|[November 21, 2012]
Fitch Affirms St. Luke's Episcopal-Presbyterian Hospitals' (MO) Rev Bonds at 'A+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings affirms the 'A+' long-term rating on the following Health
and Educational Facilities Authority of the State of Missouri bonds
issued on behalf of St. Luke's Episcopal-Presbyterian Hospitals (St.
--$39,930,000 fixed rate revenue bonds, series 2011;
--$54,210,000 fixed rate revenue bonds, series 2006.
The Rating Outlook is Stable.
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
KEY RATING DRIVERS
FAVORABLE PAYOR MIX: From its location in the affluent suburbs of St.
Louis County, St. Luke's benefits from a large base of managed care
patients (42.7% of gross patient revenues in fiscal 2012) and low
exposure to Medicaid (3.2%). The population in the St. Louis metro area
is projected to grow 6% between 2010 and 2015.
COMPETITIVE MARKET: Fitch's main credit concern is the competitive
market with the presence of several large regional health systems. St.
Luke's inpatient market share has slightly declined over the last
several years. However, management is focused on its outpatient growth
strategy, which has been the center of St. Luke's capital investments.
DECLINE IN UTILIZATION: Hospital volumes declined further in fiscal
2012, driven by the economic environment. Management indicated that
volume has rebounded in the first quarter of fiscal 2013 ended Sept. 30,
MODEST PROFITABILITY: Due to the decline in utilization, total operating
revenues were flat year over year, and operating margin dropped to 2.5%
in fiscal 2012 from 4.3% the year prior. Further negative variance was
prevented through favorable managed care rate increases, effective labor
management, and expense control. Profitability through first quarter
2013 improved compared to the same prior year period but is still down
relative to historical levels.
STRONG BALANCE SHEET: Overall balance sheet strength is supported by
adequate liquidity and low debt burden. Unrestricted cash and
investments of $203.3 million and total long-term debt of $97.1 million
at Sept. 30, 2012 produced 183.5 days cash on hand, 24.5x cushion ratio,
and 209.5% cash to debt.
LOW DEBT BURDEN: Despite depressed profitability, debt service coverage
ratios are still strong due to St. Luke's low debt burden. Maximum
annual debt service (MADS) coverage was 5.0x in fiscal 2012 and 5.9x in
St. Luke's has continued its expansion of service lines in enhancing its
capacity to provide a broader continuum of care. Since 2008, the
organization has added an outpatient center, wellness center,
rehabilitation hospital, home health services, hospice services,
cardiovascular step-down unit, private duty services, and convenient
care center. The hospital recently opened a newly renovated 10-bay
cancer infusion center. The new service lines have been accretive to the
organization and provide diversification from inpatient revenues. In
fiscal 2012, St. Luke's total revenue from outpatient activity was 54%
St. Luke's primary service area (PSA),consisting primarily of counties
of St. Louis and St. Charles, is characterized by above average personal
income levels and favorable payor mix. In fiscal 2012, managed care
contributed 42.7% to gross patient revenues, and Medicaid exposure was
low at 3.2%. The hospital had 13.3% market share in its PSA in 2011
compared to 13.8% in 2009. The presence of several large regional
competitors in the area such as SSM Health Care (rated 'AA-') and BJC
HealthCare remains a primary credit concern. Management indicated that
they have been able to negotiate favorable managed care rates in the
competitive environment due to the hospital's status as a low cost
Operating profitability declined in fiscal year 2012 after two years of
solid performance due mainly to a decline in volume. Negative variance
in profitability was offset by favorable managed care rate increases,
effective labor management, and expense control, resulting in lower
operating expenses than budgeted. Total operating revenues remained flat
in fiscal 2012 compared to a 6% growth in fiscal 2011, and St. Luke's
produced an operating margin of 2.5% in fiscal 2012, compared to 4.3% in
fiscal 2011 and Fitch's 'A' category median of 2.8%. Supported by
improved utilization levels, operating margin was 2.1% through the first
quarter ended Sept. 30, 2012, which is still down from the fiscal year
end but improved from the same prior year period with 1.6%. For fiscal
2013, management is budgeting a modest increase in volume, and projects
a 4.4% increase in total operating revenues and 3.8% operating margin,
which includes $3.5 million in anticipated receipt of meaningful use
funds. Management has a long-term target of maintaining 3% operating
margin, which Fitch believes is necessary to maintain the current rating
St. Luke's balance sheet remains strong with adequate liquidity and low
leverage. Unrestricted cash and investments totaled $203.3 million at
Sept. 30, 2012, up slightly from $188.4 million one year prior. Although
days cash on hand of 183.5 lags the 'A' category median of 191.0 days,
other balance sheet indicators are very strong, reflecting its low debt
burden with total long-term debt of $97.1 million. At Sept. 30, 2012,
cushion ratio was 24.5x and cash to debt was 209.5% relative to
respective category medians of 16.3x and 116.4%. Leverage metrics remain
favorable with 23.9% debt to capitalization and 2.5x debt to operating
EBITDA, both stronger than medians of 40.7% and 3.9x, respectively.
St. Luke's has two series of bonds outstanding, with a total outstanding
par amount of $94.1 million. Both series are uninsured fixed rate debt
producing level debt service. St. Luke's does not have any swap exposure.
The Stable Outlook reflects Fitch's expectation that St. Luke's will
rebound its profitability, which will be important in maintaining its
current rating. The inability to strengthen cash flow may place downward
pressure on the rating.
St. Luke's Episcopal-Presbyterian Hospitals owns and operates an acute
care general hospital with 493 licensed beds, a skilled nursing facility
with a residential care services, St. Luke's Rehabilitation Hospital (a
joint venture), and related healthcare facilities in Chesterfield,
Missouri, a suburb of St. Louis. In fiscal year 2012, St. Luke's
generated $439.9 million in total operating revenues. St. Luke's
covenants to provide annual disclosure within 180 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'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria', June 12, 2012;
--'Non-Profit Hospitals and Health System Rating Criteria', July 23,
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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