NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the approximately $31.9 million Health and Educational Facilities Authority of the State of Missouri, health facilities revenue bonds, series 2015B issued on behalf of St. Luke's Episcopal - Presbyterian Hospitals (St. Luke's).
In addition, Fitch has affirmed the 'A+' rating on the following St. Luke's outstanding debt:
-- $33,595,000 series 2011 fixed rate bonds;
-- $54,210,000 series 2006 fixed rate bonds.
The Rating Outlook is Stable.
The series 2015B bonds are expected to be issued as fixed-rate. Bond proceeds will be used to advance-refund a portion of the series 2006 bonds, fund approximately $10 million of capital expenditures, and pay for certain costs of issuance. The sale is expected via negotiation the week of November 2.
SECURITY
The bonds are secured by a pledge of the gross revenues of the obligated group, consisting of the hospital and its parent, St. Luke's Health Corporation.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The 'A+' rating is supported by St. Luke's strong and improving overall financial profile, producing key financial metrics that compare favorably against Fitch's respective medians.
COMPETITIVE MARKET: Fitch's main credit concern continues to be the competitive market mostly dominated by several large regional health systems. However, St. Luke's has sustained its market position in its primary service area (PSA), which has grown to 12.2% in 2014 from 11.3% in 2012.
STRONG OUTPATIENT PRESENCE: The organization's recent capital investments have been focused on enhancing service offerings and expanding the number of outpatient locations, and St. Luke's extensive outpatient presence has supported its continued success. The next major capital project will further enhance capacity in outpatient services with the construction of a five-story medical office building/outpatient services building. The building is expected to open in December 2016.
FAVORABLE SERVICE AREA: St. Luke's operates in Chesterfield, MO (a suburb of St. Louis), which has favorable demographic and payor mix characteristics as evidenced by low Medicaid and self-pay exposure (around 3% of gross revenues combined) and a high proportion of managed care.
HIGHER CAPITAL SPENDING: Capital spending is projected to be higher over the next few years due to the construction of the medical office building at its west campus (total cost of $40 million). However, the $10 million of new money from the series 2015B bond issue will fund a portion of this capital plan. Given St. Luke's very low debt burden, pro forma debt metrics will remain favorable for the rating.
RATING SENSITIVITIES
STABILITY EXPECTED: Fitch expects continued stability in St. Luke's operating and financial results, supported by favorable market characteristics and good operating platform.
CREDIT PROFILE
St. Luke's Episcopal-Presbyterian Hospitals owns and operates an acute care general hospital with 493 licensed beds, a skilled nursing facility with residential care services, St. Luke's Rehabilitation Hospital (a joint venture), and other related healthcare facilities in Chesterfield, MO, a suburb of St. Louis. In fiscal year ended June 30, 2015, St. Luke's generated $510.2 million in total operating revenue.
Improved Profitability
Profitability improved for the third year in fiscal 2015, supported by growth in hospital stays (admissions plus observation cases), more profitable mix of services, and rate increases from private payors. Operating margin and operating EBITDA margins were 4.9% and 10.4% in 2015, respectively, improved from 3.7% and 10% in 2013 and stronger than the 'A' medians of 3.6% and 10.3%. Fiscal 2015 results include $2 million in meaningful use fund receipts, and without these funds, operating margin would have been 4.6%, which is still robust for the rating.
St. Luke's has exceeded its budget in the last two years, and has targeted a slightly lower operating margin of 3.8% for fiscal 2016 due to investment in its population health initiatives. Projections for the 2017-2019 period indicate maintaining operating margins of at least 3%, which Fitch believes is reasonable.
Outpatient Growth Strategy
St. Luke's continues its expansion of service lines enhancing capacity to provide a broader continuum of care. Since 2008, the organization has added an outpatient center, wellness center for adults with Down Syndrome, rehabilitation hospital, home health services, hospice services, cardiovascular step-down unit, additional urgent care centers, renovated and expanded its cancer center, and convenient care center. Recent additional services include providing convenience care and primary care services to the residents and employees at Lutheran Senior Services Meramec Bluffs, urgent care for pediatrics, and lung cancer screening.
St. Luke's Desloge Outpatient Center is across the street from the hospital (west campus) and has convenient access off Highway 141. The new five-story medical office building will be adjacent to this building and will house medical office space as well as outpatient services. This facility is expected to open in December 2016.
Competitive Market
St. Luke's defined PSA consists primarily of St. Louis and St. Charles counties, which have above-average personal income levels and favorable payor mix. In fiscal 2015, managed care contributed 40.6% to gross patient revenues, and Medicaid and self-pay exposure was low at 3.2% combined.
Fitch's main primary credit concern is the very competitive market which is mostly dominated by large regional systems. St. Luke's two main competitors in the PSA are Mercy Hospital - St. Louis and Missouri Baptist Medical Center, which are part of Mercy and BJC Healthcare, respectively. Management indicated that St. Luke's competitive position hinges on its highly aligned physicians and reputation for quality, and the organization has been able to negotiate favorable managed care rates in the competitive environment due to the hospital's status as a low-cost provider.
Capital Plans
Projected capital spending is $44.4 million (1.9x depreciation expense) in fiscal 2016, $42.5 million in fiscal 2017, and $25.5 million in fiscal 2018. Although capital spending is elevated over the next two years, Fitch believes St. Luke's strong financial performance can absorb projected capital spending at the current rating level.
Strong Balance Sheet
Unrestricted cash and investments totaled $267.3 million at June 30, 2015, representing consistent growth for over five fiscal years. Liquidity metrics were solid with 212 days cash on hand and 32.5x pro forma cushion ratio compared to the respective medians of 205 days and 18.5x. Cash-to-debt of 308% falls to 276% post-issuance, which is still excellent for the rating compared to the median of 144%.
Very Low Debt Burden
Debt burden is very low as measured by maximum annual debt service (MADS) as a percentage of revenue of 1.6% and debt-to-capitalization of 18% in fiscal 2015 compared to the respective 'A' medians of 2.8% and 36.2. MADS coverage is also consistently solid at 6.7x in 2015 and 6.2x in 2014 compared to the 'A' median of 4.2x.
DEBT PROFILE
Total pro forma debt is $97 million, representing approximately a $10 million increase (11%), and all debt will remain fixed rate. Pro forma MADS estimated at $8.2 million is unchanged from the prior level due to refunding savings despite $10 million of new money. St. Luke's does not have any swap exposure.
On June 4, 2015, St. Luke's entered into a loan origination commitment with Bank of America. A $25 million bond issue will be purchased on Sept. 2, 2016, at which time the funds will be escrowed to refund a portion of series 2006 bonds (earlier maturities). There are additional/more stringent covenants under the bank loan (1.15x MADS coverage, 70 days cash on hand) than the master trust indenture. However, there is no bank renewal risk as the term of the direct loan is through the maturity in 2021. Pro forma debt service calculation takes into account this future transaction.
DISCLOSURE
St. Luke's covenants to provide annual disclosure within 150 days after year end, and quarterly disclosure within 45 days of the quarter end through with the Municipal Securities Rulemaking Board.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992850
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992850
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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