NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA' rating on the following bonds that were issued on behalf of Jefferson Health System, which has been restructured and now renamed Main Line Health System (MLHS):
--$129,990,000 Chester County Health and Education Facilities Authority health system revenue bonds, series 2010A;
--$57,799,000 Montgomery County Industrial Development Authority health system revenue bonds, series 2012A.
The Rating Outlook is Stable.
SECURITY
The outstanding bonds are general unsecured debt obligations of MLHS.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The affirmation of the 'AA' rating and the Stable Outlook is supported by MLHS's slightly lower than the historical trend, but still robust operating results. MLHS ended fiscal 2016 with operating income of $106.8 million equating to operating and operating EBITDA margins of 6.5% and 13%, respectively, both exceeding Fitch's 'AA' category medians.
EXCELLENT LIQUIDITY: MLHS's $1.5 billion in unrestricted cash and investments at September 30, 2016 equated to 367 days cash on hand (DCOH), cash equal to 638.7% of debt and cushion ratio of 55.9x, all significantly exceeding Fitch's 'AA' medians of 277 days, 197.9% and 29.9x, respectively.
VERY LOW DEBT BURDEN: MLHS's modest debt burden is evidenced by maximum annual debt service (MADS) at 1.6% of total revenues in fiscal 2016, lower than Fitch's 'AA' median of 2.2%. Additionally, MLHS's MADS coverage by EBITDA of 8.8x, including a $50 million 2015 debt issuance, comfortably exceeded the median of 6x.
COMPETITIVE MARKET: MLHS maintains a leading market share of 47.4% (based on 2015 discharges) in its demographically favorable service area, a slight increase from 46.4% two years ago. However the system operates in a fragmented and competitive environment with several other health systems. MLHS's largest competitor in terms of market share is Penn Medicine with 19.4% market share. Both systems have taken market share from some of the smaller providers in the market.
RATING SENSITIVITIES
MAINTAINING STRONG CASH-FLOW GENERATION: Fitch expects Main Line Health System to continue to produce slightly slimmer, but still strong operating results. Continued strong cash flow is necessary in order to generate sufficient cash-flow to support the continuing significant investment in facilities expansion and renovations without materially impacting its low debt burden.
CREDIT PROFILE
Main Line Health System is a regional health system located throughout Chester, Delaware, Montgomery and Philadelphia counties in Pennsylvania. MLHS operates four acute care hospitals and one rehabilitation hospital with a total of 1,387 beds and one drug and alcohol rehabilitation facility. In addition, MLHS operates soon to be five ambulatory health centers with the latest to open in Concordville in November 2016, an employed physician network and a home care and hospice service line. MLHS had total revenues of $1.66 billion in fiscal 2016 (June 30 year-end).
Despite its separation from Thomas Jefferson University Hospital (TJUH), following the restructuring which became effective June 2014, MLHS continues to maintain a number of clinical affiliations and collaborative relationships with TJUH, including joint ownership in the Delaware Valley Accountable Care Organization (ACO). The ACO currently manages 107,000 Medicare attributed lives.
STRONG FINANCIAL PROFILE
MLHS has continued to grow revenues, with total revenues increasing by 6.8% in fiscal 2015 and 4.6% in fiscal 2016. MLHS generated $106.8 million in income from operations in fiscal 2016, which equated to a 6.5% operating margin and 13% operating EBITDA margin, both above the 5.2% and 11.7% Fitch's 'AA' category medians. Operating income was reported at $39.5 million through the first quarter of fiscal 2017 translating to operating margin of 3%. Management has projected a slightly lower level of profitability for the next five years, with operating margins in the mid 4% range and operating EBITDA margins in the 11% range, but still consistent with Fitch 'AA' medians of 5.2% and 11.7%, respectively. A Performance Excellence initiative has been launched to improve financial operations and enhance quality and outcomes, which should help to maintain cash flow in the $200 million range, which is needed to support ongoing capital projects.
VERY LOW DEBT BURDEN
MLHS's debt burden remains very low with MADS of $26.9 million at just 1.6% of revenues in fiscal 2016 and MLHS's MADS coverage by EBITDA a solid 8.8x in the same year. The organization issued a $50 million variable rate series in May 2015 (not rated by Fitch), which was privately placed with The Northern Trust Company. The series 2015 bonds are secured on parity with MLHS's outstanding debt, which includes the fixed rate series 2010 and 2012A bonds. A portion of the proceeds - $16.6 million, were used to refund a portion of the series 2010 bonds and the remaining $33.4 million is being used in the expansion and renovation of the Bryn Mawr Hospital campus. The series 2015 bonds have an initial term of 10 years and interest rate at 67% of 30 day LIBOR plus 55 basis points.
The organization has historically funded a large portion of its capital spending through cash flow and two years ago completed a $480 million expansion and modernization project at Lankenau Hospital, of which only $30 million was funded from debt. The current modernization project underway at Bryn Mawr, which was launched in the spring 2016, includes a 7-story addition connected to the existing main hospital and will add private patient rooms, renovate the maternity and delivery areas, and add 12 new operating rooms. The $250 million project cost will be funded by a combination of the $33.4 million of the 2015 bond proceeds, $30 million from philanthropy, of which $26 million has already been raised, and the balance from operating cash-flow.
The next major campus upgrade will be for Riddle Hospital, with definitive investments not yet finalized. The capital budget for fiscal 2017 is approximately $96 million, which includes $56 million of the $160 million capital cost for the EPIC EMR implementation. Fitch believes that MLHS has ample debt capacity at the current rating level to support future capital plans.
CONTINUING DISCLOSURE
MLHS covenants to provide certain financial information in an Annual Report, no later than 180 days after the fiscal year-end. MLHS also provides quarterly information for the first three fiscal quarters on the Municipal Securities Rulemaking Board's EMMA system.
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=1015217
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015217
Endorsement Policy
https://www.fitchratings.com/regulatory
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