Fitch Ratings has downgraded the rating on University of
Colorado Hospital's (UCH) outstanding debt, listed below, to 'BBB+'
from 'A-'. The Rating Outlook is Stable. The downgrade incorporates an
upcoming off balance sheet financing of approximately $100 million,
which will fund the construction of an administrative office building
and parking garage adjacent to the hospital. UCH's auditor has yet to
approve the treatment of the financing as an operating lease, although
approval is expected. Fitch will not make adjustments to the audit
regarding the classification of the off balance sheet financing, but
has analyzed and incorporated the financing as an additional long term
obligation of UCH.
The downgrade is reflective of UCH's increased additional fixed obligations with the Leprino administrative office building (LOB) financing. In addition, this financing was not planned in UCH's original master facility transition plan that was presented to Fitch. The additional commitment of this financing is expected to increase UCH's operating expenses by approximately $8.5 million annually, which given UCH's already high debt burden, places further strain on UCH's financial profile. Management expects its obligation will be reduced to $4.8 million a year due to revenue generated by subleasing space to the university and other health science related organizations and parking revenue. However, the subleases are on an annual renewal basis, whereas the operating lease commitment is for a fixed period of approximately 22 years.
UCH is in the midst of a campus relocation that is expected to be complete in April 2007. Phase I of the Anschutz Inpatient Pavilion (AIP) opened in stages beginning in February 2004, and Phase II will include the build out of the remaining floors of the AIP. The LOB financing will allow for 50 additional beds in the AIP (for a total of 370 beds) due to the restructuring of space that was originally to be used for administrative purposes. Fitch views the full campus transition favorably and believes many of the issues that exist currently will dissipate once the entire campus move is complete. UCH faced significant problems with the opening of the first phase of the AIP, mainly due to physician acceptance and preference issues. Many physicians continued to practice at the downtown facility, resulting in volume significantly under budget at the AIP for the first eight months. Year-to-date fiscal 2006 (through Feb. 5, 2006) admissions at the AIP increased substantially to 2,760 compared to 1,535 in the prior year, although volume growth remains below budget. In addition, due to the operation of two campuses, additional physician and nurse staffing expenses have been incurred.
UCH's weak fiscal 2005 financial performance was due to the lower than expected volume at the AIP. UCH had a negative $12.6 million operating loss compared with a $12 million operating gain the prior year. However, through the six months of fiscal 2006, UCH's performance has improved and is ahead of budget. Through the period ended Dec. 31, 2005, UCH had a 2.8% operating margin and 3.0 times (x) maximum annual debt service (MADS) coverage. In addition, liquidity has increased due to the receipt of pledges receivable and profitable operations. Days cash on hand at Dec. 31, 2005 was 150.9 days up from 137.1 days at fiscal year-end 2004. Ongoing credit strengths include UCH's strong clinical reputation, integral relationship with the University of Colorado, and stable market share in a competitive environment.
Credit concerns that have existed since Fitch's initial rating continue to include UCH's high debt load and challenging payor mix. UCH has limited flexibility due to its high debt burden with 4.7% MADS as a percentage of revenue, 5.4x debt to EBTIDA, and 58.2% debt to capitalization through the six months ended Dec. 31, 2005. Although future capital needs should be manageable due to the recent investment in the AIP and LOB, UCH is in a transitional phase where additional capital outlays may be required if there are further changes to the master facility plan, which has occurred in the past. UCH's payor mix includes a high percentage of self pay and Medicaid load, which represented 11.6% and 10.6% of UCH's gross revenue, respectively, in fiscal 2005.
Fitch will reevaluate the impact of the off-balance sheet transaction to UCH's credit profile when it occurs (lease payments begin July 2007). By then, the AIP should be fully complete, physician issues should be resolved, and duplicative expenses from the operation of dual campuses should be eliminated. In addition, the university is expected to open its medical school facilities on the same site as the AIP by August 2007, further ensuring physician support and use of AIP. If management is successful in implementing these plans and financial performance exhibited through the first half of 2006 is sustained, then upward movement of the rating may be warranted.
UCH had 420 beds in operation as of June 30, 2005 at two current locations in the Denver metropolitan area (308 at the Denver campus and 112 at the AIP). UCH plans to transition all inpatient services from the Denver campus to the AIP when construction is finished in April 2007 (located in Aurora, CO, approximately 6 miles east of Denver). UCH covenants to provide bondholders with audited annual information within 150 days of fiscal year-end and unaudited quarterly statements within 60 days of quarter-end to the national recognized municipal securities information repositories. The content of UCH's disclosure is excellent and includes a balance sheet, income statement, cash flow statement, utilization statistics, and management discussion and analysis. UCH has three swaps outstanding, which will be further detailed in an upcoming credit update report.
Outstanding Issues:
-- $108,540,000 University of Colorado Hospital Authority revenue bonds, series 2004A (insured by Financial Security Assurance with SPBA provided severally by Citibank, N.A. and State Street Bank and Trust Company);
-- $50,000,000 University of Colorado Hospital Authority revenue bonds, series 2004B (letter of credit from Citibank);
-- $69,860,000 University of Colorado Hospital Authority revenue bonds, series 2001A;
-- $107,560,000 University of Colorado Hospital Authority revenue bonds, series 1999A (insured: Ambac Assurance Corp, rated 'AAA' by Fitch);
-- $98,695,000 University of Colorado Hospital Authority revenue bonds, series 1997A (insured: Ambac Assurance Corp);
-- $20,100,000 University of Colorado Hospital Authority revenue bonds, series 1995A (insured: Ambac Assurance Corp).
