|[July 30, 2014]
Fitch Affirms OSF Healthcare System's (IL) Outstanding Revs at 'A'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'A' rating on the following bonds issued
by the Illinois Finance Authority on behalf of OSF Healthcare System
--$114.3 million revenue bonds, series 2007A;
--$70 million variable rate demand revenue bonds, series 2007E and bank
--$55 million variable rate demand revenue bonds, series 2007F and bank
--$83.2 million revenue refunding bonds, series 2009A;
--$50 million variable rate demand revenue bonds, series 2009B;
--$50 million variable rate demand revenue bonds, series 2009C;
--$25 million variable rate demand revenue bonds, series 2009D;
--$156.9 million revenue refunding bonds, series 2010A;
--$176.3 million revenue bonds, series 2012A.
The Rating Outlook is Stable.
A security interest in the unrestricted receivables of the Obligated
KEY RATING DRIVERS
IMPROVING LIQUIDITY: OSF's balance sheet metrics have improved
year-over-year for the last five years and balance sheet metrics are now
in line with the 'A' category medians. Liquidity growth has been driven
by moderated capital spending, cash from operations and good investment
REGIONAL GROWTH STRATEGY: OSF continues to undertake strategic growth
initiatives intended to further develop and strengthen its regional
relationships and footprint, including the recent acquisition of Kewanee
Hospital, its partnership with University of Illinois for its Simulation
Center, which opened in the summer of 2013, the anticipated partnerships
with St. Anthony's Health System in Alton, IL and Mendota Community
Hospital in Mendota, IL and the expansion of its ambulatory care network
and affiliation arrangements with various community hospitals.
INTEGRATED SYSTEM: OSF's significant physician employment (approximately
655 physicians employed and 290 advanced practitioners) combined with a
system-wide approach to leadership emphasizing physician input and
transformation of care and operating model with a focus on innovation,
has led to physician alignment and a more integrated approach to care.
INCONSISTENT OPERATING PERFORMANCE: After an improved fiscal 2012,
operating performance was light in fiscal 2013 reflecting significant
spending on the transformation of its care model. Operating margin in
fiscal 2013 was negative 0.3% and operating EBITDA was 6.1%, down from
2.7% and 9.1%, respectively, in fiscal 2012. However, management has
recognized the need for improved profitability and has identified over
$50 million of savings mainly in the areas of supply and productivity in
fiscal 2014. Through the nine month interim ended June 30, 2014 the
focus on cost management has resulted in improved operating performance
to 3.2% and operating EBITDA of 9.9%.
MANAGEABLE DEBT BURDEN: OSF's coverage of maximum annual debt service
(MADS) at 2.7x at 2013 fiscal year-end was adequate against the 'A'
category median of 3.8x but improved to a solid 4.1x through June 30,
2014 (nine-month interim). Fitch expects coverage to remain closer to
the 'A' category median. MADS as a percent of revenue was a moderate
2.9% at the nine-month interim period and the system has a relatively
conservative debt structure with 65% of debt fixed rate.
NEED TO MAINTAIN PROFITABILITY: Fitch expects OSF to maintain solid
operating profitability, which should provide sufficient cash flow to
finance its near-term capital needs and support balance sheet levels.
Headquartered in Peoria, Illinois, OSF Healthcare System owns and
operates a combined nine health care facilities (eight in Illinois, one
in Michigan) and has close to 13,800 employees. OSF's flagship hospital,
St. Francis Medical Center, is a 609 licensed-acute care bed, Level I
trauma center that serves as a regional referral center for high-acuity,
complex clinical services. Total revenue in fiscal 2013 was $1.999
The system continues to extend its reach throughout the region via
on-going physician employment and alignment, expansion of its ambulatory
care network, and affiliation arrangements with various community
hospitals in a hub-and-spoke model. In 2012, OSF added Ottawa Regional
Hospital and Medical Center and Ottawa Regional Hospital Foundation to
the obligated group and in 2014 Kewanee Hospital was added to the
corporation through a statutory merger into the OSF healthcare system.
Continuing to pursue this regional strategy, OSF currently has letters
of intet signed with St. Anthony's Health System and Mendota Community
OSF is focused on delivery of care in the most appropriate setting,
providing complex care and developing its approach to population health
management. These initiatives include patient centered medical homes,
leveraging its technology to manage high risk populations, partnering
with skilled nursing facilities and providing tele-health. Fitch views
these initiatives positively as they will better position OSF for
healthcare reform and the changing reimbursement environment. In 2013
OSF opened a Simulation Center in partnership with University of
Illinois (both medical and engineering schools), which will be used for
clinical training and research and development.
