CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on approximately $474 million of bonds issued by the Illinois Finance Authority on behalf of the Rush University Medical Center Obligated Group (Rush).
The Rating Outlook is Positive.
SECURITY
Bond payments are secured by a pledge of the gross revenues of the obligated group.
KEY RATING DRIVERS
STRONG COVERAGE: The Positive Outlook reflects Rush's solid operating profitability and moderate debt burden which combine to produce strong coverage metrics. Maximum annual debt service (MADS) coverage equaled 5.6x in fiscal 2016, easily exceeding Fitch's 'A' category median of 4.5x.
SOLID PROFITABILITY: Operating profitability compressed from historic levels, but remains solid with operating EBITDA equal to 10.2% in fiscal 2016 and 10.6% in the three month interim period ending Sept. 30, 2016, exceeding Fitch's 'A' category median of 10.3%.
IMPROVED LIQUIDITY: Unrestricted cash and investments increased 12.5% since fiscal 2014 to $1.14 billion at Sept. 30, 2016. Liquidity metrics are solid with 205.5 days cash on hand (DCOH), 25.2x cushion ratio and 165.3% cash to debt relative to Fitch's 'A' category medians of 215.5 days, 19.4x and 148.6%.
INCREASED CAPITAL PLANS: Capital spending is projected to increase over the next five years and will likely involve the issuance of new debt. Fitch will assess the credit impact of any new bond issuance as more details become available.
RATING SENSITIVITIES
SUSTAINED CREDIT PROFILE: Fitch expects Rush University Medical Center to maintain its solid liquidity metrics and operating profitability, providing for continued robust coverage metrics.
FURTHER CLARIFICATION OF CAPITAL PLANS: Positive rating movement will be dependent upon further clarification of Rush's capital plans given management's ability to scale back plans if necessary and the impact of any new debt issuance on Rush's overall credit profile.
CREDIT PROFILE
Rush operates an academic medical center and two community hospitals located in Chicago and the surrounding suburbs. Additional operations include a medical group with 629 employed physicians, a rehabilitation and skilled nursing facility, research facilities, a university with over 2,500 students and a graduate medical education program with 667 medical residents. Rush is unique among academic medical centers in that the hospital founded the university and both entities are under a common governance and management structure. Total operating revenues equaled $2.16 billion in fiscal 2016.
Despite operating in the highly competitive Chicago market, Rush benefits from an excellent clinical reputation with strong market shares in key specialties, a highly aligned medical staff and its university with schools of medicine, nursing, allied health and biomedical research. Further, Rush's competitive position was enhanced with the opening of its new patient tower at its flagship academic medical center in January 2012.
SOLID PROFITABILITY
Operating profitability has been historically strong, but compressed slightly in fiscal 2016 and the interim period. Operating EBITDA margin averaged 12.1% between fiscal years 2009 and 2016, but decreased to 10.2% in fiscal 2016 from 12.1% in fiscal 2015. Operating EBITDA margin remained stable at 10.6% in the interim period. However, excluding certain non-recurring items, operating EBITDA margin decreased to 8.9% in the interim period. Profitability was challenged in fiscal 2016 and the interim period by increased labor and supplies expenses. Management projects that operating EBITDA margin will equal 10.7% in fiscal 2017 and will remain at comparable levels through 2020.
STRONG COVERAGE
Rush's debt burden remains moderate with MADS equal to 2.1% of fiscal 2016 revenue, relative to Fitch's 'A' category median of 2.7%. The moderate debt burden and solid profitability combine to provide strong MADS coverage by EBITDA equal to 5.6x in fiscal 2016, exceeding Fitch's 'A' category medians of 4.5x. Excluding non-recurring items, MADS coverage by EBITDA of 6.4x remained strong in the interim period. Solid investment returns mitigated the impact of the compressed adjusted interim period operating profitability on coverage.
IMPROVED LIQUIDITY
Unrestricted cash and investments increased 12.5% since fiscal 2014 to $1.14 billion at Sept. 30, 2016. Liquidity metrics are solid with 205.5 DCOH, 25.2x cushion ratio and 165.3% cash to debt relative to Fitch's 'A' category medians of 215.5 days, 19.4x and 148.6%. Unrestricted liquidity increased materially subsequent to the opening of Rush's new hospital in 2012, increasing from $618 million at June 30, 2012.
INCREASED CAPITAL PLANS
Capital spending is expected to materially increase over the next five years as Rush executes a new long term strategic plan. Historic capital spending has been modest reflecting the system's limited capital needs following the opening of Rush's new hospital in 2012 with capital expenditures averaging $109 million per year (90.7% of depreciation expense). Total capital spending is projected to equal approximately $1.5 billion over five years, averaging $299 million per year (approximately 200% of depreciation expense). However, the full capital plan will be executed only if Rush continues to achieve targeted operating performance and liquidity measures.
A primary component of Rush's long term strategic plan is an expanded ambulatory development strategy to increase patient access and catchment. Capital plans include the construction of a 500,000 square foot ambulatory center adjacent to Rush's flagship academic medical center. The project is expected to cost $450 million with an expected opening date in fiscal 2020. However, the total cost and scope of the project can be scaled back if necessary. Additional capital plans include expansion of Rush Copley Medical Center's surgery department and main entrance, expansion of Rush Oak Park Hospital's emergency department, an ambulatory surgical center in Oak Brook (IL) and an ambulatory building in Chicago's south Loop. Capital plans are expected to be funded with operating cash flow, philanthropy proceeds and a bond issuance in fiscal 2018. Fitch will assess the impact of any future debt issuance as details become more certain.
DEBT PROFILE
Rush had approximately $694.4 million of total debt outstanding at Sept. 30, 2016. In addition to the rated bonds, total debt includes approximately $90 million of bonds that are privately placed and not rated by Fitch. The bond portfolio is comprised of 84% underlying fixed rate bonds and 16% underlying variable rate bonds. Rush is counterparty to two fixed payor swaps converting 15% of the total debt portfolio to synthetic fixed rates. No collateral was required to be posted at Sept. 30, 2016.
DISCLOSURE
Rush covenants to disclose audited financial statements within 120 days of the end of the fiscal year and quarterly reports no later than 60 days after the end of each fiscal quarter. Rush's disclosure practices are among the best in Fitch's health care portfolio with quarterly and annual disclosure consisting of balance sheet, income statements and cash flow statements, utilization statistics and a management discussion and analysis.
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=1016350
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016350
Endorsement Policy
https://www.fitchratings.com/regulatory
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