Fitch Rates UnityPoint Health (Iowa Health System) Series 2016D-E Bonds 'AA-'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned an 'AA-' rating to the following bonds expected to be issued on behalf of UnityPoint Health:

--$46,610,000 Illinois Finance Authority Health Facilities revenue bonds series 2016D; and

--$168,225,000 Iowa Finance Authority Health Facilities revenue bonds series 2016E.

Additionally, Fitch has affirmed the 'AA-' rating on the approximately $677.8 million of Iowa Finance Authority, Illinois Finance Authority and Wisconsin Health and Educational Facilities Authority revenue bonds issued on behalf of UnityPoint Health and its predecessor organizations.

Fitch has also affirmed the 'F1+' short-term rating on the series 2014B1-2 variable rate demand bonds and commercial paper program that are supported by UnityPoint Health's self-liquidity.

The series 2016D-E bonds will be issued as tax-exempt fixed rate bonds. Bond proceeds will be used to refund the outstanding series 2008A bonds (Iowa Health System) and the outstanding series 2006A bonds (Proctor Hospital, to finance certain capital projects ($8 million), to reimburse for certain completed capital projects ($57 million) and to pay costs of issuance. Concurrent with the series 2016D-E transaction, UnityPoint Health plans to refinance its series 2014B windows variable rate demand bonds with the series 2016F-G bonds which will be directly placed with a bank. Pro forma maximum annual debt service (MADS) is expected to equal approximately $83.8 million, a decline from current MADS of $97.2 million. The decrease is primarily due to the payoff of a bullet maturity when the series 1985B bonds matured in 2015. The series 2016D-E bonds are expected to price the week of May 16 through negotiation.

The Rating Outlook is Stable.

SECURITY

Bond payments are secured by a pledge of the gross receipts of the obligated group.

KEY RATING DRIVERS

BROAD OPERATING FOOTPRINT: Through a series of acquisitions since 2011, UnityPoint Health has broadened its already large operating footprint and now includes 17 hospitals located across nine operating regions in three states and $3.9 billion in annual operating revenue. UnityPoint Health's broad operating platform provides for additional credit stability.

SOLID LIQUIDITY: Unrestricted liquidity metrics remain solid for the 'AA-' rating category with 209.3 days cash on hand, 25.7x cushion ratio and 192.2% cash to debt.

COMPRESSED OPERATING PROFITABILITY: UnityPoint Health's historically stable operating profitability compressed in fiscal 2015 and the three month interim period ending March 31, 2016 (the interim period). Operating EBITDA margin decreased to 8.2% in fiscal 2015 from 9.6% in fiscal 2014 and further weakened to 6.4% in the interim period. Management is in the process of implementing operating improvement and integration activities, and profitability is expected to rebound.

WEAKENED COVERAGE: The pro forma debt burden remains light with pro forma MADS equal to 2.2% of fiscal 2015 revenue. However, the compressed profitability decreased pro forma MADS coverage by operating EBITDA to 3.8x in fiscal 2015 and 3.0x in the interim period.

RATING SENSITIVITIES

IMPROVED COVERAGE: Fitch expects that UnityPoint Health's operating improvement and integration initiatives will improve profitability to levels providing for coverage more consistent with the rating category. Sustained profitability and coverage metrics consistent with the compressed first quarter results could pressure the rating.

CREDIT PROFILE

UnityPoint Health, headquartered in West Des Moines, Iowa, operates 17 hospitals and over 280 physician clinics across nine operating regions in Iowa, Illinois and Wisconsin. Total operating revenues equaled $3.9 billion in fiscal 2015. Fitch's analysis is based upon UnityPoint Health's consolidated financial statements. The obligated group accounted for approximately 88.8% of consolidated operating revenues and 96.7% consolidated total assets in fiscal 2015.

Iowa Health System began doing business as UnityPoint Health in April 2013 to reflect its broadened operating platform and increased operations outside of Iowa.

BROAD OPERATING FOOTPRINT

UnityPoint Health has transitioned from a large, predominantly single state healthcare system to a larger multi-state healthcare system over the past five years. The system acquired Methodist Medical Center (Peoria, IL) in 2011, Proctor Hospital (Peoria, IL) in 2013 and Meriter Health Services (Madison, WI) in 2014. Total operating revenue increased 81.4% during this period from $2.1 billion in fiscal 2010 to $3.9 billion in fiscal 2015.

As part of the Meriter acquisition, the system acquired Physicians Plus Insurance Corporation (PPIC), a managed care organization headquartered in Madison, WI. Additionally, UnityPoint Health entered into a joint venture with HealthPartners in 2016 to provide health insurance products in Iowa and Illinois. PPIC will remain focused on markets in Wisconsin.

