Fitch Ratings has assigned an 'AA' rating to the Indiana
Health Facilities Financing Authority's upcoming $677 million series
2006 bond issue, issued on behalf of Sisters of St. Francis Health
Services, Inc. (SSFHS). The new bonds are expected to be priced in
mid-February through negotiation led by Merrill Lynch and Citigroup.
In addition, Fitch affirms the 'AA' underlying rating on approximately
$687 million of outstanding hospital revenue bonds listed below. The
Rating Outlook is Stable.
The preliminary plan of finance includes approximately $140 million of new money to fund capital improvements at various locations throughout the system and $512 million to refund a majority of SSFHS' outstanding bonds. SSFHS expects to receive bond insurance commitments on most, if not all, the series 2006 bonds which will be a mix of variable rate demand and auction rate structures. SSFHS intends to create a synthetic fixed-rate obligation on a portion of the series 2006 bonds through use of floating-to-fixed interest rate swaps. Fitch has not reviewed any bond documents associated with the series 2006 issue. The rating assignment assumes no weakening of the borrower's current security and legal covenants.
The 'AA' rating is supported by SSFHS' strong liquidity position, solid debt service coverage, and strong market position in each of its four regions. Based on unaudited Dec. 31, 2005 financials, SSFHS' unrestricted cash and investments totaled $1.15 billion. SSFHS' unrestricted cash and investment position translates into 256 days of cash on hand and pro-forma cash-to-debt of 140%. Moreover, SSFHS' strong cash flow generation has resulted in solid EBITDA margins of 11.3%, 13.2% and 14.3% in 2005, 2004 and 2003, respectively. Historical pro-forma debt service coverage in excess of five times (x) in each of the last three years exceeds the medians of Fitch's 'AA' portfolio.
With the opening of the Heart and Vascular and the Comprehensive Oncology Institutes at St. James Hospital and Health Centers in Olympia Fields, IL, the South Suburban Chicago Region (SSCR) has generated a positive operating margin in 2005 after several years of negative results. Fitch believes that the St. James facility is well positioned to capture the increased population growth in the areas south/southwest of Chicago. Each of SSFHS' four operating regions operate profitably without any one region accounting for more than one-third of the System's revenues. Additionally, SSFHS holds either the number one or number two market positions in each of its markets.
Fitch's main credit concerns are SSFHS' thin operating margins in 2005 and 2004 relative to 'AA' medians, the expected erosion in profitability at Greater Lafayette Health Services, Inc.(GLHS) and SSFHS' sizable capital budget over the next five years. Based on unaudited Dec. 31, 2005 financials, SSFHS' operating margin (excluding earnings from its investments in affiliates) declined to 0.5% in fiscal year 2005 following a 1.9% operating margin in fiscal year 2004. This compares unfavorably to Fitch's 'AA' medians of 3.5% and 3.2% in 2005 and 2004, respectively.
Management has attributed 2005's 'below budget' results to several one-time items. These negative variances include a delay in opening the aforementioned projects at Olympia Fields due State mandated change orders, the delayed opening of the Cardiac and Vascular Care Center at St. Francis Hospital and Health Centers, and increased physician recruitment costs. The recent letter-of-intent between Clarian Health Partners, Inc (Clarian: rated 'A+' by Fitch) and the Arnett Clinic to form a joint venture to develop an acute care hospital in Lafayette, IN is expected to pressure future returns of GLHS. SSFHS has accelerated its planned master facilities improvements in Lafayette including the construction of a replacement hospital. Finally, SSFHS has developed a forecast 5-year capital budget of approximately $1.4 billion. Projected annual capital expenditures range between $200-$300 million per year and are expected to be funded from a combination of internally generated funds and additional debt.
The Stable Outlook reflects Fitch's expectation that SSFHS will achieve 2006 budgeted operating performance after two consecutive years of below budgeted operating results. Fitch believes SSFHS' 2006 budgeted operating margin (excluding earnings from its investments in affiliates) of 3% and excess margin of 6.5% is aggressive but achievable due to improved volume trends at St. James Hospital and Health Centers and improved reimbursement on certain managed care contracts beginning in 2006. In the medium term, management will be challenged to offset expected declines in profitability at GLHS through revenue growth in other regions with the expected opening of an Arnett/ Clarian hospital during fiscal year 2008. Negative variance from budgeted 2006 goals could put downward pressure on the rating.
