|[June 27, 2014]
Fitch Rates Adventist Health System Sunbelt's (FL) 2014E Revs 'AA'
NEW YORK --(Business Wire)--
Fitch Ratings has assigned its 'AA' rating to the approximately $75
million series 2014E revenue bonds issued by Colorado Health Facilities
Authority on behalf of Adventist Health System Sunbelt Obligated Group,
In addition, Fitch affirms the 'AA' long-term rating on AHS's
outstanding debt rated by Fitch and affirms AHS's short-term rating
based on self-liquidity at 'F1+'.
The Rating Outlook is Stable.
The series 2014E bonds are expected to be issued as multimodal bonds,
initially in fixed rate mode, and proceeds will be used to fund capital
improvements. The series 2014E bonds have a 2035 final maturity. A debt
service reserve fund will not be funded in connection with the series
2014E bonds. AHS also plans to issue $190 million of 2014 series A, B, C
and D direct purchase bank bonds, which Fitch was not asked to rate ($60
million of the series 2014D bank bonds will be used to refund existing
debt). The series 2014E bonds are expected to price the week of July 7,
The bonds are secured by a pledge of the obligated group's (OG) gross
revenues, which accounted for 95% of the consolidated system's revenues
(Fitch analyzes the performance of the consolidated system). AHS sells a
portion of its accounts receivable, currently $409.6 million, which is
not included in the gross revenue pledge and which reduce bondholders'
KEY RATING DRIVERS
STRONG AND CONSISTENT OPERATING RESULTS: AHS has produced strong and
sustained operating profitability margins which consistently exceed the
'AA' medians and are considered a key credit strength. AHS's operating
margin has been better than 5% over the last four years, most recently
6.6% in fiscal 2013 (year-end Dec. 31) while operating EBITDA margin
averaged 14% during the same period. For the first quarter of fiscal
2014 ended March 31, 2014 (the interim period) operating and operating
EBITDA margins continued to be robust at 6.4% and 13.7%, respectively.
TEMPORARY INCREASE IN LEVERAGE: After several years of moderating debt
metrics, leverage is somewhat elevated due to $485 million issuance of
private placement debt in 2013 and the proposed 2014 issuance. Coverage
of pro-forma maximum annual debt service (MADS) was 3.7x in fiscal 2013
based on the Master Trust Indenture (MTI (News - Alert)) calculation and MADS
represented 4.4% of total revenues, unfavorable to Fitch's 'AA' category
medians. However, management plans to defease high-coupon debt as it
becomes callable over the next two years with internal funds bringing
leverage back to a more moderate level.
STABLE LIQUIDITY: Historically strong cash flow has enabled the system
to maintain days cash on hand (DCOH) at or above 220 days despite
significant investment in facilities and programs. The system's $4.6
billion of unrestricted cash and investments at March 31, 2014 equated
to 239 DCOH, 13.9x cushion ratio and 123% cash to pro-forma debt.
STRONG AND STABLE MANAGEMENT TEAM: AHS is led by a an excellent,
long-tenured management team with a demonstrated ability to
strategically expand the system's footprint while maintaining strong
operating results with a high degree of predictability.
GEOGRAPHIC DIVERSITY AND REVENUE SIZE: The system has a significant
degree of geographic dispersion and size, operating 43 hospitals (38 in
the OG) in 10 states and generating more than $7 billion in revenue in
2013. The Florida division accounts for a high 64% of the system
operating revenues, but includes three distinct markets, with Orlando
and Tampa being the largest. AHS recently announced the creation of a
joint operating company combining their four Chicago area hospitals with
five hospitals owned by Alexian Brothers.
LIQUID RESOURCES AVAILABLE FOR UNREMARKETED PUTS: The affirmation of the
short-term 'F1+' rating is based on the sufficiency of AHS's liquid
resources and written procedures to fund the purchase price on each
mandatory tender date. Based on Fitch's rating criteria related to
self-liquidity, AHS's eligible cash and investment position covers the
maximum mandatory tender exposure of $337.5 million of bonds supported
by self-liquidity on any given date well in excess of Fitch's 1.25x
threshold for the 'F1+' short-term rating.
MODERATION OF LEVERAGE: Fitch expects AHS to continue to sustain solid
operating results and liquidity while reducing its debt burden over the
next 24-30 months to 2012 levels in order to bring it closer in line
with the rating category.
AHS is a large multistate health care organization, with 37 hospitals,
17 long-term care facilities and various other health related businesses
in 10 states, (Kansas, Colorado, Florida, Georgia, Illinois Kentucky,
North Carolina, Tennessee, Texas and Wisconsin). The AHS Obligated Group
represented 95% f system revenues and 89% of system assets in fiscal
2013. In March of 2013 AHS's six hospitals in Tampa and Tampa General
Hospital (revenue bonds rated 'A-' by Fitch) joined forces to coordinate
their clinical operations. The combined market share of the two systems
is double that of AHS prior to the affiliation. While this is not a
merger, it does strengthen their market presence vis-a-vis the two other
main competitors in the Tampa area - BayHeath (Fitch rated 'AA') and HCA.
