|[April 04, 2014]
Fitch Affirms Hospital Sisters Services, Inc. (IL) Revs at 'AA-/ F1+'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'AA-' long-term ratings on the following
revenue bonds issued on behalf of Hospital Sisters Services, Inc. (HSSI):
--$76.9 million Wisconsin Health and Educational Facilities Authority,
--$68.8 million Illinois Finance Authority, series 2012C;
--$61.1 million Wisconsin Health and Educational Facilities Authority,
--$41.6 million Wisconsin Health and Educational Facilities Authority,
--$31.6 million Illinois Finance Authority, series 2012F*;
--$31.6 million Illinois Finance Authority, series 2012G*;
--$72.0 million Illinois Finance Authority, series 2007A.
*Underlying rating. The bonds are expected to be supported by an
irrevocable direct pay letter of credit issued by the Bank of Montreal,
In addition, Fitch has affirmed the 'AA-/F1+' ratings to the following
variable-rate demand revenue bonds issued on behalf of HSSI. The 'F1+'
is based on the sufficiency of the self-liquidity provided by HSSI:
--$65.9 million Illinois Finance Authority, series 2012H;
--$89.5 million Illinois Finance Authority, series 2012I;
--$14.2 million Wisconsin Health and Educational Facilities Authority,
The Rating Outlook is Stable.
SECURITY: Joint and severable liability of each member of the obligated
KEY RATING DRIVERS
STRONG LIQUIDITY POSITION: HSSI's robust liquidity position provides a
strong financial cushion which mitigates the system's light but
improving operating profitability and the risks associated with its
variable-rate debt exposure.
SOLID DEBT SERVICE COVERAGE: HSSI's light debt burden allows for solid
coverage of maximum annual debt service (MADS) despite modest
profitability. Coverage of MADS by EBITDA was very solid 6.6x and 6.3x
in fiscal 2012 and 2013, respectively. Moreover, MADS coverage by
operating EBITDA of 4.1x and 4.5x in fiscal 2012 and 2013 is much
improved from fiscal 2010 and 2011.
IMPROVED OPERATING PERFORMANCE: HSSI's operating profitability has
improved sharply since fiscal 2011 despite continued investment in its
physician alignment strategy. Operating EBITDA margins improved to 7.7%
and 8.1% in fiscal 2012 and 2013 from 4.4% in fiscal 2011. Operating
improvement at HSSI's flagship, St John's Hospital in Springfield, IL
has been key with further improvement expected in 2014.
CHALLENGING SERVICE AREAS: HSSI's location in mid-sized markets with
stagnant growth, the concentration of system revenue at St. John's (the
flagship hospital in Springfield), and its reliance on its five
Wisconsin hospitals to cover losses at its Illinois facilities continue
to be credit concerns.
AMPLE INTERNAL LIQUIDITY: HSSI maintains ample cash and investments
which can be liquidated to fund any failed remarketing on approximately
$169.5 million variable-rate demand bonds exceeding Fitch's criteria for
assignment of an 'F1+' short-term rating.
IMPROVED OPERATING PERFORMANCE: HSSI's improvement in operating
performance combined with its strong liquidity position and light
leverage provide ample financial cushion to absorb the corporation's
continued physician alignment strategy as well as the transition to
value based reimbursement models at the current rating level.
HSSI is composed of 13 inpatient hospitals, with eight facilities in
Illinois and five facilities in Wisconsin. In fiscal 2013, the system
had 1,965 beds in operation and total revenue of $2 billion.
Fitch's analysis is based upon consolidated financial statements. In
2013, the obligated group accounted for 93.2% of consolidated operating
revenue and 90.0% of consolidated total assets in fiscal 2013.