SSFHS is a regional health care system that operates 12 hospitals along the I-65 corridor between Chicago and Indianapolis. Organized into four distinct markets serving Central Indiana, Northern Indiana, Western Indiana and South Suburban Chicago, the system operates approximately 2,463 staffed beds and has 349 employed physicians. For the 2005 fiscal year, SSFHS expects to generate approximately $73 million in excess income on total operating revenues of $1.81 billion. SSFHS provides quarterly and annual disclosure directly bondholders and the NRMSIRs. SSFHS' disclosure to date has been excellent in terms of content and timeliness.
Outstanding debt rated by Fitch includes the following: -0- Indiana Health Facility Financing Authority -- $180,000,000 health system revenue bonds, series 2003 (auction-rate securities) (Sisters of St. Francis Health Services, Inc. Obligated Group)(2)(3); -- $70,450,000 health system revenue bonds, series 2001 (Sisters of St. Francis Health Services, Inc. Obligated Group)(3); -- $96,350,000 health system revenue bonds, series 2000A (FLOATS) (Sisters of St. Francis Health Services, Inc. Obligated Group)(3); -- $136,470,000 hospital revenue bonds, series 1999A (Sisters of St. Francis Health Services, Inc. Project)(1)(4); -- $141,870,000 hospital revenue bonds, series 1997A (Sisters of St. Francis Health Services, Inc. Project)(1)(4). Illinois Development Finance Authority -- $36,650,000 health system revenue bonds, series 2000B (FLOATS) (Sisters of St. Francis Health Services, Inc. Obligated Group)(3); -- $25,625,000 Hospital Revenue Bonds, Series 1997B (Sisters of St. Francis Health Services, Inc. Project)(1)(3). (1) The bonds are insured by MBIA whose financial insurer strength is rated 'AAA' by Fitch. (2) The bonds are insured by FSA whose financial insurer strength is rated 'AAA' by Fitch (3) Expected to be refunded from the 2006 bonds (4) Expected to be partially refunded from the 2006 bonds.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, '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.
The preliminary plan of finance includes approximately $140 million of new money to fund capital improvements at various locations throughout the system and $512 million to refund a majority of SSFHS' outstanding bonds. SSFHS expects to receive bond insurance commitments on most, if not all, the series 2006 bonds which will be a mix of variable rate demand and auction rate structures. SSFHS intends to create a synthetic fixed-rate obligation on a portion of the series 2006 bonds through use of floating-to-fixed interest rate swaps. Fitch has not reviewed any bond documents associated with the series 2006 issue. The rating assignment assumes no weakening of the borrower's current security and legal covenants.
The 'AA' rating is supported by SSFHS' strong liquidity position, solid debt service coverage, and strong market position in each of its four regions. Based on unaudited Dec. 31, 2005 financials, SSFHS' unrestricted cash and investments totaled $1.15 billion. SSFHS' unrestricted cash and investment position translates into 256 days of cash on hand and pro-forma cash-to-debt of 140%. Moreover, SSFHS' strong cash flow generation has resulted in solid EBITDA margins of 11.3%, 13.2% and 14.3% in 2005, 2004 and 2003, respectively. Historical pro-forma debt service coverage in excess of five times (x) in each of the last three years exceeds the medians of Fitch's 'AA' portfolio.
With the opening of the Heart and Vascular and the Comprehensive Oncology Institutes at St. James Hospital and Health Centers in Olympia Fields, IL, the South Suburban Chicago Region (SSCR) has generated a positive operating margin in 2005 after several years of negative results. Fitch believes that the St. James facility is well positioned to capture the increased population growth in the areas south/southwest of Chicago. Each of SSFHS' four operating regions operate profitably without any one region accounting for more than one-third of the System's revenues. Additionally, SSFHS holds either the number one or number two market positions in each of its markets.
