction rate mode. The maximum is the lesser of 175% of the S&P Municipal Bond 7-day Intermediate Grade Rate Index or 12%, which resulted in an average interest rate of 19 basis points (bp) and 24 bp in fiscal 2014 and 2015, respectively. At FYE 2015, in addition to bonded debt, WK had $5.2 million in mortgage notes, $16.6 million equipment notes payable, and $917,000 in capital leases. There are no plans to issue any additional bonded debt.
DISLOSURE:
WK is required to provide annual audited financial information with 180 days of each FYE. However, the health system has provided both annual and interim financial disclosure with utilization data on a timely basis via the Municipal Security 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=1009266
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009266
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.