CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to approximately $35 million of series 2016 bonds expected to be issued by the Industrial Development Authority of the County of Cape Girardeau, Missouri (the authority) on behalf of Saint Francis Healthcare System (SFHS).
The series 2016 bonds are expected to be issued as fixed rate bonds. Bond proceeds will be used to refund the series 2009A bonds and pay costs of issuance. Pro forma MADS is expected to decrease to $12.25 million from $12.7 million. The series 2016 bonds are expected to price the week of October 31 via negotiation.
Additionally, Fitch has also affirmed the 'AA-' rating on approximately $184.4 million of revenue bonds issued through the authority on behalf of SFHS.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of gross revenues of the obligated group.
KEY RATING DRIVERS
STRONG OPERATING PROFITABILITY: Operating profitability remains consistently strong with operating EBITDA margins averaging 14.6% since fiscal 2009 and equal to 14.1% in fiscal 2016, exceeding Fitch's 'AA' category median of 11.7%.
LARGE CAPITAL PROJECTS COMPLETED: SFHS has completed a period of elevated capital spending with the completion of a new patient tower and implementation of a new IT system. Capital spending is expected to decrease going forward allowing for further liquidity growth.
STRONG LIQUIDITY: Despite elevated capital spending over the past three years, liquidity metrics remain strong with 378.1 days cash on hand, 34.9x cushion ratio and 223.3% cash to pro forma debt.
MANAGEABLE DEBT BURDEN: SFHS's debt burden remains manageable with MADS equal to 2.6% of fiscal 2016 operating revenue. MADS coverage by EBITDA equaled a strong 7.0x in fiscal 2016, reflecting the manageable debt burden and robust profitability.
SOLID MARKET POSITION: SFHS maintains a solid 55% market share in its total service area; however, the local market is competitive and is effectively split between SFHS and its primary competitor.
RATING SENSITIVITIES
SUSTAINED PROFITABILITY AND BOLSTERED LIQUIDITY: Fitch expects that Saint Francis Health System's profitability and coverage metrics will remain strong while low capital spending requirements provide for further strengthening of liquidity metrics. Further strengthening of liquidity metrics to levels exceeding 'AA' rated peers, thereby mitigating the system's single market focus and smaller revenue base relative to 'AA' rated peers, could lead to upward rating movement.
CREDIT PROFILE
SFHS operates Saint Francis Medical Center (SFMC), a 308-licensed bed acute care hospital located in Cape Girardeau, MO, approximately 120 miles south of St. Louis and 160 miles north of Memphis. Total consolidated operating revenues equaled $471.4 million in fiscal 2016. SFMC is the sole member of the obligated group and comprised 98.7% of consolidated operating revenues and 97.5% of consolidated total assets in fiscal 2016.
ROBUST OPERATING PROFITABILITY
Operating profitability has been consistently strong with operating EBITDA margins averaging 14.6% since fiscal 2009 and equal to 14.1% in fiscal 2016, exceeding Fitch's 'AA' category median of 11.7%. Operating profitability remained strong despite increased expenses related to the system wide implementation of a new Epic IT system. Implementation was successfully completed in July 2016 for a cost of approximately $40 million. The implementation was funded through cash and cash flow and is expected to increase operating efficiencies going forward. The robust operations reflect continued expense management initiatives, strong physician alignment and strategic investments.
LARGE CAPITAL PROJECTS COMPLETED
SFHS completed a period of heavy capital spending with capital expenditures averaging $68.6 million per year (230% of depreciation) between fiscal years 2014 and 2016 The system's low 7.6 year average age of plant at June 30, 2016 is reflective of the historically strong capital spending. Capital spending is expected to decrease to $10 million per year going forward.
Completed capital projects include a new five story patient tower that opened in July 2015 with renovations at the prior facility completed in July 2016. The new patient tower cost approximately $127 million and provides SFMC with 100% private beds while increasing the number of licensed beds to 308 from 289. The project included a new orthopedics and neurosciences center, a new women's and children's pavilion, expansion of existing clinical areas and one floor of shelled space for future expansion. The new tower should further bolster SFHS's operations, volumes, revenues and competitive position.
STRONG LIQUIDITY
Despite the elevated levels of capital spending, liquidity metrics remain strong. Unrestricted cash and investments decreased to $427.1 million at June 30, 2016 from $457.5 million at June 30, 2015 reflecting the continued capital reinvestment into the system. With 378.1 days cash on hand, 34.9x cushion ratio and 223.3% cash to pro forma debt, liquidity metrics continue to exceed Fitch's 'AA' category medians of 277.4 days, 29.9x and 197.9%, respectively.
Given the completion of major capital projects and relatively low levels of projected capital spending, liquidity metrics should further strengthen in the near-term. Improved liquidity metrics to levels exceeding SFHS's 'AA' rated peers, thereby mitigating potentially increased volatility resulting from SFHS's single market focus and smaller revenue base relative to its 'AA' rated peers, could lead to upward rating movement.
MANAGEABLE DEBT BURDEN
SFHS's pro forma debt burden remains manageable with pro forma MADS equal to 2.6% of operating revenue in fiscal 2016, which is somewhat elevated relative to Fitch's 'AA' category median of 2.2%. MADS as a percent of revenue moderated from 3.1% of fiscal 2012 revenue and should continue to moderate given expectations for continued revenue growth. SFHS's strong profitability and manageable debt burden produced strong MADS coverage by EBITDA and operating EBITDA of 7.0x and 5.4x, respectively, in fiscal 2016, exceeding Fitch's respective 'AA' category medians of 6.0x and 5.2x.
SOLID MARKET POSITION
SFHS maintains a solid 55% market share in its total service area. However, the service area remains competitive with SFHS' primary competitor, Southeast Missouri Hospital Association (SoutheastHealth, revenue bonds rated 'BB+') located just two miles away in Cape Girardeau. SoutheastHealth holds a 45% market share in the total service area. SoutheastHealth has struggled financially in recent years.
The solid market position is bolstered by SFHS's membership in the Health Network of Missouri, its membership in the MD Anderson Cancer Network and an affiliation with Cleveland Clinic in cardiology. The Health Network of Missouri includes SFHS, University of Missouri Health Care, Hannibal Regional Health System, Bothwell Regional Health Center, Lake Regional Health System and Capital Region Medical Center. All of the hospitals are electronically connected and are working together to create a clinically integrated network and to improve access and care coordination. The MD Anderson Cancer Network membership and Cleveland Clinic affiliation increase SFHS's oncology and cardiology expertise, allowing SFMC to retain some of the profitable tertiary services that otherwise may out-migrate to St. Louis area academic medical centers.
DEBT PROFILE
Post issuance, total debt is expected to decrease to approximately $191.3 million from $193.5 million June 30, 2016. The decrease is due to the release of the series 2009A debt service reserve fund. The pro forma debt portfolio will be comprised of approximately 80% underlying fixed rate bonds and 20% underlying variable rate bonds. The system is not counterparty to any swaps.
DISCLOSURE
SFHS covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 60 days of the end of each fiscal 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/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013518
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013518
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https://www.fitchratings.com/regulatory
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