|[June 19, 2014]
Fitch Affirms Summa Health System's (OH) Revs at 'BBB+'; Outlook Revised to Positive
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'BBB+' rating on the following bonds
issued on behalf of Summa Health System (Summa):
--$44.8 million series 2004A revenue bonds, Akron, Bath & Copley Joint
Township Hospital District (OH);
--$183.6 million series 2010 revenue bonds, State of Ohio;
The Rating Outlook is revised to Positive from Stable.
Bond payments are secured by a pledge of the accounts and general
intangibles of the obligated group.
KEY RATING DRIVERS
MATERIAL INCREASE IN LIQUIDITY: The Outlook revision to Positive
reflects the material increase in Summa's unrestricted liquidity
resulting from HealthSpan Partner's (HSP), a secular auxiliary
organization of Catholic Health Partners (CHP rated 'AA-' by Fitch),
$250 million minority investment in Summa. Unrestricted cash and
investments increased 61% since April 30, 2013 to $747.9 million at
April 30, 2014.
COMPRESSED PROFITABILITY: Operating EBITDA margin compressed to 6.7% and
6.6% in fiscal years 2012 and 2013, respectively, from 7.7% in fiscal
2011. Operating EBITDA margin further decreased to 4.1% in the four
month interim period ending April 30, 2014 (the interim period).
LIGHT DEBT BURDEN: Summa's debt burden remains light with MADS equal to
2.2% of operating revenues in fiscal 2013. The light debt burden allowed
for solid MADS coverage by operating EBITDA of 3.0x in fiscal 2013
despite the compressed profitability. However, the weakened interim
profitability decreased MADS coverage by operating EBITDA to a light
STRONG MARKET POSITION: Summa's leading market share and broad operating
platform, including a large employed physician group and a health plan
with capitation experience, provides credit stability and should provide
a strong base for implementation of health care reform initiatives.
IMPROVED CASH FLOW: Fitch expects operating cash flows to improve from
levels achieved in the interim period. Cash flow generation that
supports MADS coverage more consistent with Fitch's 'A' category medians
will likely result in upward rating movement, particularly given Summa's
strengthened liquidity metrics.
Summa is an integrated delivery system headquartered in Akron, OH.
Operations include six hospitals (three of which are wholly owned),
outpatient facilities, a physician multi-specialty group with
approximately 300 employed physicians and a health plan with over
240,000 members (SummaCare). Total consolidated revenues equaled $1.4
billion in fiscal 2013.
HSP, a secular auxiliary organization of CHP, purchased a 30% minority
stake in Summa for $250 million in September 2013. Simultaneous with the
closing of the minority investment, the number of members serving on
Summa's board of directors was reduced from 26 to 16, including five
members appointed by HSP. Fitch views the minority investment favorably
as the partnership should provide for near-term and long-term benefits
amongst the two system's hospital operations and health plans.
MATERIAL INCREASE IN LIQUIDITY:
Unrestricted liquidity increased significantly due to the $250 million
miority investment. Unrestricted cash and investments increased 61%
since April 30, 2013 to $747.9 million at April 30, 2014. Liquidity
metrics are very strong with 199.5 days cash on hand, 23.9x cushion
ratio and 174.2% cash to debt, exceeding both Fitch's 'BBB' and 'A'
Fitch does not expect liquidity metrics to be materially impacted by
capital plans in the near term. However, management is currently
reviewing several capital projects which Summa may pursue over the next
two to five years. Additionally, Summa will begin installation of a new
clinical IT system in late fiscal 2014 which is expected to be funded
through operating cash flows.
Operating profitability continued at lower levels in fiscal 2013 with
operating and operating EBITDA margins equal to 1.6% and 6.6%,
respectively. Operating and operating EBITDA margins further compressed
to negative 1.1% and positive 4.1%, respectively, in the four month
interim period. The compressed profitability was due to low inpatient
admissions, increased observation stays and a high medical loss ratio at
SummaCare. Management had budgeted for a 2% operating margin in fiscal
2014 and currently expects to achieve between 1.5% and 2.0%.
Summa is implementing a performance improvement plan which initially
targeted $100 million in annual operating improvement. The plan was
subsequently increased to $150 million per year due to the expected
benefits of the HSP transaction. Major initiatives include revenue
cycle, length of stay reduction, supply chain and labor productivity
improvements. Through 2013, management has achieved $75 million in
annual savings and expects to achieve the additional $75 million by
fiscal 2016. Additionally, SummaCare reviewed its claims experience and
adjusted pricing and case management practices to decrease its medical
LIGHT DEBT BURDEN
The system's debt burden remains light with MADS equal to 2.2% of
operating revenue. Despite the compressed operating profitability in
fiscal 2013, MADS coverage by operating EBITDA of 3.0x was solid
relative to Fitch's 'BBB' category median of 2.7x. However, MADS
coverage by operating EBITDA decreased to a light 1.8x in the interim
period. Several capital projects are currently under consideration which
may involve the issuance of additional debt; however, no additional debt
is expected within the next two years. Fitch will assess the impact of
any additional debt as plans become more certain.
Summa's leading market share and broad operating footprint lend
stability to its credit profile. The broad operations, including a
highly aligned employed physician group and a health insurance plan,
should position Summa well for implementation of healthcare reform and
population health management. Including joint ventures and affiliates,
Summa maintains a strong leading primary service area (PSA) market share
of approximately 56%. PSA market share declined slightly from 58% in
Summa covenants to provide annual disclosure within 150 days of fiscal
year end and quarterly disclosure within 45 days of the end of each
fiscal quarter. Disclosure is provided through the Municipal Securities
Rulemaking Board's EMMA System.
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:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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