NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating on the following bonds expected to be issued on behalf of WakeMed Health System (WakeMed):
--$309 million North Carolina Medical Care Commission health care facilities revenue refunding bonds (WakeMed), series 2012A
In addition, Fitch affirms at 'AA-' the following parity debt issued on behalf of WakeMed by the North Carolina Medical Care Commission:
--$166.9 million series 2009A bonds;
--$75 million series 2009B bonds*;
--$78.2 million series 2009C bonds*;
*The series 2009B and 2009C bonds are variable-rate bonds supported by a direct-pay letters of credit (LOC) from Wells Fargo Bank (rated 'AA-/F1+'; Stable Outlook by Fitch). The LOCs expire in October 2014. The Rating Outlook is Stable.
Proceeds from the 2012A bonds will be used to refund series 2009A bonds and series 2001 bonds (which Fitch currently does not rate), as well as pay for the cost of issuance. Maximum annual debt service (MADS), including capital leases, drops to $28.3 million from $33.5 million and that figure was provided by the underwriter. Total long-term debt after issuance is expected to be approximately $459 million, with the debt mix a conservative 67% fixed-rate and 33% variable-rate. WakeMed has no outstanding swaps. The 2012A bonds are expected to sell via negotiation the week of June 18.
SECURITY
Fixed-rate bonds are secured by an interest in pledged assets and variable-rate bonds are secured by a direct-pay letter of credit from Wells Fargo Bank.
KEY RATING DRIVERS
STRONG MARKET POSITION: WakeMed's leading 44.9% inpatient market share (2011 data) in the economically solid Wake County (where approximately 67% of WakeMed's patients originate) is a key credit strength. Both the city of Raleigh and Wake County GOs are rated 'AAA' by Fitch, and are supported by solid financial profiles and a diverse economic base.
IMPROVING OPERATIONS: Six month fiscal 2012 (Sept. 30 year end) interim results show an excellent 5.6% operating margin and 14.1% operating EBITDA margin, compared to 3.8% and 12.9%, respectively, for the comparable prior year period. The strong operating performance reflect efficiencies and savings resulting from WakeMed's consulting engagement with Wellspring and continued execution on a strategy to bring higher level acuity patients to WakeMed through physician recruitment and the building of regional hospital relationships, with the goal to keep lower acuity patients at community hospitals while directing more acute level patients to WakeMed.
NEW NORTH CAROLINA ASSESSMENT PROGRAM: WakeMed stands to benefit from North Carolina's new assessment program that will leverage federal matching funds for Medicaid reimbursement. WakeMed anticipates booking a net $17.7 million in revenue related to the program in the second half of fiscal 2012. The funds will be accretive to WakeMed (the strong six month interim results reflect none of these funds) and will help offset WakeMed's high level of Medicaid (15%) for the rating level. Moving forward, WakMed expects to net $30 to $35 million a year through the program. However, the federal government is expected to phase out such matching programs as part of health care reform legislation.
LIQUIDITY SOLID FOR RATING LEVEL: At March 31, 2012, WakeMed had $572.8 million in unrestricted cash and investments, which equated to 240.7 days cash on hand, a 20.2 times (x) cushion ratio, and 129.3% cash to debt, all relatively consistent with Fitch's 'AA' category medians.
SIZABLE CAPITAL PLANS: The organization's five-year capital plan calls for approximately $800 million in capital investments, which is expected to be funded from a combination of cash flow, philanthropy, and/or tax-exempt debt. The capital plans are flexible and most of the larger projects, including a new patient care tower on WakeMed's main campus, are in a discussion phase and have not been approved by the board. To date, only $371 million of capital projects have been approved by the board. The capital plans reflect WakeMed's continued growth and its need to remain competitive. WakeMed has two strong competitors in Wake County: Duke University Health System (DUHS, rated 'AA') and UNC Health System (UNCHS). However, any debt issuance of significance that adversely affects WakeMed's leverage metrics could pressure the rating.
STABLE OUTLOOK: The Stable Outlook reflects Fitch's belief that WakeMed will continue to produce solid operating results, supported further by the new assessment, and coupled with WakeMed's manageable debt burden. At the six month fiscal 2012 interim period, WakeMed had excellent pro forma MADS coverage by EBITDA 5.8x and pro forma MADS as a percent of revenue of 2.7%, compared to Fitch's 'AA' category median of 2.6%.
CREDIT PROFILE
Headquartered in Raleigh, NC, WakeMed is an integrated health system with two acute care hospitals, an 84-bed rehab hospital, two skilled nursing facilities, and other related entities primarily serving Wake County and surrounding areas. In fiscal 2011, WakeMed had total revenues of $1 billion.
The affirmation of the 'AA-' rating is supported by WakeMed's strong market position, improved financial performance, and manageable debt burden. Fitch's primary credit concerns include the organization's sizeable five-year capital plan and competitive service area.
To grow operations, WakeMed continues to develop an extensive primary care network of ambulatory care centers, which are strategically located in the service area, offer 24-hour emergency room care, and act as a feeder for its system's acute care facilities. With the pending construction of WakeMed North, a 61-bed inpatient facility that will focus on women's services and builds on WakeMed's North Healthplex, and its newly opened Brier Creek Healthplex, WakeMed continues to grow its regional clinical footprint. WakeMed North will cost about $62 million to build and be funded out of cash flow.
Construction is expected to begin January 2013 and be completed by January 2015. Based on projects that have received board approval, WakeMed will spend approximately $74 million a year in capital expenditures over the next five years, but that figure could increase or decrease each year as the capital plan evolves. WakeMed averaged about $79 million a year in capital spending for the last four audited years. While the capital plans are flexible and WakeMed has some debt capacity at the current rating level, WakeMed will have to sustain current levels of improved operations in order to fully fund all the proposed projects.
DISCLOSURE
WakeMed provides annual and quarterly disclosure to EMMA. Overall, Fitch views AEHN's disclosure favorably, which consists of a balance sheet and statement of profitability and loss, cash flow statement, and utilization information.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
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