Fitch's main credit concerns are SSFHS' thin operating margins in 2005 and 2004 relative to 'AA' medians, the expected erosion in profitability at Greater Lafayette Health Services, Inc.(GLHS) and SSFHS' sizable capital budget over the next five years. Based on unaudited Dec. 31, 2005 financials, SSFHS' operating margin (excluding earnings from its investments in affiliates) declined to 0.5% in fiscal year 2005 following a 1.9% operating margin in fiscal year 2004. This compares unfavorably to Fitch's 'AA' medians of 3.5% and 3.2% in 2005 and 2004, respectively.
Management has attributed 2005's 'below budget' results to several one-time items. These negative variances include a delay in opening the aforementioned projects at Olympia Fields due State mandated change orders, the delayed opening of the Cardiac and Vascular Care Center at St. Francis Hospital and Health Centers, and increased physician recruitment costs. The recent letter-of-intent between Clarian Health Partners, Inc (Clarian: rated 'A+' by Fitch) and the Arnett Clinic to form a joint venture to develop an acute care hospital in Lafayette, IN is expected to pressure future returns of GLHS. SSFHS has accelerated its planned master facilities improvements in Lafayette including the construction of a replacement hospital. Finally, SSFHS has developed a forecast 5-year capital budget of approximately $1.4 billion. Projected annual capital expenditures range between $200-$300 million per year and are expected to be funded from a combination of internally generated funds and additional debt.
The Stable Outlook reflects Fitch's expectation that SSFHS will achieve 2006 budgeted operating performance after two consecutive years of below budgeted operating results. Fitch believes SSFHS' 2006 budgeted operating margin (excluding earnings from its investments in affiliates) of 3% and excess margin of 6.5% is aggressive but achievable due to improved volume trends at St. James Hospital and Health Centers and improved reimbursement on certain managed care contracts beginning in 2006. In the medium term, management will be challenged to offset expected declines in profitability at GLHS through revenue growth in other regions with the expected opening of an Arnett/ Clarian hospital during fiscal year 2008. Negative variance from budgeted 2006 goals could put downward pressure on the rating.
SSFHS is a regional health care system that operates 12 hospitals along the I-65 corridor between Chicago and Indianapolis. Organized into four distinct markets serving Central Indiana, Northern Indiana, Western Indiana and South Suburban Chicago, the system operates approximately 2,463 staffed beds and has 349 employed physicians. For the 2005 fiscal year, SSFHS expects to generate approximately $73 million in excess income on total operating revenues of $1.81 billion. SSFHS provides quarterly and annual disclosure directly bondholders and the NRMSIRs. SSFHS' disclosure to date has been excellent in terms of content and timeliness.
Outstanding debt rated by Fitch includes the following: -0- Indiana Health Facility Financing Authority -- $180,000,000 health system revenue bonds, series 2003 (auction-rate securities) (Sisters of St. Francis Health Services, Inc. Obligated Group)(2)(3); -- $70,450,000 health system revenue bonds, series 2001 (Sisters of St. Francis Health Services, Inc. Obligated Group)(3); -- $96,350,000 health system revenue bonds, series 2000A (FLOATS) (Sisters of St. Francis Health Services, Inc. Obligated Group)(3); -- $136,470,000 hospital revenue bonds, series 1999A (Sisters of St. Francis Health Services, Inc. Project)(1)(4); -- $141,870,000 hospital revenue bonds, series 1997A (Sisters of St. Francis Health Services, Inc. Project)(1)(4). Illinois Development Finance Authority -- $36,650,000 health system revenue bonds, series 2000B (FLOATS) (Sisters of St. Francis Health Services, Inc. Obligated Group)(3); -- $25,625,000 Hospital Revenue Bonds, Series 1997B (Sisters of St. Francis Health Services, Inc. Project)(1)(3). (1) The bonds are insured by MBIA whose financial insurer strength is rated 'AAA' by Fitch. (2) The bonds are insured by FSA whose financial insurer strength is rated 'AAA' by Fitch (3) Expected to be refunded from the 2006 bonds (4) Expected to be partially refunded from the 2006 bonds.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, '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.