Fitch Ratings has affirmed the underlying rating of ''A-'' on approximately $291.75 million of health care facilities variable-rate demand revenue bonds, series 2008A-C and $106.3 million of health care facilities bonds, series 2008D-E issued on behalf of Essentia Health (Essentia) by the following issuers: $124,800,000 Cass County, North Dakota; $12,975,000 Wisconsin Health and Educational Facilities Authority; $260,310,000 Minnesota Agricultural and Economic Development Board, all in conjunction with Essentia''s planned conversion of approximately $197 million of variable-rate demand debt to fixed-rate debt.
The system also plans to terminate two of its three outstanding standby bond purchase agreements and a portion of its interest rate swaps. The timing of the conversion is being determined and Fitch will be asked to rate the fixed-rate bonds prior to their issuance. The Rating Outlook is Stable.
The ''A-'' rating reflects Essentia''s position as the dominant market provider in the upper Midwest region with the leading market position in all of its markets and consistent though slim profitability trends with an average operating margin of 1.5% over the past five years.
Liquidity ratios are weak compared to ''A''-category medians and have been further stressed by market losses, but absolute cash and investments have actually increased over the past three years. Debt ratios are also slightly higher than the median for the category but this concern is mitigated by a light debt burden and good debt service coverage.
With the 2008 merger with Innovis Health, which included the Dakota Clinic and Innovis Hospital, Essentia has expanded and enhanced its physician alignment strategy and extended its market with the addition of more than 150 physicians. Essentia now has a very large physician base of over 700 physicians at its 62 clinics and 15 hospitals.
Both inpatient and outpatient statistics have increased, primarily through the acquisition of Innovis Hospital. Beds in service for the obligated group have increased from 912 to 934 while admissions have increased 7.7% in fiscal 2009. Average length of stay declined slightly. Outpatient surgeries have increased as have emergency room visits.
Liquidity ratios which have been below category medians declined further in 2008 due primarily to the increased expense base associated with the merger but stabilized in 2009. In fiscal 2007, Essentia had 121.2 days cash on hand, a 14 times (x) cushion ratio and a 75% cash to debt ratio. In fiscal 2009, days cash on hand declined to 98.8 days, the cushion ratio declined marginally to 13.3x and the cash to debt ratio was 73.5%. Other than the cushion ratio, Essentia''s liquidity ratios fall below Fitch''s medians for the ''A'' category of 171.2 days, 13.3x cushion ratio, and 113.4% cash to debt. Operating margins have been consistently slim; operating income ranges from 1.4% to 1.6% over the past five years, well below the category median of 2.7%. However, excess margins have historically met or exceeded medians, except for 2009, due to investment losses. Offsetting weak liquidity and slim cash is a low debt burden ratio as a percentage of revenues, at less than 2% of revenues, and good debt service coverage. In fiscal 2009, Essentia earned $20.3 million from operations (1.4% operating margin) and lost $7.8 million (negative 0.6%) on the bottom line. Medians for the category are 2.7% and 3.9%, respectively. Maximum annual debt service (MADS) by EBITDA coverage was 2.8x and debt as a percentage of revenues was 1.8%, compared to ''A'' category medians of 3.5x and 3.1%, respectively.
The Stable Rating Outlook is based on the continued development of a fully integrated, physician-driven, business model. The system''s physician integration strategy is its core strategic component and important to Essentia''s long-term success. Initial performance is encouraging as both utilization trends and operating performance have improved from prior years. Positive rating pressure is contingent upon the strengthening of the system''s cash reserves to support future capital needs, particularly at Innovis, improved liquidity to debt ratios, and the continued evolution of the system''s debt profile to reduce its risk profile.
Essentia is an integrated health care system with acute hospitals and physician clinics spread throughout northern Minnesota, eastern North Dakota, and northwest Wisconsin. Its revenue base is largely concentrated in the Duluth, MN region where Essentia owns and operates its flagship St. Mary''s Medical Center (358-staffed beds), which is adjoined to the SMDC Medical Center (128-staffed beds) and Nat G. Polinsky Memorial Rehabilitation; Duluth Clinic, a 450 physician multi-specialty clinic; and Innovis Health, which consists of a 160-member multi-specialty physician clinic and an 86-bed acute care hospital located in Fargo, ND. Essentia''s revenue in fiscal 2009 was approximately $1.4 billion. Essentia covenants to provide quarterly unaudited consolidated financial statements within 60 days of quarter end and annual audited financial statements and operating data with 120 days to national recognized municipal securities information repository (NRMSIRs).
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