UnityPoint Health has maintained a stable system-wide inpatient market share of approximately 38% and maintains the first or second market share position in almost every region. However, each region is highly competitive. The recent acquisitions have significantly diversified the system's revenue base. However, operating revenue remains concentrated with approximately 50% derived from the system's three largest regions.

Overall, Fitch views UnityPoint Health's broadened operating platform favorably. The acquisitions and health insurance operations further diversify the system's operations while enhancing UnityPoint Health's capabilities in population health management.

SOLID LIQUIDITY

Liquidity metrics remain solid for the 'AA-' rating level with $2.15 billion of unrestricted cash and investments at March 31, 2016. With 209.3 days cash on hand, 25.7x cushion ratio and 192.2% cash to debt, UnityPoint Health's liquidity metrics are light relative to Fitch's 'AA' category medians of 289.4 days, 27.0x and 201.7%, respectively. However, liquidity metrics remain solid relative to similarly sized 'AA-' rated peers. Unrestricted liquidity is expected to be bolstered by approximately $57 million of reimbursement proceeds upon closing of the series 2016D-E transaction.

COMPRESSED OPERATING PROFITABILITY

UnityPoint Health expected decreased profitability in fiscal 2015; however, operating profitability was slightly weaker than budgeted targets with operating and operating EBITDA margins decreasing to 1.7% and 8.2%, respectively, from 3.0% and 9.6% in fiscal 2014. Prior to fiscal 2015, operating and operating EBITDA margins had been stable, averaging 2.8% and 9.8%, respectively, between fiscal years 2009 and 2014.

Operating profitability further weakened in the interim period with operating and operating EBITDA margins decreasing to 1.7% and 6.4%, respectively. The decreased profitability reflects increased costs associated with strategic investments, including implementation of a new IT system, the HealthPartners joint venture and integration of newly acquired assets, in addition to greater than expected volumes which stressed labor expenses.

Having completed a period of significant growth, management is now focused on integrating the newly acquired assets. The compressed profitability is currently mitigated by UnityPoint Health's broadened operating platform, solid liquidity, strategic investments and integration activities.

Management is in the process of implementing $75 million in operating improvement initiatives identified for fiscal 2016. UnityPoint Health's budget targets an operating margin of 2.3% in fiscal 2016, excluding certain non-recurring items. Fitch expects that operating profitability will rebound to sufficient levels to provide for coverage metrics consistent with the 'AA-' rating level.

WEAKENED COVERAGE

The system's pro forma debt burden remains light with pro forma MADS equal to 2.2% of fiscal 2015 revenue relative to Fitch's 'AA' category median of 2.4%. Despite the lighter operating profitability in fiscal 2015, pro forma MADS coverage by EBITDA and operating EBITDA remained solid for the 'AA-' rating category at 4.8x and 3.8x, respectively. However, the further decline in profitability through the interim period weakened both MADS coverage by EBITDA and operating EBITDA to 3.3x and 3.0x, respectively, comparing unfavorably to similarly sized 'AA-' peers and to Fitch's 'AA' category medians of 5.7x and 4.4x, respectively.

SHORT-TERM RATING

The 'F1+' rating reflects the strength of UnityPoint Health's eligible cash and investments to pay the mandatory tender on the $85 million series 2014B1-2 variable rate demand bonds in a Windows mode and $200 million taxable commercial paper program backed by self-liquidity. The commercial paper program is structured so that no more than $25 million can rollover on any given date. At March 31, 2016, UnityPoint Health's eligible cash and investments position under Fitch's criteria would cover the maximum mandatory put on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating. The $85 million series 2014B1-2 bonds are expected to be refunded with direct placement bonds. The series 2014B1-2 refunding is expected to close the week of June 6.

DEBT PROFILE

Subsequent to the series 2016 bond issuance, UnityPoint Health will have approximately $1.2 billion of total debt outstanding. The pro forma debt portfolio will consist of approximately 61% underlying fixed rate bonds and 39% underlying variable rate bonds. The system is counterparty to approximately $465 million in swaps, including $405 million in fixed payor swaps and a basis swap. The fixed payor swaps convert approximately 38% of the system's bond portfolio to synthetic fixed rates. UnityPoint Health was not required to post any collateral related to the swaps at March 31, 2016. UnityPoint Health will have approximately $303 million of bonds directly placed with banks subsequent to the series 2016 transactions. The direct placement covenants are substantially similar to those contained in the master trust indenture. Fitch has withdrawn the rating on UnityPoint Health's series 2013B-3 and 2013C bonds as the bonds were not issued.

DISCLOSURE

UnityPoint Health covenants to provide annual disclosure within 120 days after the end of the fiscal year and quarterly disclosure within 60 days of the end of the first three fiscal quarters. Disclosure is provided through the UnityPoint Health website and the Municipal Securities Rulemaking Board's EMMA System.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508

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

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004271

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Associate Director
+1-212-908-0345
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Associate Director
+1-212-908-0345
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com