CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following bonds expected to be issued by the Illinois Finance Authority on behalf of Southern Illinois Healthcare Enterprises, Inc. (SIHE):
--$80.82 million fixed-rate revenue bonds (tax-exempt), series 2016A;
--$65.99 million fixed-rate revenue bonds (taxable), series 2016B.
Fitch has also affirmed the 'A+' rating on approximately $68 million of SIHE series 2005 bonds.
The series 2016A&B bonds are expected to be issued as fixed-rate bonds. The series 2016A bonds are to be tax-exempt while the series 2016B will be taxable. Bond proceeds will be used to advance-refund the series 2005 fixed-rate bonds, fund certain capital projects, reimburse SIHE for approximately $20 million of prior capital spending, and pay the costs of issuance. Maximum annual debt service (MADS) will increase from $12.2 million to $16.2 million pro forma. The bonds are expected to price via negotiation the week of Jan. 9, 2017.
The Rating Outlook is Stable.
SECURITY
Bond payments are secured by a pledge of the gross revenues of the obligated group.
KEY RATING DRIVERS
SOUND PROFITABILITY: SIHE has a track-record of profitability and sound operating EBITDA margins. SIHE's operating EBITDA
margin measured 10% in fiscal 2016 and 9.5% through six-months fiscal 2017.
ADEQUATE DEBT COVERAGE RATIOS: SIHE's stable profitability and manageable debt burden results in adequate pro forma debt coverage ratios, with 4.6x MADS coverage by EBITDA based on interim fiscal 2017.
SOUND LIQUIDITY: Based on Sept. 30, 2016 financial statements (and including $20 million of cash reimbursement for prior capital), SIHE's pro forma cash on hand measures a favorable 269 days and pro forma cash-to-debt 153%.
ELEVATED CAPITAL SPENDING: As expected, SIHE's capital spending is projected to be elevated in the coming years. Total capital spending is projected at just over $350 million between fiscal 2017 and fiscal 2021, highlighted by an OR expansion project and implementation of a new Epic electronic medical record (EMR) system. SIHE's average age of plant measured a low 8.7 years at fiscal year-end 2016.
DISTINCTLY LEADING MARKET SHARE: SIHE maintains a distinctly leading 56% inpatient market share of a broad seven-county service area.
RATING SENSITIVITIES
MAINTENANCE OF CREDIT PROFILE: Fitch expects Southern Illinois Healthcare Enterprises (SIHE) will maintain operating margins and absorb the new debt issuance to sustain good liquidity and adequate debt coverage ratios despite elevated capital spending in the coming years. With the series 2016A&B financing, Fitch believes SIHE does not have additional debt capacity at the current rating level.
CREDIT PROFILE
SIHE is a three-hospital health system headquartered in Carbondale, IL, approximately 105 miles southeast of St. Louis. Hospitals include 154-bed Memorial Hospital of Carbondale (in Carbondale, IL), 114-bed (which includes 29-rehabilitation beds) Herrin Hospital (in Herrin, IL), and 25-bed critical access hospital St. Joseph Memorial Hospital (in Murphysboro, IL). Total operating revenue was over $560 million in fiscal 2016.
SOUND PROFITABILITY
SIHE has a track-record of profitability and sound operating EBITDA margins (which are consistently in the 10% range). SIHE's operating EBITDA margin measured 10% in audited fiscal 2016 and 9.5% through unaudited six-months fiscal 2017.
SIHE's fiscal 2016 results benefited from: volume gains in most key areas, including inpatient admissions (up 2.5% in fiscal 2016) and observation stays (up 5.2%; total hospital stays up 3.4% including inpatient admissions and observations), inpatient surgeries (up 7.2%), outpatient surgeries (up 11.1%), and outpatient visits (up 4.3%); lower agency costs (down approximately $3 million); and continued benefits from the improvement program developed with Huron Consulting.
SIHE's volume growth has occurred in part as the system has worked to decrease out-migration to the St. Louis area, through expansion of new service and recruitment of specialists in key areas such as neurosurgery and cancer services (SIHE's new cancer center opened in 2015). As part of this strategy, SIHE joined the BJC Collaborative, which includes eight hospital systems in Missouri and Illinois and is anchored by BJC HealthCare. BJC is SIHE's preferred referral for certain high acuity services and BJC re-refers these patients back to SIHE for services that SIHE can accommodate. Additional benefits to SIHE from the collaborative also include shared best practices and supply and capital spending cost savings.
