CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to the following bonds expected to be issued by the Akron, Bath and Copley Joint Township Hospital District on behalf of Summa Health System (Summa).
--$344,000,000 Akron, Bath and Copley Joint Township Hospital District hospital facilities refunding and improvement revenue bonds series 2016.
Fitch has also affirmed the 'A-' underlying rating on approximately $183.6 million of series 2010 bonds issued by the State of Ohio on behalf of Summa.
The series 2016 bonds are expected to be issued as fixed rate bonds. Bond proceeds will be used to refund all or a portion of the series 2010, 2014B and 2015 bonds, to fund certain capital projects and pay costs of issuance. The fixed rate refunding of the series 2010 bonds will be dependent upon market conditions. Pro forma maximum annual debt service (MADS) is expected to equal $32.7 million, including capital leases. The series 2016 bonds are expected to price the week of Dec. 5 via negotiation.
The Rating Outlook is revised to Positive from Stable.
SECURITY
Bond payments are general obligations of the obligated group secured by a gross revenue pledge.
KEY RATING DRIVERS
STRENGTHENED LIQUIDITY: The Positive Outlook reflects Summa's increasing liquidity and profitability. With 254.8 days cash on hand (DCOH), 27.1x cushion ratio and 178.5% cash-to-pro forma debt at Sept. 30, 2016, liquidity metrics exceed Fitch's 'A' category medians of 215.5 days, 19.4x and 148.6%.
IMPROVED PROFITABILITY: After decreasing in fiscal years 2012 and 2013, operating EBITDA margin increased to 7.9% in fiscal 2014 and 8.3% in fiscal 2015. However, profitability remains light for the rating. Operating EBITDA margin equaled 7.7% in the nine-month interim period ending Sept. 30, 2016 (the interim period), comparing favorably with the prior year's interim period.
LIGHT DEBT BURDEN: Summa's pro forma debt burden remains light with MADS equal to 2.3% of operating revenues in fiscal 2015, allowing for solid MADS coverage by operating EBITDA of 3.7x in fiscal 2015 and 3.2x in the interim period.
STRONG MARKET POSITION: Summa's leading market share and broad operating platform, including a large employed physician group and a health plan with capitation experience, provides credit stability and a strong base for implementation of population health management initiatives.
INCREASED CAPITAL SPENDING: Capital spending is expected to increase through fiscal 2021 as Summa executes a $350 million multi-phase master facility plan, including $285 million in the first five years. The master facility plan is expected to be funded by the series 2016 bond issuance, a potential future bond issuance and operating cash flows.
RATING SENSITIVITIES
SUCCESSFUL EXECUTION OF CAPITAL PROJECTS: Fitch expects that Summa will successfully execute its master facility plan without materially impacting its overall credit profile.
CONTINUED IMPROVEMENT IN LIQUIDITY OR PROFITABILITY: Continued strengthening of liquidity metrics or increased profitability resulting in coverage more consistent with Fitch's 'A' category medians will likely result in positive rating movement. Fitch will assess the impact of any additional debt that may be issued on Summa's credit profile as details become more certain.
CREDIT PROFILE
Summa is an integrated delivery system headquartered in Akron, OH. Operations include five hospitals (three of which are wholly owned), outpatient facilities, a physician multi-specialty group with more than 250 employed physicians, and a health plan with approximately 120,000 members (SummaCare) including administrative services outsourcing and business process outsourcing lives. Fitch's analysis is based upon Summa's consolidated financial statements. Total consolidated revenues equaled $1.43 billion in fiscal 2015. The obligated group accounted for approximately 63% of consolidated operating revenue and 96% of consolidated total assets in fiscal 2015. Non-obligated entities include SummaCare, Summa Health Medical Group, a foundation, an accountable care organization and other related entities.
HealthSpan Partners (HSP), a secular auxiliary organization of Mercy Health (rated 'AA-'), purchased a 30% minority stake in Summa for $250 million in September 2013. Fitch views the minority investment favorably as the partnership should provide for near-term and long-term benefits amongst the two system's operations.
STRENGTHENED LIQUIDITY
Unrestricted cash and investments increased 21% since December 2013 to $886.5 million at Sept. 30, 2016. The increase primarily reflects the system's improved operating cash flows. With 254.8 DCOH, 27.1x cushion ratio and 178.5% cash-to-pro forma debt, liquidity metrics exceed Fitch's 'A' category medians of 215.5 days, 19.4x and 148.6%, respectively. Unrestricted liquidity increased materially in September 2013 due to the $250 million minority investment. Liquidity metrics are not expected to be materially impacted by the increased capital spending associated with the master facility plan.
