|[October 16, 2013]
Fitch Rates Sisters of Charity of Leavenworth (CO) 2013A Revs 'AA-'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has assigned an 'AA-' rating to the following Colorado
Health Facilities Authority revenue bonds issued on behalf of Sisters of
Charity of Leavenworth Health System (SCLHS):
--$300 million series 2013A.
The bonds are expected to price the week of Oct. 28 via negotiated sale.
Proceeds will reimburse SCLHS for prior capital expenditures associated
with its Exempla St. Joseph's replacement hospital and pay costs of
In addition, Fitch affirms the 'AA-' rating on approximately $1.1
billion in revenue bonds issued by the California Health Facilities
Financing Authority (CA (News - Alert)), Colorado Health Facilities Authority (CO),
Kansas Development Finance Authority (KS), and Montana Facility Finance
Authority (MT), on behalf of SCLHS. An additional $125.9 million in
direct placement debt is not rated by Fitch.
The Rating Outlook is Stable.
The bonds are an unsecured obligation of the SCLHS corporate parent (the
sole member of the obligated group).
KEY RATING DRIVERS
STABLE BALANCE SHEET: The series 2013A bonds will reimburse SCLHS for
prior capital expenditures related to its Exempla St. Joseph Hospital in
Denver replacement facility. On a pro forma basis, SCLHS will bolster
its unrestricted liquidity by nearly $70 million with no increase to
maximum annual debt service (MADS) requirements. On a pro forma basis,
cash to debt and cushion ratio were 113.8% and 16.8x, respectively, as
of June 30, 2013.
SIGNIFICANT DEBT BURDEN: Total debt will equal approximately $1.6
billion post issuance, equal to 44% of capitalization and 4.1x EBITDA,
both unfavorable to Fitch's 'AA' category medians of 32.7% and 2.9x,
respectively. Still, capital needs are expected to decline to below $200
million in 2015 following completion of the St. Joseph's Hospital
project in December 2014.
SUSTAINED OPERATING PERFORMANCE: SCLHS maintained steady operating cash
flow levels in fiscal 2012 with a 1.4% operating margin and 12.3%
operating EBITDA margin. Through the six-month interim period ended June
30, 2013 it generated operating and operating EBITDA margins of 2.0% and
12.1% respectively. Coverage of pro forma MADS was 2.5x in 2012 and 2.6x
in interim 2013, and a marked improvement from 2.0x coverage in 2010.
DIVERSE REVENUE BASE: A key credit strength is SCLHS' geographic
diversity. Following the transfer of the St. John's facility in
California, SCLHS will have a portfolio of nine hospitals in six
distinct markets. Further, SCLHS has pursued strategic partnerships
within certain markets which are expected to both bolster its market
position, and be accretive to overall system operating performance.
CAPITAL PLAN FUNDING: In order to preserve liquidity, SCLHS will require
sustained operating results over the next 12-18 months to fund the
remaining costs associated with the St. Joseph's replacement facility,
as well as the one-time costs associated with opening and moving to the
new site in December 2014. Failure to do so could result in negative
SCLHS is a large, multi-state health care system operating nine acute
care hospitals, four safety net clinics, a children's mental health
center, and over 190 ambulatory service centers across the four states
of Kansas, Montana, Colorado and California. In fiscal 2012 (year end
Dec. 31), SCLHS reported total revenues of approimately $2.2 billion.
Fitch analysis is based on the consolidated entity, and Fitch
reclassifies certain financial statement items for analytical purposes.
The sole obligated group member is SCLHS as corporate parent, with nine
hospitals comprising the restricted affiliates group. Covenant tests
include the OG and the restricted affiliates, which accounted for 97.4%
of total revenues and had 315 days cash on hand (DCOH) against the
consolidated system's 334 DCOH for 2012. Debt service coverage for the
OG and affiliates was 3.5x against a consolidated 3.1x.
BALANCE SHEET STRENGTH
The series 2013A bonds will reimburse SCLHS for capital expenditures on
the Exempla St Joseph's replacement hospital in Denver which is expected
to open in Dec 2014. Separately, SCLHS expects to cash defease roughly
$220 million of debt associated with Exempla JOA. Thus, SCLHS' pro-forma
unrestricted liquidity of $1.8 billion at June 30, 2013 equates to 316
DCOH against Fitch's 'AA' median of 254.3 DCOH. Overall, pro forma debt
ratios remain consistent for the rating level, and despite significant
capital spending expected through 2014, SCLHS' balance sheet is expected
to remain robust.
Fitch views positively that SCLHS' defined benefit pension plan remains
well funded at 86.5% at Dec. 31, 2012. In addition, it has started the
process to convert its smaller pension with Lutheran Medical Center to a
church plan over the next few years, which would eliminate its ERISA
PRO FORMA DEBT BURDEN
Still, SCLHS' overall debt burden remains sizeable, and pro forma
coverage is somewhat light for the category at 3.6x by EBITDA at June
30, 2013. The series 2013A bonds are expected to be issued as fixed
rate, with MADS of $107.5 million.
Since the series 2013A bonds are not new money, post-issuance SCLHS will
have approximately $1.6 billion in debt outstanding, of which $199
million are variable-rate demand bonds (VRDBs) supported by standby bond
purchase agreements (SBPAs). The next renewal date is Nov. 26, 2014 for
those SBPAs issued by JP Morgan (News - Alert) Chase on $147.3 million in VRDBs. No
additional debt is anticipated, and Fitch believes there is limited
capacity for additional debt at the current rating level.
SIGNIFICANT CAPITAL NEEDS
Capital expenditures will remain significant through 2014 as major
projects are completed, including the Saint Joseph replacement hospital
in Denver and the St. Mary's bed tower in Grand Junction. For 2014
capital expenditures will be between $312 million and $420 million. As
only $312 million has been committed, SCLHS will need to continue
producing solid operating EBITDA to preserve its balance sheet.
SCLHS has undertaken several strategic initiatives to achieve systemwide
performance improvement, focusing on improving its revenue cycle,
realigning its portfolio of hospitals, and more efficient and effective
clinical performance. Effective April 1, 2013, SCLHS sold its Providence
(Kansas City) and Saint John (Leavenworth) hospitals to Prime Healthcare
for $56.7 million, which was used to redeem associated debt and
reimburse SCLHS for prior expenditures. And in September 2013, SCLHS
signed a definitive agreement to transfer its Saint John's Health Center
(Santa Monica) to Providence Health with an expected close by Dec. 31.
Finally, a joint operating agreement is underway with National Jewish,
which is expected to be accretive to the system overall.
SCLHS has begun to realize some results from improvement efforts, as
demonstrated by significant improvement in operating EBITDA to 12.3% in
2013 from 8.5% in 2010. Fitch expects steady operating EBITDA levels
through 2015 as its capital needs start to wane, which should also allow
for balance sheet preservation.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20,
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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