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Fitch Affirms Palos Community Hospital's (IL) Revs at 'AA-'; Outlook Revised to StableFitch Ratings has affirmed the 'AA-' rating on the following revenue bonds issued by the Illinois Finance Authority on behalf of Palos Community Hospital (PCH): --$147,525,000, series 2010C --$120,145,000, series 2007A The Rating Outlook is revised to Stable from Negative. SECURITY Pledge of unrestricted receivables of the obligated group. KEY RATING DRIVERS MARGINAL IMPROVEMENT IN PROFITABILITY: PCH (consolidated entity including St. George Corporation and subsidiaries) managed to improve its operating EBITDA margin from a very weak 2.8% in 2013 to 10.6% in 2014 and 9.6% in unaudited 2015 (Dec. 31, fiscal year-end), which was necessary to maintain the rating. Though still well below Fitch's 'AA' category rating, further incremental improvement is expected in 2016 given PCH's ongoing efficiency efforts, and expected clinical growth and efficiencies from its new partnership with Loyola University Medical Center (LUMC; part of Trinity Health, rated 'AA/Negative Outlook). PERMANENT LEADERSHIP IN PLACE: After a year of significant turnover at the board and management levels in 2013, Fitch notes that permanent appointments in both senior management and the board of directors are expected to support strategic stability going forward. Further, large campus renovation projects have largely been completed, allowing PCH to refocus on core operating initiatives and future strategy. STRONG BALANCE SHEET: The 'AA-' rating continues to be supported by PCH's significant balance sheet strength, with 889.8 days of cash on hand (DCOH), 36.1x cushion ratio and 222.7% cash to debt at unaudited year-end 2015. PCH's robust liquidity currently provides some cushion against historically thin operating performance and an elevated debt burden. A conservative debt structure and no pension liability alleviates additional risk. ELEVATED DEBT BURDEN: PCH's debt burden remains sizeable for its rating and revenue size, with maximum annual debt service (MADS) comprising 6.3% of total revenues and a light 3.9x MADS coverage by EBITDA for unaudited 2015. Both are unfavorable to Fitch's 'AA' category medians of 2.4% and 5.7x, though have improved significantly since 2011 from 1.6x coverage and 7.1%, respectively. PCH's leverage is expected to further moderate over time as no additional debt is planned. STEADIED MARKET POSITION: PCH's market share and clinical activity have rebounded since Silver Cross' (BBB+/Stable) competing acute care hospital opened in 2011. PCH garnered 22% market share in 2015, up from 21% in 2012, and adjusted admissions have grown consistently since 2013. Further, the area has strong demographic characteristics and favorable payor mix characteristics. RATING SENSITIVITIES SUSTAINED OPERATING IMPROVEMENTS: Maintaining the 'AA-' rating will require Palos Community Hospital (PCH) to continue to generate incremental improvements in its operating EBITDA, further reduce its leverage and preserve its liquidity. Material deterioration in operating profitability below historical lows would result in negative rating pressure. CREDIT PROFILE Located in Palos Heights, Illinois (approximately 25 miles southwest of Chicago), PCH currently operates 352 of its 425 licensed inpatient beds. The organization reported $371 million in total operating revenues through unaudited fiscal-year-end Dec. 31, 2015, which Fitch adjusts to exclude $55.1 million in investment income (included below the line in excess income). Fitch uses consolidated financial data in its analsis. The obligated group includes Palos Community Hospital and St. George Corporation, which represented 99% of total assets and 97% of total revenues in unaudited 2015. Non-obligated entities include Palos Medical Group (PMG (News - Alert)), St. George Wellness Center and the joint ventures. IMPROVING PROFITABILITY Under now stabilized and permanent leadership, PCH produced two fiscal years of better profitability via some recovery in market share, increased clinical volumes, and expense controls. Further, PCH's new relationship with LUMC is expected to support programmatic service line growth as well as foster a stronger clinically integrated network going forward. Still, PCH's operating margins remain thin for the rating category and debt burden, particularly core operating cash flow with a 9.6% operating EBIDA and 1.5x coverage of MADS at unaudited fiscal 2015. As such, only marginal room for negative operating volatility exists at the 'AA-' rating level. PCH expects to maintain its operating EBITDA near current levels for 2016, which should be feasible. Further, PCH's robust liquidity and consistent investment income levels are expected to continue providing financial cushion against somewhat thin operating margins going forward. PCH's investment pool is moderately allocated (over 50% in cash and fixed income) and the organization has no pension exposure. DEBT PROFILE Total outstanding debt at Dec. 31, 2015 was $380 million, which was 74% fixed rate. The variable rate debt is all privately placed with various banks, and committed through 2025 at the earliest, limiting renewal risk over the near term. MADS is measured at $23.4 million, and is largely level through 2040. Per its obligated group indenture calculations, PCH generated 5.55x debt service coverage and had 960.3 DCOH at Dec. 31, 2015. DISCLOSURE PCH covenants to provide annual financial information within 150 days of each fiscal year end and quarterly unaudited financial statements within 45 days of the first three fiscal quarter-ends and within 60 days of the close of the fiscal year end for the fourth quarter. Disclosure to Fitch has been timely and thorough. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Revenue-Supported Rating Criteria (pub. 16 Jun 2014) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001584 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001584 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 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. View source version on businesswire.com: http://www.businesswire.com/news/home/20160328005547/en/ |
