CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to $189.4 million of series 2016A fixed rate revenue bonds expected to be issued by the Illinois Finance Authority on behalf of Edward-Elmhurst Healthcare (EEH).
In addition, Fitch has upgraded to 'A' from 'BBB' the following bonds issued by the Illinois Finance Authority on behalf of Elmhurst Memorial Healthcare:
--$76 million taxable fixed rate revenue bonds series 2013A;
--$30.5 million taxable variable rate revenue bonds series 2013B;
--$124.8 million fixed rate revenue bonds series 2008A
--$50 million variable rate demand bonds series 2008D*.
*Underlying Rating. The series 2008D bonds currently are supported by a letter of credit (LOC) from BMO Harris Bank, which is to be replaced with an LOC from Bank of America
In addition, Fitch has downgraded to 'A' from 'A+' the following bonds issued by the Illinois Finance Authority on behalf of Edward Hospital:
--$86.1 million fixed rate revenue bonds series 2008A;
--$48.5 million variable rate demand bonds series 2008B-1*
--$48.5 million variable rate demand bonds series 2008B-2*;
--$9.1 million variable rate demand bonds series 2008C*;
--$42.9 million variable rate demand bonds series 2009A*
*Underlying Ratings. The series 2008B-1, 2008B-2 and 2008C bonds are supported by LOCS from JP Morgan Chase Bank. The series 2009A bonds are supported by an LOC from Bank of Montreal
The Rating Outlook is Stable.
As part of the 2016 plan of finance, EEH also plans to issue $49.3 million of series 2016B direct purchase variable rated bonds (with JPMorgan) and $43.5 million of series 2016C direct purchase variable rate bonds (with Bank of America); the series 2016B&C bonds are not rated by Fitch. Bond proceeds from the series 2016 financings (which include releasing $10.5 million of debt service reserve funds) will refund and advance refund Edward Hospital's (Edward) series 2008A fixed rate bonds, Edward's series 2008B-1 variable rate demand bonds (VRDBs), Edward's series 2009A VRDBs, Elmhurst Memorial Healthcare's (Elmhurst) series 2008A fixed rate bonds, and pay the costs of issuance. The bonds are expected to price the week of Oct. 31 via negotiation.
SECURITY
Bond payments are to be secured by a joint and several revenue pledge of the Edward-Elmhurst Healthcare obligated group, which will be created upon the issuance of the series 2016 financing. The bonds are not to be supported by a mortgage or a debt service reserve fund (DSRF).
KEY RATING DRIVERS
PLAN TO COMBINE OBLIGATED GROUPS: The creation of the EEH obligated group is one of the final steps in the process of merging Edward and Elmhurst. While the formation of the EEH obligated group is happening one or two years earlier than planned originally, this is not unexpected as Edward-Elmhurst has been operating as a single system since the merger was finalized on July 1, 2013. After the issuance of the series 2016 bonds, the separate Edward and Elmhurst obligated groups will cease to exist.
GROWING MARKET PRESENCE IN FAVORABLE SERVICE AREA: EEH is benefiting from volume growth in its favorable western Chicago suburban service area. Despite a competitive service area, EEH has realized market share growth in recent years.
SOMEWHAT MODEST OPERATING MARGINS: While profitable, EEH's operating EBITDA margins are somewhat modest for the 'A' rating category. In fiscal 2015 and 2016, EEH recorded operating EBITDA margins of 8.7% and 8.4%, respectively.
ELEVATED DEBT LOAD: Because of Elmhurst's heavy debt burden, EEH's pro forma debt service ratios are somewhat stressed. Pro forma maximum annual debt service (MADS) coverage by EBITDA is modest at 2.9x as is debt-to-EBITDA at 5.5x. Pro forma MADS as a percentage of revenue is manageable at 3.6%.
MIXED LIQUIDITY RATIOS: EEH's liquidity position is mixed. Pro forma cash on hand (226 days) and cushion ratio (16.0x) are adequate. Pro forma cash-to-debt, however, is thin at 101%.
RATING SENSITIVITIES
SUSTAINED OPERATING RESULTS: Fitch expects newly combined Edward Elmhurst Healthcare Obligated Group (EEH) to benefit from its growing market position, modern physical plant, and favorable physician relationships to sustain, if not improve, operating margins over time. Given that the system does not have new money debt plans in the coming years, debt service coverage and liquidity ratios should improve over time.
CREDIT PROFILE
EEH is the result of the July 2013 merger between Edward and Elmhurst. EEH is a 613 licensed bed health system headquartered in Naperville, IL with inpatient acute care hospitals in Naperville and Elmhurst and the Linden Oaks Hospital, a 108 bed psychiatric hospital in Naperville. Naperville and Elmhurst are located 33 miles and 18 miles, respectively, west of downtown Chicago. EEH generated just over $1.2 billion in operating revenue in fiscal 2016 (June 30 fiscal year-end).
