|[April 07, 2014]
Fitch Rates Denver Health's (CO) Series 2014 A/B bonds 'BBB+'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings assigns a 'BBB+' rating to the following bonds expected to
be issued by the Denver Health & Hospital Authority (Denver Health):
--$73,185,000 healthcare revenue bonds, series 2014A;
--$16,990,000 taxable healthcare revenue bonds, series 2014B.
Additionally, Fitch affirms the 'BBB+' rating for the following bonds
issued by Denver Health:
--$27,625,000 healthcare recovery zone facility revenue bonds, series
--$3,985,000 healthcare revenue bonds, series 2009A;
--$114,645,000 healthcare revenue bonds, series 2007A;
--$63,180.000 healthcare revenue bonds, series 2007B.
The Rating Outlook is Stable.
The series 2014A and 2014B bonds are expected to be issued as tax-exempt
fixed rate bonds and taxable fixed rate bonds, respectively. Proceeds of
series 2014 A/B bonds will be used to finance the acquisition and
construction of a new clinic, the renovation of an existing clinic,
various renovation and improvement projects on the main campus and to
pay costs of issuance. Pro forma maximum annual debt service (MADS) is
expected to equal $21.4 million, increasing from the current MADS of
$15.8 million. The series 2014 A/B bonds are expected to price the week
of April 22, 2014 via negotiation.
The bonds are secured by a pledge of the gross revenues of the obligated
group and a debt service reserve fund.
KEY RATING DRIVERS
ESSENTIAL SERVICE PROVIDER: Denver Health is an essential health care
service provider in the Denver metropolitan area assuming the roles of
the city's safety net hospital and public health system while providing
care for approximately one-third of Denver's residents and approximately
34% of Denver's children. The essentiality of services mitigates some of
the credit metrics which are below 'BBB+' peers.
RELIANCE ON (News - Alert) GOVERNMENT FUNDING: Denver Health's high exposure to
Medicaid and significant funding from other government sources makes the
system vulnerable to state and federal budget cuts.
HISTORICALLY LIGHT PROFITABILITY: Operating profitability is light for
the rating category with operating EBITDA margin averaging 7.3% since
fiscal 2008 and equaling 7.1% in fiscal 2013 relative to Fitch's 'BBB'
category median of 9.0%. Profitability is expected to improve with the
expanded coverage under the PPACA, with fiscal 2014 budgeted operating
EBITDA margin equal to 8.6%.
LOW DEBT BURDEN: Denver Health's light debt burden, with pro forma MADS
equal to a low 2.7% of revenue in fiscal 2013, allows for solid MADS
coverage by operating EBITDA equal to 2.6 times (x) in fiscal 2013
relative to Fitch's 'BBB' category median of 2.7x.
LIGHT LIQUIDITY METRICS: With $155 million of unrestricted cash and
investments at December 31, 2013 equating to 75.8 days cash on hand,
7.3x pro forma cushion ratio and 43.2% cash to pro forma debt, liquidity
metrics are light relative to Fitch's 'BBB' category medians of 144.7
days, 10.2x and 91.7%.
MAINTENANCE OF CREDIT PROFILE: Fitch expects that Denver Health will
maintain its broad operating platform and essentiality within the City
and County of Denver while sustaining coverage metrics that are
consistent with Fitch's 'BBB' category medians.
Denver Health is an integrated health care delivery system with an
extremely broad operating platform in the Denver metropolitan area. In
addition to Denver Health Medical Center, a 525 licensed bed acute care
hospital, Denver Health operates the city's public health system, the
Rocky Mountain Center for Medical Response to Terrorism, the Rocky
Mountain Regional Trauma Center, an HMO, a Medicaid Choice managed care
plan and a network of federally qualified health centers. Denver
Health's essential nature to the Denver metropolitan area is highlighted
b the fact that it provides healthcare services to approximately
one-third of Denver's residents and approximately 34% of Denver's
Fitch's analysis is based upon Denver Health's consolidated financial
statements. The obligated group accounted for 96% of consolidated total
assets and 100% of consolidated operating revenues in fiscal 2013.
