SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the approximately $315 million Arizona Health Facilities Authority revenue bonds, Scottsdale Lincoln Hospitals Project, series 2014A and prior outstanding $14.5 million series 2006E bonds. In addition, Fitch has affirmed the 'A' rating on Scottsdale Healthcare's outstanding debt listed at the end of this release.
Scottsdale Healthcare Hospitals (SHH) and John C. Lincoln Health Network (JCL) affiliated in October 2013, but retained separate obligated groups for their respective debt. With the series 2014 financing, the debt will be consolidated under SHH's existing master trust indenture and JCL will be added as an obligated group member. The proceeds from the series 2014A fixed-rate bonds plus proceeds from an anticipated direct bank loan with Bank of America ($81 million) will refinance all of JCL's existing indebtedness, refinance a portion of SHH's outstanding debt, fund $75 million of capital expenditures, and pay costs of issuance. The bonds are expected to price the week of Dec. 15th.
The Rating Outlook is Stable.
SECURITY
Debt payments will be secured by a pledge of the gross revenues of the obligated group, which includes SHH and JCL.
KEY RATING DRIVERS
MERGER UNDERWAY: SHH affiliated with JCL as of Oct. 1, 2013, and a new parent organization was created, Scottsdale Lincoln Health Network (SLHN), which provides a common governance and management structure over the two entities. Integration is underway and one major milestone will be implementing a common information technology platform, which is expected to be complete by 2016. The consolidation of the debt under one master trust indenture is one of the last steps to a full merger, which is expected to occur on Dec. 23, 2014.
SOLID FINANCIAL PROFILE: The combined entity's financial profile compares favorably against Fitch's 'A' category medians with good liquidity, adequate profitability and solid debt service coverage. Profitability has been pressured in fiscal 2014 due to integration costs. However, SLHN expects to achieve approximately $200 million of cost reduction and revenue enhancement initiatives over its first three years.
STRONG MARKET POSITION: Fitch views the strategic benefits of SLHN's expanded scale and geographic coverage favorably and believes it solidifies the corporation's strong market position in a desirable service area. One of management's key goals is to leverage the resources of the combined entity for population health management.
UPCOMING CAPITAL NEEDS: SHH plans to install Epic over the next two years to create a common information technology platform with JCL, which has had Epic since 2012. SHH expects to install Epic by 2016 and capital spending will be elevated over the next few years, which will be partially funded from new money proceeds from the series 2014 issuance.
RATING SENSITIVITIES
BENEFITS FROM AFFILIATION: Fitch expects SLHN to achieve benefits from its greater scale in terms of an enhanced market position, better cost efficiencies and ability to manage population health. The realization of these benefits over the near term could result in upward rating pressure over the next two to three years.
CREDIT PROFILE
SLHN is composed of SHH, which includes three acute care community hospitals: Scottsdale Healthcare-Osborn (346 licensed acute care beds); Scottsdale Healthcare-Shea (413 licensed acute care beds); and Scottsdale Healthcare - Thompson Peak (92 licensed acute care beds) and JCL, which includes two hospitals in Phoenix: John C. Lincoln North Mountain Hospital (266 beds) and John C. Lincoln Deer Valley Hospital (204 beds). There will be an audit for SLHN beginning the fiscal year ended Dec. 31, 2014. For the nine months ended Sept. 30, 2014, the annualized total revenue of SLHN was $1.5 billion.
SCOTTSDALE LINCOLN HEALTH NETWORK CREATED
As of Oct. 1, 2013, SLHN was formed from the affiliation between SHH and JCL. The SLHN board was populated by almost an equal number of board members from the preceding SHH (11 appointees) and JLC (10 appointees) boards. There is one management team and strategic planning for SLHN has been completed. Fitch views the affiliation positively as the two entities have the ability to collaborate on strategic initiatives especially in the fairly competitive greater metropolitan Phoenix area. Various departments have already been consolidated and there are a total of 25 integration teams that have been implementing various opportunities since the fourth quarter of 2013. The consolidation of the debt under one master trust indenture is a key step to a full merger, which is expected to occur on Dec. 23, 2014.
SLHN's market position in a desirable service area is viewed favorably and management has been in discussions to increase its participation in risk-based and narrow-network products. Fitch views this favorably given the competitive environment and will monitor SLHN's progress in these new payer arrangements.
SOLID FINANCIAL PROFILE
The combined entity has a solid financial profile with good liquidity, adequate profitability and solid debt service coverage. For the nine months ended Sept. 30, 2014, the combined entity had annualized total revenue of $1.5 billion and had 211.7 days cash on hand, 137.2% cash to debt, 2.5% operating margin, 9.7% operating EBITDA margin, and 4.4x maximum annual debt service (MADS) coverage.
Management has an overall plan to reduce costs and improve revenue for SLHN by $200 million for fiscal 2014 - 2016 to offset the expected decline in reimbursement. The organization is on track to realize approximately $30 million-$40 million of these savings in fiscal 2014.
INCREASED CAPITAL NEEDS
Total capital spending is elevated over the next few years due to the investment in Epic for SHH, which is expected to be implemented by 2016. Total capital spending is projected at $241 million in fiscal 2015, $179 million in fiscal 2016, and $87 million in fiscal 2017.
CONSERVATIVE DEBT PROFILE
Total outstanding debt of SLHN after the series 2014 issuance is approximately $662 million and will be 74% fixed rate debt and 26% variable rate. The variable-rate exposure includes SHC's series 2006F auction-rate bonds and the expected series 2014B direct bank loan with Bank of America. SHH has some swaps outstanding and no collateral is being posted.
MADS for the combined entity is approximately $40 million and the debt burden is moderate with MADS at 2.6% of total revenues through the nine months ended Sept. 30, 2014 for the combined entity compared to the 'A' category median of 3.1%. MADS coverage by EBITDA was 4.4x for the same time period compared to the 'A' category median of 3.8x.
DISCLOSURE
SLHN will provide annual and quarterly disclosure through the Municipal Securities Rule Making Board's EMMA system.
Outstanding debt:
--$117,340,000 Scottsdale Industrial Development Authority (AZ) (Scottsdale Healthcare) hospital revenue refunding bonds series 2008A
--$89,700,000 Scottsdale Industrial Development Authority (AZ) (Scottsdale Healthcare) hospital revenue bonds series 2006F (insured: Assured Guaranty Municipal Corp.)
--$37,400,000 Scottsdale Industrial Development Authority (AZ) (Scottsdale Healthcare) hospital revenue refunding bonds series 2006D (insured: Assured Guaranty Municipal Corp)
--$58,350,000 Scottsdale Industrial Development Authority (AZ) (Scottsdale Healthcare) hospital revenue refunding bonds series 2006C (insured: Assured Guaranty Municipal Corp.)
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2014
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=944215
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