IMPROVED PROFITABILITY
Operating profitability has been sustained at the improved levels achieved in fiscal 2014; however, profitability remains light for the 'A-' rating. Fitch notes that profitability is diluted by Summa's health plan operations. Operating EBITDA margin improved slightly to 8.3% in fiscal 2015 from 7.9% in fiscal 2014. The negative impact of decreased patient volumes and lower insured lives in the health plan was mitigated by continued operating improvement initiatives and the benefit from Ohio's expansion of Medicaid under the PPACA. Operating EBITDA margin remained stable at 7.7% in the interim period, comparing favorably with the prior year's interim period despite continued decreases in patient volumes and insured lives which were mitigated by an improved health plan medical loss ratio and operating improvement initiatives. Despite the decreased insured lives, SummaCare achieved operating profitability in the interim period. The decreased patient volumes reflect increased observation stays, a Medicaid managed care contract that was cancelled in January 2015 but renewed in October 2015 and Summa's population health management initiatives.
Following a routine Medicare audit, SummaCare was subjected to Medicare sanctions effective Aug. 11, 2014. The sanctions were largely due to the decisions and appeals process related to SummaCare's Medicare Advantage Prescription Drug Plan. The sanctions were lifted in March 2015 after Medicare determined that the deficiencies were corrected and are not likely to re-occur. As a result, SummaCare could not actively market itself to new beneficiaries in the fall 2014 enrollment period and its star rating decreased to 2.5 stars from 4.5 stars. The star rating increased to 4 stars in 2016. However, due to SummaCare's star rating in 2015, SummaCare will not receive Medicare incentive payments in 2017 which will compress consolidated profitability. The incentive payments will be reinstated in 2018, reflecting the increased star rating in 2016.
Summa continues to implement a performance improvement plan which initially targeted $100 million in annual operating improvement. The plan was subsequently revised with a target of $140 million to $150 million per year due to the expected benefits of the HSP transaction. Major initiatives include revenue cycle, length of stay reduction, and supply chain and labor productivity improvements. Management has achieved approximately $140 million in aggregate operating improvements, including $60 million since the HSP transaction in 2013.
LIGHT DEBT BURDEN
The system's pro forma debt burden remains light with MADS equal to 2.3% of operating revenue in fiscal 2015. MADS coverage by EBITDA and operating EBITDA of 3.9x and 3.7x, respectively, in fiscal 2015 is consistent with Fitch's 'A' category medians of 4.5x and 3.9x. Despite the decreased profitability in the interim period, MADS coverage by EBITDA and operating EBITDA of 3.4x and 3.2x remained solid for the 'A-' rating category, reflecting the benefit of Summa's light debt burden. Fitch will assess the impact of any additional debt issuance associated with the master facility plan as details become more certain.
MARKET POSITION
Summa's leading market share and broad operating footprint lend stability to its credit profile. The broad operations, including a highly aligned employed physician group and a health insurance plan, position Summa well for implementation of healthcare reform and population health management initiatives. Including joint ventures and affiliates, Summa maintained a strong leading primary service area (PSA) market share of approximately 51.4% in 2015. The PSA accounts for 75% of Summa's admissions. Summa's primary competitor, Akron General, held a 28.6% market share in the PSA. Akron General was acquired by Cleveland Clinic in fall 2015. Cleveland Clinic had previously acquired a minority stake in Akron General in 2014. Cleveland Clinic holds a leading 27.6% market share (without Akron General) in Summa's secondary service area compared to Summa's 15.0% market share.
INCREASED CAPITAL SPENDING
Including routine capital spending, Summa's five-year projected capital budget exceeds $650 million between fiscal years 2017 and 2021, averaging $133 million per year (181% of depreciation). Historical capital spending has been solid, averaging $60.3 million per year (116% of depreciation) between fiscal 2011 and 2015. The increased capital spending reflects execution of Summa's multi-phase master facility plan. The master facility plan totals $350 million over 10 years, including $285 million over the next five years during the first phase of the plan. The master facility plan will be funded by $100 million of series 2016 bond proceeds, cash flow and a potential bond issuance in 2018. The future bond issuance will depend upon the final scope of the master facility plan. Fitch will assess the impact of any future debt issuance as details become more certain.
The majority of the increased capital spending during phase I will fund construction of a new patient tower at Summa Akron City Hospital. The new tower is expected to cost $229 million and will provide expanded space for the hospital's surgical and women's health programs and increase the hospital's ratio of inpatient beds. Additional phase I projects include inpatient renovations and a new medical office building on the Akron City campus and a new diagnostic imaging center, modernized operating rooms, renovated lab services and a surface parking lot on the Barberton campus. Fitch views the projects favorably and expects successful execution to enhance Summa's competitive position and operations.
DEBT PROFILE
Post issuance, total debt is expected to increase to approximately $496.5 million from $406.6 million at Sept. 30, 2016. The pro forma debt portfolio will be composed of approximately 73% underlying fixed-rate bonds and 27% underlying variable-rate bonds. The variable-rate bonds are directly placed with various banks, thereby eliminating remarketing risks and significantly reducing exposure to renewal risk due to the long-term nature of the funding commitments. The system is counterparty to three fixed payor swaps, a basis swap and a constant maturity swap, converting 100% of Summa's variable-rate bonds to a synthetic fixed rate. No collateral was required to be posted at Sept. 30, 2016.
DISCLOSURE
Summa covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of the end of each fiscal quarter for the series 2010 bonds and the first three fiscal quarters for the series 2016 bonds. 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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015495
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https://www.fitchratings.com/regulatory
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