On June 20, 2014 Alexian Brothers Health System (ABHS), part of
Ascension Health (rated 'AA+')and Adventist Midwest Health (AMH), part
of AHS, announced the signing of a non-binding letter of intent to form
a joint operating company (JOC). The two systems plan to pursue an
affiliation creating an integrated health care system in the suburban
Chicago area combining the four AHS hospitals (Bolingbrook, Glendale
Oaks, Hinsdale and La Grange) and five ABHS hospitals. The affiliation
will bring together 3,000 physicians and should facilitate efforts
directed at population care management. AHS has faced challenges in this
this market, particularly with the Bolingbrook facility, and the JOC can
create opportunities for cost reductions to offset the utilization
declines in this market.
STRONG AND CONSISTENT OPERATING RESULTS
Fitch views AHS's consistent and highly predictable operations, together
with the geographic diversity and presence in several favorable markets,
as a chief credit positive. Operating margins have ranged between 5.4%
and 7% over the last four fiscal years, most recently 6.6% in 2013 and
operating EBITDA margins averaged 14%, both favorable to Fitch's 'AA'
medians of 4.2% and 13.9%, respectively. These results were accomplished
despite continued investment in facilities and expansion in new and
existing markets. AHS's capital expenditures as percent of depreciation
averaged 153% over the last three years and the investment is reflected
in a low average age of plant of nine years. The strong results have
been accomplished with a dedicated effort at expense management and AHS
is also committed to the application of evidence based medicine for
several high volume conditions, which is expected to generate savings of
TEMPORARY INCREASE IN LEVERAGE
Pro forma series 2014 leverage metrics and debt burden are elevated, but
Fitch expects leverage to moderate over the next 24 to 30 months. In
addition to the $75 million series 2014E bonds, AHS expects to issue
approximately $190 million of series 2014A-D bonds which will be
privately placed with TD Bank. Fitch does not rate the series 2014A-D
bonds. Fitch notes positively the reduced risk of exposure to variable
rate. Proceeds of the series 2014A-E will be used to fund capital
projects of the system. Post issuance, total long term debt will
increase to approximately $3.7 billion. The pro forma debt portfolio
will be composed of 89% of either fixed-rate bonds or direct bank put
bonds that are in fixed rate for the initial periods. Coverage of
pro-forma MADS was 3.4x in 2013, lagging the 'AA' median of 4.2x and pro
forma MADS as a percentage of revenues increased to 4.4%, also
unfavorable to the 'AA' category median of 2.6x. Debt to capitalization,
once extremely high, at 37% is still moderate and within the category
Following the issuance of the series 2014A-E bonds, AHS expects to enter
into a new MTI by 2014 calendar year-end. Highlights of the new MTI
provisions include elimination of the current rate covenant and
introduction of a new additional bonds test.
Prior Fitch press releases had noted AHS's moderating leverage, which
historically had been high and considered the main credit weakness.
Recent debt issuance has returned the system to an elevated debt
position, but Fitch expects that the debt burden will improve over the
next 24-30 months. Starting with 2012 AHS has been implementing a Master
Plan of Finance (MPF) intended to reduce dependence on letter of credit
(LOC's), eliminate swap exposure and pay-off high coupon debt when bonds
become callable. As part of the plan, all swaps were eliminated in 2012
and variable debt backed by LOC's has gradually been replaced by direct
purchase bank bonds with staggered terms. Fitch expects AHS's leverage
and debt burden to moderate to 2012 levels over the next 24 to 30 months.
The $4.6 billion of unrestricted cash and investments at March 31, 2014,
equating to 239 DCOH, 13.9x cushion ratio and 123% cash to pro-forma
long term indebtedness provide a degree of flexibility and liquidity has
been maintained due to robust cash-flow from operations despite the
heavy investment in facilities, which to a large degree had been
accomplished from internal sources. The affirmation of the 'F1+'
short-term rating reflects the adequacy of AHS's liquidity position and
management's procedures to access funds in case of an unremarketed put
of any of its outstanding variable-rate debt supported by
self-liquidity. Fitch's adjusted funds available for an unremarketed put
for AHS at March 31, 2014 are $3.5 billion, which would cover the
maximum tender exposure of $337.5 million of debt supported by
self-liquidity on any given date by 10.3x, significantly exceeding
Fitch's criteria for assigning short-term ratings of 1.25x coverage.
AHS discloses annual financial statements within 150 days and quarterly
financial statements within 60 days through MSRB' EMMA website.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
'Revenue-Supported Rating Criteria', this action was informed by B.C.
Ziegler and Company.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 20,
--'Rating U.S. Public Finance Short-Term Debt', Dec. 9, 2013.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Rating U.S. Public Finance Short-Term Debt
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