Fitch Ratings affirms its 'AA-' rating on approximately $148.1 million of St. Joseph County Hospital Authority, IN, health system revenue bonds issued on behalf of Memorial Health System (Memorial). In addition, Fitch affirms the 'AA-' ratings on approximately $79 million series 2007 that are currently held by Memorial.
The Rating Outlook is Stable.
The 'AA-' rating reflects Memorial's strong operating performance, leading market position and improved liquidity and debt related indicators. Memorial's operating profitability in fiscal 2008 and through the seven-month interim period remained strong in spite of the more difficult operating environment. In fiscal 2008, Memorial's posted operating and operating EBITDA margins of 4.3% and 11.8%, respectively which includes the positive impact accelerated Disproportionate Share (DSH) payments by the State of Indiana. In fiscal 2009, management has implemented several revenue enhancement / cost containment measures to offset expected reductions in DSH. Through the seven-month interim period, Memorial's operating profitability has remained consistent with prior year's performance with operating and operating EBITDA margins of 4.4% and 11.4%, respectively, which do not include any DSH payment or accrual. Memorial's historical operating performance reflects the hospital's leading market share of 44.9% in St. Joseph County, which has allowed the hospital to maintain favorable contracts with its managed care payors. Memorial's market position is enhanced as the exclusive provider of several tertiary service lines, its solid clinical reputation, the growth in its employed medical staff and on-going outreach programs.
Many of Memorial's liquidity and capital-related ratios have improved significantly since fiscal year-end 2008 (Dec. 31) reflecting the deleveraging of the balance sheet through the acquisition of its series 2007 bonds and the return of collateral related to its swap portfolio. At July 31, 2009 Memorial's unrestricted cash and investments totaled $214.3 million as compared to $166.4 million at Dec. 31, 2008 and $237.9 million at July 31, 2008. Thus, days cash on hand at July 31, 2009 equals 212 compared to 162 and 238 at Dec. 31, 2008 and July 31, 2008, respectively. However, due largely to the acquisition of its series 2007, Memorial's total long-term debt at July 31, 2009 has dropped to $144.2 million from $232.9 million at July 31, 2008. As result, Memorial's cushion and cash to debt ratios have improved (compared to the year earlier period) to 22.3 times (x) and 149%, respectively, compared to 18.4x and 102% in the year earlier date. Similarly, debt measures have improved with MADS (maximum annual debt service) as a percent of revenue declining to 2.1% from 2.9% at July 31, 2008 and debt to capitalization improving to a light 26.7% from 34.5%. Debt service coverage through the interim period is a robust 8.8x.
Fitch's credit concerns include the competitive service area and Memorial's sizable swap portfolio. The service area remains competitive. Memorial's primary competitor, St. Joseph Regional Medical Center expects to open its new replacement hospital in the North Mishawaka area (approximately seven miles from Memorial's facility) in December 2009. Fitch believes a short-term impact may be felt due to the 'halo effect' typically experienced with a new facility.
Memorial has utilized swaps to hedge against a rise in short-term interest primarily through 'basis' swaps. At July 31, 2009 the total notional value of Memorial's swap portfolio was approximately $742.1 million of which $574 million were basis swaps and $120 million were 'yield curve' swaps. The mark-to-market value of Memorial's swap portfolio at July 31, 2009 was approximately negative $35 million. Management has taken steps to reduce the risk exposure of the swap portfolio through the diversification of its counter-parties and an increase of its collateral posting threshold to $55 million from $30 million. Memorial expects to terminate certain of its swaps to as the value approach break-even.
The Rating Outlook is Stable. Operation efficiency initiatives have preserved robust operating profitability in spite of a more difficult operating environment. Moreover, the board has postponed indefinitely the development of a Porter County hospital given current economic conditions.
Memorial operates a 385-staffed bed tertiary care medical center in South Bend, IN, and other health care-related entities. Total operating revenue in 2008 was $446 million. Memorial has covenanted to provide annual and quarterly disclosure to bondholders.
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Fitch Ratings
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Michael
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or
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Email: cindy.stoller@fitchratings.com
