Fitch Ratings assigns an 'A' rating to the approximately $166.4 million Illinois Finance Authority revenue bonds, series 2012A, issued on behalf of OSF Healthcare System (OSF). In addition, Fitch affirms the 'A' rating on OSF's outstanding debt.
The Rating Outlook is Stable.
The series 2012A bonds are expected to be fixed rate. Bond proceeds in addition to the release of existing debt service reserve funds will refund all or a portion of the series 2004, 2007G, 2009A and 2009F bonds ($136 million), reimburse for prior capital projects ($15.8 million), refinance outstanding lines of credit ($26.5 million), and pay costs of issuance. Total pro forma bonds will be $833.55 million with 66% underlying fixed rate and 34% underlying variable rate. Pro forma maximum annual debt service (MADS) as calculated by the underwriter is $59.7 million. The series 2012A bonds are expected to price the week of September 10th.
A security interest in the unrestricted receivables of the Obligated Group.
KEY RATING DRIVERS
REGIONAL GROWTH STRATEGY: OSF continues to undertake strategic growth initiatives intended to further develop and strengthen its regional relationships and footprint. These include the recent acquisition of Ottawa Regional Hospital, its partnership with University of Illinois College of Medicine for its Simulation Center, which is scheduled to open in the summer of 2013, and the expansion of its ambulatory care network and affiliation arrangements with various community hospitals, which also further strengthens their market position and footprint. Although the proposed merger between OSF's facility in Rockford with Rockford Health System ended because of the federal government's antitrust ruling, Fitch believes OSF will continue to pursue regional relationships as appropriate.
INTEGRATED SYSTEM: OSF's physician employment base of over 550 physicians (out of 1,210 total active medical staff), combined with a system-wide approach to leadership emphasizing physician input, has led to physician alignment and a more integrated approach to care.
IMPROVED OPERATING PERFORMANCE: After several years of weak profitability mainly driven by its investments in physician practices and information technology (IT), operating profitability has begun to rebound with a 2.1% operating margin through the nine months ended June 30, 2012 compared to 1.1% in fiscal 2011 and negative 1.9% in fiscal 2010. However, profitability is still below the 'A' category median.
MANAGEABLE DEBT BURDEN: Capital ratios, including pro forma MADS coverage of 3.8x and MADS as a percent of revenue of 3.0% for the nine months ended June 30, 2012, compare favorably to Fitch's 'A' category medians.
Since Fitch's last rating review in May 2012, the 'A' rating continues to reflect OSF's continued regional growth strategy, good market share, and strong physician alignment. OSF's flagship hospital, St. Francis Medical Center, is a 616 licensed-acute care bed, Level I trauma center that serves as a regional referral center for high-acuity, complex clinical services. 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.
OSF has benefited from its integrated delivery strategy, which results in a strong referral network through its growing employed physician base, which totaled 565 physicians as of June 2012. OSF is in the final stages of restructuring its leadership and management to include a more system-wide approach to leadership, which will enhance accountability. OSF has maintained its strong market share position for its largest facility in Peoria (OSF St. Francis Medical Center), holding 47.7% of the market share in its primary market share in fiscal 2011, up from 47% in fiscal 2010 and ahead of its closest competitor, Methodist Medical Center, at 27.9%. Market share at its Bloomington/Pontiac facility has increased while market share in the Galesburg/Monmouth and Rockford markets has decreased.
OSF generated $20.6 million of income from operations (1.1% operating margin) in fiscal 2011 after posting operating losses in fiscal 2009 and 2010, which resulted from the corporation's investments in a new clinical IT system, physician acquisitions, and inpatient and ambulatory capital spending.
Operating EBITDA jumped to $156.4 million (8.4% operating EBITDA margin) in 2011 from $86.6 million in fiscal 2010 (5.1% margin) and $103.5 million in fiscal 2009 (6.3% margin). Profitability continued to improve through the nine months ended June 30, 2012 with operating margin of 2.1% and operating EBITDA margin of 9.4%. However, the improvement was aided by a one-time positive net prior year Medicare adjustment of $8.8 million. Without this one-time adjustment, operating margin would have been 1.5%. Fitch expects profitability to continue to improve as further efficiencies are achieved. Fitch notes that OSF receives approximately $30 million-$40 million a year in supplemental disproportionate share and upper payment limit funding and any reductions in funding would pressure profitability.
OSF's liquidity position continues to be light for the rating level. At June 30, 2012, OSF's unrestricted cash and investments totaled approximately $776.4 million, which equated to 163 days cash on hand, 13x cushion ratio and 88.1% cash to debt compared to the respective 'A' category medians of 194.1 days, 15.4x and 133.8%. Days in accounts receivable is very high at 88 days with an increase in accounts receivable of $138.8 million as of June 30, 2012 compared to the prior year. Although a large portion is due to the state of Illinois' deferred Medicaid payments, which accounted for $83 million of the increase, other receivables are up by $55.8 million. Total Medicaid receivables are $126 million at June 30, 2012.
OSF's pro forma debt burden remains manageable with proforma MADS of
$59.7 million making up 3.2% of total fiscal 2011 revenue compared to
the 'A' category median of 2.9%. MADS coverage by EBITDA is adequate at
3.2x times in fiscal 2011 and 3.8x for the nine months ended June 30,
2012. OSF's future capital needs are modest with no large projects
projected in the near term. Total capital spending for fiscal 2012 and
2013 is projected at $125 million and $110 million, respectively.
The Stable Outlook reflects Fitch's belief that profitability and liquidity will continue to improve as OSF benefits from physician, plant and IT investments. Fitch expects that management will improve the collection of outstanding receivables, which is expected to strengthen liquidity and bring liquidity ratios more in line with category medians.
Headquartered in Peoria, Illinois, OSF Healthcare System owns and operates a combined eight health care facilities (seven in Illinois, one in Michigan) with 1,316 licensed acute care beds. Total revenue in fiscal 2011 was $1.9 billion. 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. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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', July 12, 2012;
--'Non-Profit Hospitals and Health Systems Rating Criteria', July 23, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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