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Fitch Upgrades Little Company of Mary Hospital (IL) Revs to 'A+'; Outlook Stable
[September 18, 2014]

Fitch Upgrades Little Company of Mary Hospital (IL) Revs to 'A+'; Outlook Stable


CHICAGO --(Business Wire)--

Fitch Ratings has upgraded the rating on the following Illinois Finance Authority bonds issued on behalf of Little Company of Mary Hospital (LCMH) to 'A+' from 'A':

--$38.7 million fixed-rate revenue bonds, series 2010;

--$112.7 million variable-rate demand revenue bonds, series 2008A and 2008B (underlying rating).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues of the obligated group.

KEY RATING DRIVERS

REBOUND IN PROFITABILITY: The rating upgrade to 'A+' reflects LCMH's sustained improvement in operating performance in fiscal 2014 (June 30 year-end), after rebounding ahead of expectations in fiscal 2013. LCMH generated a high 7.5% operating EBITDA and 27.2% EBITDA margin in unaudited fiscal 2014, well improved from the low 3.6% operating EBITDA and 10.5% EBITDA margin in fiscal 2012. The improvement was supported by successful expense management despite an uptick in clinical volume and revenue.

ROBUST LIQUIDITY: Fitch considers LCMH's very healthy liquidity position to be a key credit factor, as it provides for significant flexibility against any short-term fluctuations in operating or investment performance. At April 30, 2014 LCMH had over 1,083 days of cash on hand, and 310% cash-to-debt (or 508% cash-to-demand debt). Fitch expects LCMH to sustain its balance sheet strength as its capital needs going forward are modest.

CAPITAL PROJECTS NEAR COMPLETION: LCMH is nearing final completion of its $174 million four-year campus project, including the connector between the new and existing bed tower. LCMH successfully funded over $100 million in equity for this project without affecting its liquidity, and going forward, capital needs are expected to moderate. LCMH expects to spend near $19 million on capital in 2015, or 150% of depreciation expense.

MANAGEABLE DEBT LEVEL: Total debt of $185 million equated to 2.6x EBITDA and 23.6% of capitalization for fiscal 2014, both favorable to Fitch's 'A' category medians of 3.6x and 36.3%, respectively. Further, management reports its (frozen) pension plan was funded at 119% at unaudited fiscal year end.

SERVICE AREA CHALLENGES: LCMH operates in a competitive service area of southwest metropolitan Chicago, which includes several formidable competitors. Additionally, its payor mix has shifted away from commercial to government pay since 2011. Still, LCMH's inpatient market share has remained steady at 23% in 2013 and its new comprehensive women's center and more contemporary clinical space have helped stabilize clinical volumes in a depressed inpatient-volume environment.

RATING SENSITIVITIES

DEBT PLANS: The series 2010 debt is callable in August 2015, at which point LCMH may refinance as well as issue between $20 million and $50 million in additional debt. While these plans are preliminary and not factored into the current rating action, Fitch believes LCMH can absorb the additional debt at the 'A+' rating level. Fitch expects to review LCMH's capital and debt plans within the next 12-18 months and take rating action as necessary.

CREDIT PROFILE

Little Company of Mary Hospital (LCMH) is located in the village of Evergreen Park on the southwest side of metropolitan Chicago. LCMH is licensed or 477 beds (operating 298) and generated $206.9 million in total revenue through the unaudited fiscal year ended June 30, 2014. Fitch adjusts this to 204.6 million, excluding investment gains from operating revenue. In addition, Fitch does not include unrealized gains/losses in its Excess or EBITDA calculations, which deviates from the audit presentation.



IMPROVED OPERATING PERFORMANCE

The rating upgrade to 'A+' reflects LCMH's sustained improvement in its operating performance since 2012. Results have been driven by successful execution of its campus project and associated clinical volume growth, as well as rigorous expense management and efficiency efforts. After declining from fiscal 2011-2013, inpatient clinical volumes improved in 2014. As a result, total operating revenues grew 4%, against a modest 1% increase in operating expenses. While that trajectory is not expected to persist going forward, Fitch anticipates LCMH will continue to produce Excess and EBITDA margins to produce debt service coverage at a level consistent with the 'A+' rating.


BALANCE SHEET STRENGTH

Fitch believes LCMH's ample liquid resources currently provide significant cushion against moderate operating or environmental volatility. Further, despite the significant equity contribution to its campus project, LCMH retained its balance sheet strength. At June 30, 2014, unrestricted liquidity equaled $572.9 million, or 1,083.3 days of cash on hand (DCOH), a 45.3x cushion ratio, and 310.1% cash-to-debt. Concerns regarding LCMH's reliance on investment returns for its profitability are mitigated somewhat by the consistent level of interest and dividends (averaging over $20 million annually since fiscal 2009). LCMH's investment mix includes 34% cash and fixed income, and its investment pool is highly liquid.

As of June 30, 2014, LCMH had a total $184.9 million in long-term debt, of which $112.6 million consists of variable-rate demand bonds supported by irrevocable direct-pay letters of credit (LOC) from JP Morgan (News - Alert). The LOCs were extended through Nov. 1, 2016. Fitch believes that LCMH has sufficient liquidity to meet unremarketed puts, with 508% cash-to-putable debt at June 30, 2014. Total debt also includes a $33.4 million taxable bridge loan, thru Nov. 30, 2015 which was used to repurchase $33.3 million of series 2010 bonds. Maximum annual debt service (MADS) is measured at $12.7 million, which is inflated due to LCMH's variable-rate debt profile, as its actual annual debt service requirements were near $8.1 million in fiscal 2014.

FUTURE CAPITAL PLANS

LCMH will complete the majority of its remaining campus transformation plan this calendar year, including a new bed tower, comprehensive women's center, and ambulatory care center. For fiscal 2015, approximately $19 million in capital needs will be used in part to finish campus projects including renovations in patient rooms and surgery. LCMH is also contemplating borrowing additional debt within the next 12-18 months as part of the larger refinancing, though these plans are not yet finalized. While Fitch believes LCMH can absorb additional debt at the 'A+' rating level, it will review any plans as they are finalized and take any rating action as necessary.

CONTINUING DISCLOSURE

LCMH provides audited financial statements within 150 days of each fiscal year end and quarterly financial disclosure within 60 days of the first three quarter ends. Disclosure to Fitch has been timely with good access to management.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014)

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=876095

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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