|[January 15, 2013]
Fitch Revises Essentia Health's (MN) Outlook to Stable; Affirms 'A-'Revs
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'A-' rating on in the following
outstanding revenue bonds issued on behalf of Essentia Health (Essentia).
--$9.6 million Minnesota Agricultural & Economic Development Board
health care facilities revenue bonds, series 1999A
--$1.1 million Duluth Economic Development Authority health care
facilities revenue bonds, series 2004
--$61.1 million Cass County health care facilities variable-rate demand
revenue bonds, series 2008A
--$46.0 million Cass County health care facilities revenue bonds, series
--$42.0 million Minnesota Agricultural & Economic Development Board
health care facilities revenue bonds, series 2008E
--$154.0 million Minnesota Agricultural & Economic Development Board
health care facilities variable-rate demand revenue bonds, series 2008C
--$12.9 million Wisconsin Health & Educational Facilities Authority
health care facilities variable-rate demand revenue bonds, series 2008B
Essentia has an additional $129 million in direct placement debt and $6
million in non-obligated group debt which Fitch does not rate. The
series 2008A, 2008B and 2008C bonds were reoffered as fixed rate in 2010.
Fitch has also revised Essentia Health's Rating Outlook to Stable from
The bonds are a joint and several obligation of the obligated group. The
bonds are secured by a pledge of unrestricted receivables, subject to
permitted encumbrances and a debt service reserve fund.
KEY RATING DRIVERS
ADDITIONAL DEBT EXPECTED: The outlook revision to Stable from Positive
is due to Essentia's plans to issue $100 million of additional debt in
2013 and weaker operating performance in fiscal 2012. Fitch did not
anticipate either of these developments at the time of its last review
(when Fitch assigned the Positive Outlook).
DEBT LEVEL REMAINS MANAGEABLE: Essentia plans to issue $192.9 million of
nonrated fixed-rate bonds in first quarter-2013, including $50 million
in new debt to be used for capital plans and strategic growth. Fitch
also expects Essentia to issue another $50 million later this year for
strategic capital uses. Essentia's pro forma debt burden is manageable
for the current rating level. Pro forma debt to EBITDA coverage was 3.7x
and MADS coverage EBITDA was 3.7x through the three-month interim period.
STEADY OPERATING PERFORMANCE: Despite a decline in fiscal 2012, Essentia
has maintained solid operating performance. Essentia produced a 2.5%
operating and 8.6% operating EBITDA margin through the three-month
interim period ended Sept. 30, 2012.
STRONG CLINICAL INTEGRATION: Fitch believes Essentia's long-standing
alignment with a large medical staff coupled with successful deployment
of its EPIC information technology platform should result in improved
care management, clinical efficiency, and better quality. All of these
are key to success under healthcare reform.
GROWING MARKET PRESENCE: Essentia has expanded its market reach via
selective partnerships with area hospitals and clinic integration. This
has supported steady utilization, consistent revenue growth, and allows
Essentia to negotiate its payor contracts from a position of strength.
That said, Fitch notes that Essentia faces material competition in
certain markets from several hospital systems.
MODEST BALANCE SHEET: While Essentia's total unrestricted liquidity has
consistetly grown to $512.3 million at Sept. 30, 2012 its associated
ratios remain light for the 'A' rating category. At Sept. 30, 2012
Essentia had 128.6 days of cash on hand (DCOH), 99.8% cash to debt
(which drops to 82.6% post-issuance), and 11.4X pro forma cushion ratio.
All of these figures fall below Fitch's 'A' category median ratios of
191 DCOH, 116.4% cash to debt, and 16.3x cushion ratio.
Essentia's 'A-' affirmation reflects the system's increasing yet
manageable debt level, steady operating performance, growing market
presence, high level of clinical integration and reform preparedness,
and relatively light (albeit improving) liquidity metrics.
Proceeds from the $192.9 million series 2013 issuance will be used to
refund Essentia's $6.3 million in series 1999 bonds, $7.1 million series
2008 Brainerd (News - Alert) debt, $101.3 million series 2010 direct placement debt,
and $25.1 million series 2011 private placement. Additionally, $50
million will be used to reimburse prior and fund future capital
expenditures. Essentia also has preliminary plans to issue an additional
$50 million in direct placement debt later this year.
Post both debt issuances, Essentia will have approximately $620 million
in total long term debt (of which $50 million will be variable-rate).
Total pro forma MADS equals $44.9 million. This includes $36.1 million
in obligated group debt and capital lease payments, $2.3 million in
non-obligated debt requirements, $400,000 in guarantees, and $3.8
million which assumes the full draw on a $60 million line of credit per
the definition of MADS in Essentia's Master Trust Indenture. As of Jan.
15 2013, there was nothing drawn on the line of credit.
Essentia will also terminate $52 million in fixed payor swaps, leaving
approximately $51 million in fixed payor swaps outstanding. Upon this
restructuring, the swaps will have a $20 million collateral posting
threshold, and no collateral is currently being posted.
Bond proceeds will be used in part on capital expenditures, which may
include a sizeable renovation/expansion of its Fargo facility. Fitch
believes this is a necessary strategy to grow its market position within
this high-growth service area against sizeable competition from Sanford
Health. Essentia maintains leading market position within the East
Region (Duluth/north Wisconsin) and its overall market reach continues
to grow. That said, Essentia faces significant competition within its
West Region (North Dakota/northwest Minnesota) and Central Region
A key credit strength remains Essentia's large base of 686 employed/799
active medical staff. Fitch believes its large base will allow Essentia
to continue implementing more efficient and effective care management
practices across its care sites. This is expected to translate into
better outcomes, cost management, and should help support favorable
reimbursement from both government and commercial payors.
The Stable Outlook reflects the short term impact that additional debt
will have on Essentia's financial profile, and Fitch's expectation that
Essentia's capital plans could hinder meaningful growth in liquidity
over the near term. However, Fitch believes that positive rating
movement could occur over the next one to two years if Essentia can
generate cash flow at levels which result in balance sheet growth to
levels more reflective of Fitch's 'A' category medians.
Essentia is an integrated health care system with acute hospitals and
physician clinics spread throughout Northern Minnesota, Eastern North
Dakota, and Northwest Wisconsin. Its operations include 16 hospitals and
65 clinics across the region, and nearly 800 physicians.
Essentia's total revenue in fiscal 2012 was approximately $1.6 billion.
Essentia covenants to provide quarterly unaudited consolidated financial
statements within 60 days of quarter end and annual audited financial
statements and operating data with 120 days to the Municipal Securities
Rulemaking Board's EMMA system. Disclosure to Fitch has been timely and
thorough, with good access to management.
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);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23,
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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