CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following hospital revenue bonds issued through the Montana Facility Finance Authority on behalf of Benefis Health System Obligated Group (Benefis):
--$140.3 million series 2016.
The series 2016 bonds are expected to be structured as conventional fixed-rate debt. Bond proceeds will fund approximately $20.0 million of capital improvements, refinance (market dependent) approximately $41.2 million of outstanding series 2011A bonds and $101.7 million of outstanding series 2007 issued through the Montana Facility Finance Authority and pay costs of issuance. The bonds are expected to price the week of Oct. 31, 2016 through negotiated sale.
The Rating Outlook is Stable.
SECURITY
Bonds are payable from a pledge of the gross revenues of the obligated group.
KEY RATING DRIVERS
ESSENTIAL SERVICE PROVIDER: Benefis Health System (Benefis) is an integrated health system that acts as the sole provider of acute care services in its primary service area (PSA) of Great Falls, MT, as well as the larger geographic area in central Montana. For the 12-month period ended March 31, 2015, Benefis had a 97% inpatient market share position in its PSA and 72% market share position in its total service area. Fitch views Benefis' essentiality of services as a key credit strength.
STRONG PROFITABILITY: Benefis' historical profitability has been strong with operating EBITDA margins ranging between 13.7% and 14.6% in each of the last three years; well exceeding the 'A' category median of 10.3%. Benefis' has been able to generate strong operating performance despite a weak payor-mix.
IMPROVING LIQUIDITY METRICS: Benefis' $215.1 million in unrestricted cash and investments at June 30, 2016 have grown from $143.4 million at FYE 2013; or 50% over last 30 months. While Benefis' liquidity metrics are mixed relative to the 'A' category medians, Fitch expects liquidity growth to continue given the system's strong profitability and manageable capital needs.
CHALLENGING PAYOR MIX: Benefis' payor mix is weak by industry standards with roughly 69% of 2015 gross revenues being governmental payors (i.e. Medicare, Medicaid, Tricare, etc.). However, through cost containment efforts the system has been able to achieve Medicare breakeven for four consecutive year which largely mitigates the weak payor mix.
RATING SENSITIVITIES
SUSTAINED OPERATING PERFORMANCE: The 'A' rating assumes Benefis Health System will continue to generate strong operating performance despite its challenging payor mix, resulting in further improvement in liquidity metrics and adequate coverage of maximum annual debt service.
CREDIT PROFILE
Benefis Health System is an integrated health care provider located in Great Falls, Montana. The Obligated Group includes a 295 staffed-bed acute care hospital on two campuses and an employed medical group with 228 providers. Non-obligated entities include the Benefis Health System Foundation, Benefis Spectrum Medical, Benefis Teton Medical Center, a 10-bed critical access hospital, a physician-hospital organization and fitness center. For the year ended Dec. 31, 2015, the Obligated Group accounted for 92% of the System's total operating revenues and 91% of the System's total assets. Fitch's analysis is based on the results of the consolidated system.
PLAN OF FINANCE
Approximately $20 million of debt proceeds will be used to fund an expansion and renovation of the existing emergency department, a relocation of the endoscopy suite and information technology resources. The current ED was designed for 24,000 visits compared to 34,000 visits in 2015.
Approximately $153.5 million of net proceeds will be used to refund approximately $101.7 million of outstanding series 2007 bonds and approximately $41.2 million of outstanding series 2011A bonds. The refunding is expected to generate approximately $12.5 million in net present value saving and management expects to match the amortization of the existing debt.
ESSENTIAL SERVICE PROVIDER
Benefis Health System (Benefis) acts as the sole provider of key acute care services in a large, mostly rural service area that encompasses the north central geography of Montana. Based in Great Falls, Benefis' PSA consists of Cascade County which had a total population of 82,000 residents in 2015, of which, 60,000 live in Great Falls. The secondary service area includes 12 counties that surround Great Falls primarily to North and East of the city. For the 12-month period ended March 31, 2015, Benefis had a 97% inpatient market share position in its PSA and 72% market share position in its total service area. The closest inpatient acute care facilities with more than 100 beds are St. Peter's Hospital in Helena, MT (91 miles away), St Patrick's Hospital in Missoula, MT (168 miles away) and St. Vincent's Hospital in Billings, MT (217 miles away). In addition to inpatient services, Benefis' also operates licensed skilled nursing facilities, an inpatient psychiatric unit, and an inpatient rehabilitation unit. Fitch views Benefis' essentiality of services as a key credit strength.
STRONG PROFITABILITY
Benefis' historical profitability has been strong with operating EBITDA margins ranging between 13.7% and 14.6% in each of the last three years; well exceeding the 'A' category median of 10.3%. Benefis' has been able to generate strong operating performance despite a weak payor mix. In 2015, approximately 75% of gross revenues consisted of Medicare, Medicaid, Tricare, Indian Health Services or self-pay payors. According to management, the system has been able to achieve breakeven on its Medicare volumes over the last four years. The ability to breakeven on its Medicare business is unusual among providers and helps to mitigates the risk of its high level of governmental reimbursement. The ability to reach breakeven results from management's cost reduction efforts which have achieved over $30 million in incremental savings since 2013. Additionally, Benefis' strong market position allows it to maintain favorable commercial payor contracts, which further mitigates its overall payor mix.
IMPROVING LIQUIDITY METRICS:
At June 30, 2016 Benefis' total unrestricted cash and investments position had grown to $215.1 million from $143.4 million at FYE 2013; or 50% over last 30 months. At June 30th, days cash on hand, cushion and cash to debt of 218.4, 14.0x and 110.9% are mixed against respective 'A' category medians of 215.5, 19.4x and 148.6%. Fitch notes that liquidity growth has been constrained by Benefis' historically conservative investment approach with roughly 40% allocated to cash and cash equivalents. Beginning in 2016, the system is moving to a more balanced approach with greater allocation across fixed income, equities and up to 8% allocated to hedge funds. While Benefis' liquidity metrics are mixed relative to the 'A' category medians, Fitch expects liquidity growth to continue given the system's strong cash flow generation and manageable capital needs.
ELEVATED DEBT BURDEN
Some of Benefis' debt metrics are somewhat elevated reflecting its front loaded debt structure. Pro-forma debt service is level through 2030, after which it drops from a high of $15.3 million to $12 million in 2031, and to approximately $6.0 million thereafter. As a result, pro-forma MADS equates to a high 3.7% of 2015 total revenues as compared to the 'A' category median of 2.7%. Despite Benefis' strong profitability, historical coverage of pro-forma MADS by EBITDA in 2015 and 2014 of 4.2x and 3.7x, respectively, lags the 'A' category median of 4.5x. However, Fitch notes that debt-to-capitalization of 35.7% at June 30, 2016 was in line with the 'A' category median of 36.0%, and the absence of a defined benefit plan and obligation is viewed positively.
DISCLOSURE
Benefis covenants to provide continuing disclosure, with the submission of audited financial statements within 150 days of fiscal year end. Quarterly statements for the first three fiscal quarters will be provided within 45 days of quarter end and the fourth quarter interim financial statements will be provided within 60 of the quarter-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=1013635
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013635
Endorsement Policy
https://www.fitchratings.com/regulatory
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