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 downgrade is reflective of UCH's increased additional fixed obligations with the Leprino administrative office building (LOB) financing. In addition, this financing was not planned in UCH's original master facility transition plan that was presented to Fitch. The additional commitment of this financing is expected to increase UCH's operating expenses by approximately $8.5 million annually, which given UCH's already high debt burden, places further strain on UCH's financial profile. Management expects its obligation will be reduced to $4.8 million a year due to revenue generated by subleasing space to the university and other health science related organizations and parking revenue. However, the subleases are on an annual renewal basis, whereas the operating lease commitment is for a fixed period of approximately 22 years.
UCH is in the midst of a campus relocation that is expected to be complete in April 2007. Phase I of the Anschutz Inpatient Pavilion (AIP) opened in stages beginning in February 2004, and Phase II will include the build out of the remaining floors of the AIP. The LOB financing will allow for 50 additional beds in the AIP (for a total of 370 beds) due to the restructuring of space that was originally to be used for administrative purposes. Fitch views the full campus transition favorably and believes many of the issues that exist currently will dissipate once the entire campus move is complete. UCH faced significant problems with the opening of the first phase of the AIP, mainly due to physician acceptance and preference issues. Many physicians continued to practice at the downtown facility, resulting in volume significantly under budget at the AIP for the first eight months. Year-to-date fiscal 2006 (through Feb. 5, 2006) admissions at the AIP increased substantially to 2,760 compared to 1,535 in the prior year, although volume growth remains below budget. In addition, due to the operation of two campuses, additional physician and nurse staffing expenses have been incurred.
UCH's weak fiscal 2005 financial performance was due to the lower than expected volume at the AIP. UCH had a negative $12.6 million operating loss compared with a $12 million operating gain the prior year. However, through the six months of fiscal 2006, UCH's performance has improved and is ahead of budget. Through the period ended Dec. 31, 2005, UCH had a 2.8% operating margin and 3.0 times (x) maximum annual debt service (MADS) coverage. In addition, liquidity has increased due to the receipt of pledges receivable and profitable operations. Days cash on hand at Dec. 31, 2005 was 150.9 days up from 137.1 days at fiscal year-end 2004. Ongoing credit strengths include UCH's strong clinical reputation, integral relationship with the University of Colorado, and stable market share in a competitive environment.
Credit concerns that have existed since Fitch's initial rating continue to include UCH's high debt load and challenging payor mix. UCH has limited flexibility due to its high debt burden with 4.7% MADS as a percentage of revenue, 5.4x debt to EBTIDA, and 58.2% debt to capitalization through the six months ended Dec. 31, 2005. Although future capital needs should be manageable due to the recent investment in the AIP and LOB, UCH is in a transitional phase where additional capital outlays may be required if there are further changes to the master facility plan, which has occurred in the past. UCH's payor mix includes a high percentage of self pay and Medicaid load, which represented 11.6% and 10.6% of UCH's gross revenue, respectively, in fiscal 2005.
Fitch will reevaluate the impact of the off-balance sheet transaction to UCH's credit profile when it occurs (lease payments begin July 2007). By then, the AIP should be fully complete, physician issues should be resolved, and duplicative expenses from the operation of dual campuses should be eliminated. In addition, the university is expected to open its medical school facilities on the same site as the AIP by August 2007, further ensuring physician support and use of AIP. If management is successful in implementing these plans and financial performance exhibited through the first half of 2006 is sustained, then upward movement of the rating may be warranted.
UCH had 420 beds in operation as of June 30, 2005 at two current locations in the Denver metropolitan area (308 at the Denver campus and 112 at the AIP). UCH plans to transition all inpatient services from the Denver campus to the AIP when construction is finished in April 2007 (located in Aurora, CO, approximately 6 miles east of Denver). UCH covenants to provide bondholders with audited annual information within 150 days of fiscal year-end and unaudited quarterly statements within 60 days of quarter-end to the national recognized municipal securities information repositories. The content of UCH's disclosure is excellent and includes a balance sheet, income statement, cash flow statement, utilization statistics, and management discussion and analysis. UCH has three swaps outstanding, which will be further detailed in an upcoming credit update report.
Outstanding Issues:
-- $108,540,000 University of Colorado Hospital Authority revenue bonds, series 2004A (insured by Financial Security Assurance with SPBA provided severally by Citibank, N.A. and State Street Bank and Trust Company);
-- $50,000,000 University of Colorado Hospital Authority revenue bonds, series 2004B (letter of credit from Citibank);
-- $69,860,000 University of Colorado Hospital Authority revenue bonds, series 2001A;
-- $107,560,000 University of Colorado Hospital Authority revenue bonds, series 1999A (insured: Ambac Assurance Corp, rated 'AAA' by Fitch);
-- $98,695,000 University of Colorado Hospital Authority revenue bonds, series 1997A (insured: Ambac Assurance Corp);
-- $20,100,000 University of Colorado Hospital Authority revenue bonds, series 1995A (insured: Ambac Assurance Corp).
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.