SIHE's budgeted operating margins are in-line with historical results though unaudited six-months fiscal 2017 (as of Sept. 30, 2016) moderated slightly, with an operating EBITDA margin of 9.5% (compared to 10.1% for the same period fiscal 2016). Volume trends in interim fiscal 2017 were mixed, with declines in inpatient admissions, observation stays and inpatient surgeries, offset in part by growth in outpatient surgeries and total outpatient visits.
ADEQUATE DEBT COVERAGE RATIOS
SIHE's stable profitability and manageable debt burden (pro forma MADS measures 2.8% of total revenue) results in adequate debt coverage ratios. Based on six months fiscal 2017 results, pro forma MADS coverage by EBITDA measures 4.6x ('A' median is 4.5x), debt-to-capitalization 32% ('A' median is 36%), and debt-to-EBITDA 3.4x ('A' median is 2.9x).
Financial covenants included in SIHE's MTI and private placement agreements include minimum debt service coverage of 1.25x (consultant call-in) and 1.15x (event of default) and maximum debt-to-capitalization of 60% (consultant call-in) and 65% (event of default).
Following the issuance of the series 2016A&B bonds, SIHE will have $257 million of debt. Approximately 55% of pro forma debt will be fixed-rate and 45% variable-rate. SIHE has two fixed payor swaps in place as a hedge on variable-rate debt. The counterparties on the swaps are Royal Bank of Canada (RBC) and Morgan Stanley. The total notional amount of the swaps was $70.7 million at fiscal year-end 2016. The net termination value of the swaps was a negative $18.4 million to SIHE at fiscal year-end 2016 and negative $19.6 million at unaudited Sept. 30, 2016. Collateral posting on the RBC swap is required if its negative termination value exceeds $15 million.
SIHE's debt coverage position is bolstered by the fact that the system has manageable operating leases and does not have a defined benefit pension plan.
SOUND LIQUIDITY
SIHE's liquidity position remains favorable. Based on Sept. 30, 2016 financial statements (and including $20 million of cash reimbursement for prior capital), SIHE's pro forma cash on hand measures a favorable 269 days ('A' median is 216 days), cushion ratio measures 24x ('A' median is 19x), and cash-to-debt measures 153% ('A' median is 149%).
ELEVATED CAPITAL SPENDING
As expected, SIHE's capital spending is projected to be elevated in the coming years, particularly in fiscals 2017 and 2018. Total capital spending is projected at just over $350 million between fiscal 2017 and fiscal 2021, or roughly $70 million per year (compared to budgeted depreciation expense of $32 million in fiscal 2017). Highlighted projects include expanding OR space and implementation of the Epic EMR system, which is expected to go-live in summer 2017.
SIHE's average age of plant was a low 8.7 years at fiscal year-end 2016 ('A' median is 11.0 years). SIHE does not have additional new money debt in the coming years beyond the series 2016A&B bonds.
DISTINCTLY LEADING MARKET SHARE
SIHE maintains a distinctly leading and growing 56.2% inpatient market share of a broad seven-county service area in 2015 (up from 50.4% in 2013). The service area is centered around Jackson County, IL. SIHE's market share growth has come largely at the expense of Heartland Regional Medical Center in Marion, IL, the only competitor that captures more than 10% of SIHE's service area. Heartland's market share has decreased from 14.0% in 2013 to 10.9% in 2015.
SIHE's service area is challenged to some degree, although the area's economy is stabilized by significant economic anchors including Southern Illinois University-Carbondale and SIHE. Population trends in Jackson County are stagnant to declining, the median household income level in the county is well below national and Illinois averages (due in part to the presence of a large university), and the poverty rate is well above average (U.S. Census Bureau data). While the unemployment rate in the Carbondale-Marion, IL MSA is above average, at approximately 6%, the unemployment rate is palatable.
DISCLOSURE
SIHE covenants to disclose both annual and quarterly financial statements through the Municipal Securities Rulemaking Board's EMMA system. Audits are to be filed within 150 days after the fiscal year-end.
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=1015605
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015605
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https://www.fitchratings.com/regulatory
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