HIGH EXPOSURE TO GOVERNMENT FUNDING
Given its high level of exposure to government funding, Denver Health is
susceptible to state and federal budget cuts. As the city's safety net
provider, Denver Health is the largest recipient of disproportionate
share hospital (DSH) funding in Colorado and is among the largest
Section 330 Public Health Service grant recipients in the United States.
Additionally, Medicaid accounted for a high 34.9% of gross revenues in
Fiscal 2013. The high Medicaid exposure is reflective of Denver Health's
role as a safety net provider for the medically indigent and uninsured.
Total supplemental funding (net of provider fee expense) increased to
$105 million in fiscal 2013 from $89 million in fiscal 2012.
Denver Health's status as the city's safety net provider and the
essential nature of its services provide a level of operating stability
and has historically provided some insulation from potential budget
cuts. However, major revenue components are vulnerable to local, state
and national changes in health policy and reimbursement mechanisms. The
uncertainty of funding levels and distribution formulas as the industry
moves through healthcare reform is a credit concern.
HISTORICALLY LIGHT PROFITABILITY
Operating profitability remains light for the rating category, despite
the increased supplemental funding in fiscal 2013 with operating margin
equal to negative 0.6% and operating EBITDA margin equal to 7.1%.
Profitability was challenged in fiscal 2013 by decreased inpatient
volumes, state budget cuts and federal sequestration cuts.
Profitability is expected to improve in fiscal 2014 due to the benefits
of expanded coverage under the PPACA and operational improvement
initiatives. Initiatives include productivity improvement (including a
new flexible staffing model and a 261 FTE reduction since January 2013),
continued expansion of Denver Health's LEAN operations program and the
opening of a short stay unit in summer 2013 to increase efficiencies
associated with observation stays. Management is budgeting for an 8.6%
operating EBITDA margin in fiscal 2014. Operating EBITDA margin equaled
10.3% through the two month interim period ending February 28, 2014.
LIGHT DEBT BURDEN
Despite the light profitability, Denver Health's light debt burden
allows for solid pro forma MADS coverage. MADS coverage by EBITDA and
operating EBITDA equaled 3.2x and 2.6x, respectively, in fiscal 2013 and
is consistent with Fitch's 'BBB' category medians of 3.2x and 2.7x.
Total debt outstanding is expected to increase by approximately $90
million to $299.6 million (including capital leases and notes payable).
Notes payable increased by approximately $18.5 million in fiscal 2013
due to a non-cash charge incurred from the restructuring of an IT system
contract. The charge will be paid out in annual installments through
2020, but is not considered debt under the master trust indenture.
Denver Health's pro forma debt mix equals 79% fixed rate and 21%
underlying variable rate. The variable rate bonds are swapped to fixed
rate. The swap contains no collateral posting requirements as long as
Denver Health's rating is 'BBB-' or above.
Unrestricted liquidity decreased 10% to $155 million at December 31,
2013 from $172 million at December 31, 2012. The decrease was primarily
due to increased capital expenditures, increased days in accounts
receivable, early retirement incentive payments and an early bond
principal payment. Liquidity metrics are light for the rating category
with 75.8 days cash on hand, 7.3x pro forma cushion ratio and 43.2% cash
to pro forma debt. Management expects liquidity to increase in fiscal
Denver Health covenants to provide annual disclosure within 150 days of
fiscal year end and quarterly disclosure within 45 days of the end of
the first three fiscal quarters and within 60 days of the end of the
fourth fiscal quarter. Disclosure is provided through the Municipal
Securities Rulemaking Board's EMMA system. Denver Health's disclosure
practices are excellent, consisting of a detailed management discussion
and analysis, balance sheet and income statement, utilization statistics
and other supplemental material.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20,
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria - Effective July
23, 2012 to May 20, 2013
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