|[April 01, 2014]
Fitch Affirms Palos Community Hospital's (IL) Revs at 'AA-'; Outlook Revised to Negative
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'AA-' rating on the following fixed-rate
revenue bonds issued by the Illinois Finance Authority on behalf of
Palos Community Hospital (PCH):
--$147,525,000, series 2010C
--$120,145,000, series 2007A
Fitch notes that PCH also has $100,000,000 in variable-rate bonds series
2010A&B in the form of direct bank loans privately placed with JP Morgan (News - Alert)
Chase and Northern Trust banks, on which they had drawn $64,000,000 as
of Dec. 31, 2013. Fitch does not provide a rating on these bonds, but
the effect of this debt is included in Fitch's overall analysis of PCH's
The Rating Outlook is revised to Negative from Stable.
--Pledge of the obligated group's unrestricted receivables.
KEY RATING DRIVERS
DETERIORATION IN OPERATING PERFORMANCE: The Outlook revision to Negative
reflects PCH's weak operating performance, which has been below Fitch's
expectations and short of budgeted results. For 2013 (year ended Dec.
31; draft audit) PCH posted a 3.5% operating EBITDA margin, which is
very weak compared to Fitch's 'AA' category median 11.8% and was below
the 4.9% budget.
STRONG BALANCE SHEET: The 'AA-' rating continues to be supported by
PCH's significant balance sheet strength, with 30.7x cushion ratio and
255.3% cash to debt at fiscal year-end 2013. PCH's robust liquidity
currently provides some cushion against the weak operating performance
and high debt burden.
HIGH DEBT BURDEN: PCH's debt burden is significant for its revenue size
with maximum annual debt service (MADS) comprising about 8.4% of total
revenues in 2013 compared to the 'AA' category median of 2.6% resulting
in a very light 2.8x debt service coverage ratio.
PAVILION EXPANSION COMPLETE: PCH opened its new bed tower (the
Hospitaller Pavilion) on time on March 19, 2013 and under budget for a
total cost of approximately $340 million, approximately 15% less than
the original 2010 estimated cost. PCH anticipates completing the
remainder of its campus renovation project by fall 2015, after which
capital spending will fall significantly.
STEADY MARKET POSITION: PCH captured 21.7% market share during fiscal
2013 in its service area, relatively flat from 21.6% in 2012 despite the
presence of robust competition. Further, the area has strong demographic
characteristics and favorable payor mix characteristics.
TURNOVER OF BOARD AND MANAGEMENT: The recent resignation of five parent
board and hospital board members coupled with the Feb 12th resignation
of the former CEO, Edgardo Tenreiro, raises concern about the stability
and direction of the organization as it attempts to improve operating
performance and complete its campus project.
NECESSARY OPERATING IMPROVEMENT: Despite its strong liquidity position,
PCH will have to demonstrate significant improvement in operating
profitability by 2015 to maintain the current rating, particularly in
light of its heavy debt burden. PCH needs to successfully implement its
performance improvement plan which should result in improved operating
results in 2014 and significant improvement by 2015. The Negative
outlook reflects Fitch's concern about the organization's ability to
improve operating performance, which is heightened due to the
instability at the governance and management level. A material erosion
in PCH's liquidity position or a lack of progress in improving operating
profitability would result in a rating downgrade.
Located in Palos Heights, Illinois (approximately 25 miles southwest of
Chicago), PCH operates 377 inpatient beds, and the organization reported
$335.3 million in total revenue in fiscal 2013.
Fich's analysis is based on the consolidated entity. The obligated
group includes Palos Community Hospital and St. George Corporation,
which represented 99% of total assets and 97% of total revenues in 2013.
Non-obligated entities include Palos Medical Group (PMG (News - Alert)), St. George
Wellness Center and some joint ventures.
DETERIORATION IN OPERATING PERFORMANCE
The Outlook revision to Negative from Stable is driven primarily by
PCH's weak operating profitability, which declined further than expected
in 2013. PCH failed to meet its 2013 budget with a $22.2 million loss
from operations (negative 6.6% operating margin) compared to a budgeted
loss of $18.6 million (negative 5.9% operating margin). The loss from
operations in 2013 reflects a significant increase in the operating
expenses associated with the opening of the new Hospitaller bed tower,
coupled with reimbursement pressure from government payors and flat to
An operational improvement plan is being implemented by management,
which depending on the level of success, should result in up to $34.5
million in net margin improvement by fiscal 2015. Key initiatives
include improving throughput and productivity, reducing supply costs and
revenue cycle enhancement. Fitch is concerned about PCH's ability to
improve operating results given the recent instability among the board
and management. Of the five board member resignations, two were in their
12th year of service (the term limit) and three resigned following
initial three-year terms. These actions, when considered in conjunction
with the departure of the prior CEO in Feb 2014 raises concern about the
stability and direction of the organization over the near term. Fitch
notes the board named Dr. Terrence Moisan as interim CEO, who has been a
PCH physician for 36 years and an active member of both boards.
STRONG BALANCE SHEET
The affirmation at 'AA-' rating reflects PCH's robust liquidity
position, which provides some financial cushion while management
executes its operating improvement plan. At December 31, 2013,
unrestricted cash and investments totaled $863.7 million, equating to
939.4 days cash on hand, 30.7x cushion ratio and 255.3% cash to debt,
all well exceeding the respective 'AA' category medians of 254.3 days,
23.4x and 173.6%. Fitch expects PCH to preserve its liquidity through
completion of the campus renovation in 2015, which will require
approximately $47 million in remaining equity contribution.
HIGH DEBT BURDEN
PCH's debt burden remains high for the rating, with MADS equal to 8.4%
of revenue, compared to the 'AA' category median of 2.6%. Total
outstanding debt after the full draw down of the direct loans (expected
in 2014) is $374 million. Debt service coverage is tested on MADS, which
is estimated at $28.2 million and does not occur until 2016 when the
principal amortization of the series 2010C bonds begins. PCH has two
direct bank loans, series 2010A and B ($50 million each series), which
are structured as bullet maturities. The initial placement date expires
in May 2040 for the series 2010A (JPMorgan) and May 2015 for the series
2010B (Northern Trust). For 2013, PCH's coverage calculation was 2.95x,
ahead of the covenant requirement of 1.10x. No additional debt is
currently planned, and Fitch believes that PCH has no room for
additional debt at the 'AA-' rating level.
PCH faces considerable competition with four acute care providers
located within its service area. Silver Cross (rated BBB+/Stable by
Fitch), located just eight miles from PCH, opened a replacement facility
in February 2012. This did have a slight negative impact on PCH's total
admissions and market share during 2012. Fitch notes that PCH's market
share stabilized at 21.7% in 2013. Comparatively, Advocate Christ
Hospital (part of Advocate Health Care Network rated AA; Stable) had
25.3% share and Silver Cross had 13.1% share in 2013. The total market
includes the area from which 89% of PCH admissions originate.
PCH covenants to provide annual financial information within 150 days of
each fiscal year end and quarterly unaudited financial statements within
45 days of the first three fiscal quarter-ends and within 60 days of the
close of the fiscal year end for the fourth quarter. Disclosure to Fitch
has been timely and sufficient.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 2013)
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria - Effective July
23, 2012 to May 20, 2013
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