GROWING MARKET PRESENCE IN FAVORABLE SERVICE AREA
EEH has benefited from considerable volume growth in its favorable western Chicago suburban service area. Between fiscal 2014 and fiscal 2016, inpatient admissions increased 10% (9.7% including observation stays), total surgeries 6.1%, and outpatient visits 17.6%. These volume trends are particularly notable given that inpatient trends are stagnant in the Chicago metropolitan service area. The EEH management team has been successful at implementing strategic growth initiatives for expansion, particularly at the Elmhurst campus, which had been underperforming prior to the merger. EEH continues to benefit from its tight relationship with the DuPage Medical Group (DMG), a multi-specialty group with over 600 physicians. EEH and DMG share the same instance of the Epic electronic medical record (EMR). In addition, EEH and DMG participate in Illinois Health Partners and Illinois Health Partners, ACO, physician-hospital organizations that manage nearly 150,000 covered lives.
Despite a competitive service area, EEH's volume growth has led to market share gains in recent years. Between fiscal 2013 and nine-months fiscal 2016, EEH increased its inpatient market share position in its primary service area (PSA) each year, from 32.9% to 35.9%. EEH's market share growth has come largely at the expense of Good Samaritan Hospital (a member of Advocate Health Care, rated 'AA') whose market share position in EEH's PSA decreased from 8.5% to 7.5% and Central DuPage Hospital (a member of Northwestern Medicine) whose market share position decreased from 6.4% to 5.4%.
SOMEWHAT MODEST OPERATING MARGINS
While profitable, EEH's operating EBITDA margins are somewhat modest for the 'A' rating category. In fiscal 2015 and 2016, EEH recorded operating EBITDA margins of 8.7% and 8.4%, respectively (fiscal 2015 adjusted to remove one-time $6 million recovery audit contractor payment and $2.5 million rural floor settlement from operating revenue), which are modest compared to the 'A' category median of 10.3%. Despite driving notable improvement at Elmhurst, operating profitability at Elmhurst continues to be a drag on system results; in fiscal 2015 and 2016, the Elmhurst campus recorded operating EBITDA margins of 6% and 6.6%, respectively.
Looking forward, management has budgeted a 7.7% operating EBITDA margin in fiscal 2017, which includes one-time costs associated with Elmhurst's go-live of the Epic EMR system in October 2016. Beyond, fiscal 2017, management projects an operating EBITDA margin in the 8%-9% range, which Fitch expects EEH to meet if not exceed.
ELEVATED DEBT LOAD
Because of Elmhurst's heavy debt burden, EEH's pro forma debt service ratios are somewhat stressed. Pro forma MADS coverage by EBITDA is modest at 2.9x ('A' median is 4.5x) as is debt-to-EBITDA at 5.5x ('A' median is 2.9x). Pro forma MADS as a percentage of revenue is manageable at 3.6% ('A' median is 2.7%). Fitch expects EEH to grow absolute cash flow and therefore debt ratios should improve over time.
EEH's pro forma debt will be a mix of fixed rate debt (42% of pro forma debt outstanding) and variable rate (58%). Variable rate debt series will consist of VRDBs supported by LOCs, direct bank purchases, and R-Floats.
Financial covenants will include minimum debt service coverage of 1.20x and minimum cash on hand of 100 days.
EEH has a legacy defined benefit pension plan (from Elmhurst) that was frozen in Dec. 2013. The plan was 75% funded relative to a projected benefit obligation (PBO) of $237 million at fiscal year end 2016.
EEH has just over $500 million notional of swaps outstanding, including fixed payor, fixed spread basis, and basis. Counterparties include JPMorgan, PNC, Deutsch Bank, Goldman Sachs, Citi, UBS, Morgan Stanley, and Merrill Lynch. The net termination value of the swaps at the end of fiscal 2016 was a negative $53 million to EEH.
MIXED LIQUIDITY RATIOS
EEH's liquidity position is mixed relative to its 'A' rated peer group. Unrestricted cash and investments measured $721 million at the end of fiscal 2016. EEH's pro forma cash on hand of 226 days and cushion ratio of 16.0x are adequate ('A' medians are 216 days and 19.4x, respectively). Pro forma cash-to-debt is thin at 101% ('A' median is 149%). EEH's liquidity ratios should strengthen over time as EEH's has manageable capital spending plans and absolute cash flow growth is expected.
Manageable Capital Spending
EEH has manageable capital spending plans, as both Edward and Elmhurst invested considerably in physical plant in recent years. EEH's average age of plant measured 11.7 years at the end of fiscal 2016 ('A' median is 11.0 years). Capital spending in the coming years will be focused on ambulatory development and information technology. EEH does not have new money debt plans in the near term.
Disclosure
EEH covenants to provide annual audited financial statements within 150 days of fiscal year-end and unaudited quarterly statements within 45 days of quarter end to bondholders. Quarterly disclosures for both Edward and Elmhurst in the past have included a balance sheet, income statement, cash flow statement, and volume statistics.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Not-for-Profit Hospitals Rating Criteria (pub. 04 Dec 2015)
https://www.fitchratings.com/site/re/874120
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013352
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https://www.fitchratings.com/regulatory
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