STRONG LIQUIDITY / LIGHT DEBT BURDEN
The 'AA-' rating reflects the benefits of HSSI's robust balanc sheet,
light debt burden and solid debt service coverage which serve to
mitigate HSSI's historically weak operating profitability for the rating
category. At Dec. 31, 2013, HSSI's unrestricted cash and investments
totaled $1.71 billion which is up from $1.63 billion at fiscal year-end
(FYE) 2013 (+4.9% increase) and $1.47 billion at FYE 2012 (+16.6%
increase). HSSI's days cash on hand, cushion and cash-to-debt ratios of
324.7, 47.4x and 265.6%, respectively, well exceed the 'AA' category
HSSI enjoys a light debt burden which allows for strong debt service
coverage despite light but improving profitability. MADS of $36 million
equates to a light 1.8% of fiscal 2013 total revenues while debt to
capitalization (at Dec. 31, 2013) of 21.4% compares favorably to the
'AA' category median of 32.7%. Coverage of MADS by EBITDA has been very
solid at 6.6x and 6.3x in fiscal 2012 and 2013, respectively, and
exceeds the 'AA' median of 5.0x. Coverage of MADS by operating EBITDA
has improved to 4.1x and 4.5x in fiscal 2012 and 2013 and is now in line
with the 'AA' category median. Further capital spending has been strong
averaging 164% of depreciation expense over the last three years.
LIGHT BUT IMPROVING PROFITABILITY
Since posting a $44.8 million loss from operations (-2.4% operating
margin) in fiscal 2011, HSSI has generated improved profitability in
fiscal 2012 and 2013. In fiscal 2012, HSSI generated 'break even'
operations and in fiscal 2013, the corporation generated income from
operations of $18.8 million (0.9% operating margin). However, Fitch
notes that 2013 results were enhanced by receipt of 'EHR Incentive
Program' revenues in 2013 ($31.8 million in 2013 vs. $4.2 million in
2012). The improved results of the system's hospital operations have
been diluted by the losses from HSSI's physician alignment and
employment strategy. Operating performance through the six month interim
period ended Dec. 31, 2013 is improved over the prior year period with
$12.8 million of income from operations (1.2% operating margin) compared
to $9.5 million in operating income (1% operating margin) in prior year
At FYE 2013, the system employed a total 588 physicians and mid-level
providers as compared to 431 at FYE 2010. Along with the acquisition of
established physician practices, HSSI has many newly recruited
physicians, which continues to have a negative impact on profitability.
Growth in the employed physician group is expected to continue over the
near to medium term which will likely depress the rate of profitability
SERVICE AREA CHALLENGES:
Many of HSSI's hospitals are located in mid-sized markets with little
projected population growth and marginal demographics. Management is
making progress in reducing losses at St. John's-Springfield, which
accounted for about 22% of total system revenues in fiscal 2013 which is
viewed positively. The operating loss at St. John's- Springfield
narrowed to roughly $11 million in fiscal 2013 from $20.9 million in
2012 and $34.4 million in 2011. Proceeds from the series 2012 financing
are being used to rebuild the surgical suites and remodel of four
patient floors, which should improve surgical volumes and further
improve the financial performance at St. John's. Fitch believes improved
financial performance at St. John's is critical to the overall operating
success of the system. Fitch expects to see improved operating balance
across the system as capital improvements and physician alignment
strategies take hold.
The 'F1+' short-term rating reflects the sufficiency of HSSI's highly
liquid cash and investments available to fund any failed re-marketing
puts on approximately $169.5 million of series 2012 variable-rate demand
bonds. At Feb. 28, 2014, after assigning appropriate discounts based on
underlying ratings and maturity of its holdings, HSSI had eligible cash
and fixed income investments available to fund any un-remarketed puts
well in excess of the required threshold of 1.25x to achieve the 'F1+'
short-term rating. The system has a written procedures letter outlining
the liquidation procedures in place to ensure timely funding and
provides Fitch monthly investment reports which are used to monitor its
cash and investment position available for self-liquidity.
HSSI covenants to provide bondholders with audited annual information
within 120 days of fiscal year-end and unaudited quarterly statements
within 45 days of quarter-end to the national recognized municipal
securities information repositories and through Digital Assurance
Certification, L.L.C. The content of HSSI's disclosure to-date has been
excellent and includes a balance sheet, income statement, cash flow
statement, utilization statistics, and management discussion and
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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