The 'A' rating reflects OSF's improved liquidity, regional growth
strategy, good market share position in a competitive service area,
coupled with adequate operating and debt metrics.
Historically, OSF's liquidity position has been light for the rating
category. However, cash has grown almost 30% since fiscal 2012 and at
June 30, 2014 (nine-month interim). Unrestricted cash and investments
totaled $1.1 billion, equating to 212.7 days cash on hand, 18.6% cushion
ratio and 120.1%; all in line with the respective 'A' category medians
of 196.3 days, 15.6x and 129.2%. Fitch believes liquidity should
continue to demonstrate modest improvement over the near term as capital
needs are currently budgeted at about 1.1x depreciation expense.
INCONSISTENT OPERATING PROFITABILITY
Operating profitability has fluctuated somewhat over the last few years
as OSF has been investing in IT, physician acquisitions, and the
transition and advancement of its care model. Operating income was
significantly under budget in 2013 and was caused by services taken
off-line for upgrades, the continuation of Epic installation and volume
declines; management is focusing on cost reductions and profitability
rebounded through the nine month interim period ended June 30, 2014.
Operating margin was 3.2% and operating EBITDA margin was 9.9% at June
30, 2014, up from negative 0.3% and 6.1%, respectively, in fiscal 2013.
Management has identified over $50 million in cost reductions in
performance improvement initiatives including supply savings, increased
productivity, and other clinical and IT cost savings. Fitch expects OSF
to meet its 2014 budgeted operating and operating EBITDA margins of 1.7%
and 8.4%, respectively. Fitch notes that OSF receives approximately $40
million-$50 million a year in supplemental disproportionate share and
upper payment limit funding and any reductions in funding would pressure
GOOD MARKET SHARE POSITION
The service area of St. Francis Medical Center (OSF's largest facility)
has consolidated since Fitch's last review. UnityPoint Health (rated
'AA-'; Outlook Stable) acquired Methodist Healthcare and Proctor
Hospital, two of OSF's primary competitors in its Peoria Service area.
Despite this change to the market, OSF has maintained its strong
position in its primary service area for St. Francis Medical Center,
holding 47.6% of the market share in the second quarter 2014, up from
46.5% in fiscal 2013 and ahead of its closest competitor, UnityPoint
Health- Methodist, at 26.1%. Inpatient market share at St. Joseph
Medical Center in Bloomington/Pontiac is down slightly in the second
quarter 2014 at 31.2% verses Advocate BroMenn's share at 40.3%, likely
because of a focus on moving care to an outpatient setting. Market share
in Rockford at St. Anthony's Medical Center was also down slightly to
28.1% in the second quarter 2014 vs. 28.3% in fiscal 2013.
MANAGEABLE DEBT BURDEN
OSF has about $820.2 million in debt outstanding, of which 65% is fixed
rate and 35% is variable rate. OSF's debt burden remains manageable for
the category with MADS of $59.7 million making up about 3% of total
fiscal 2013 revenue compared to the 'A' category median of 3.1%. MADS
coverage by EBITDA was adequate at 2.7x times in fiscal 2013 and
improved to 4.1x for the nine months ended June 30, 2014.
OSF has a $30 million line of credit with PNC (News - Alert) bank, which is renewed
annually. In March, 2014, OSF drew $29.7 million in conjunction with the
purchase of Kewanee Hospital. The draw will be repaid prior to Sept. 30,
2014 with the proceeds of a private placement with PNC. The $30 million
is included in long-term debt at June 30, 2014 but the current MADS does
not include the contemplated $30 million direct placement with PNC.
Fitch does not believe this financing will materially impact OSF's debt
metrics. OSF currently has four fixed payor swaps insured by Assured
Guaranty and one basis swap outstanding for a total notional amount of
$365.7 million. The uninsured swap has a $20 million collateral
threshold and no collateral is currently posted.
OSF covenants to provide quarterly financial information within 60 days
of quarter-end (for the first three quarters) and annual financial
information within 150 days of fiscal year-end to bondholders. Quarterly
interim financials include consolidated and consolidating balance sheet
and income statements and are available through the MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Rating
Criteria, this action was additionally informed by information from
Barclays, the underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 16, 2014;
--'Non-Profit Hospitals and Health Systems Rating Criteria', May 30,
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Not-for-Profit Hospitals and Health Systems Rating Criteria Outside the
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