Fitch Ratings has assigned an 'A' rating to the following new issues for the Health and Educational Facilities Authority of the State of Missouri (issued on behalf of CoxHealth):
--$159.9 million fixed-rate revenue and refunding bonds, series 2008A;
--$70 million series fixed-rate revenue and refunding bonds, series 2008B;
--$35 million variable-rate revenue bonds, series 2008C.
In addition, Fitch has assigned 'A' ratings on the following outstanding debt for CoxHealth:
--$12.6 million bonds, series 1992H
--$29.9 million bonds, series 1993I
The Rating Outlook is Stable.
Proceeds from the series 2008A bonds will be used to refund approximately $21.9 million of outstanding series 1997 bonds and approximately $57.9 million of outstanding series 2002 bonds issued by CoxHealth, fund approximately $52.8 million in routine and long-term capital expenditures, reimburse approximately $15 million of prior capital expenditures, and fund capitalized interest. In advance of the issuance of the series 2008A bonds, CoxHealth executed a $200 million fixed spread basis swap with Merrill Lynch as the counter party with the intent of lowering costs on the traditional fixed rate bonds through the assumption of tax risk.
Approximately $98.5 million of the proceeds from the series 2008B&C bonds will finance a new emergency department; a new ambulatory surgery center; a new parking garage; fund renovation of space for future dedication to Orthopedic services, fund capitalized interest, and pay cost of issuance. The series 2008A bonds are expected to be issued as uninsured fixed-rate bonds while the series 2008B&C bonds are expected to be issued as variable-rate demand bonds backed by a direct pay letters of credit (LOC) from Bank of Nova Scotia (series 2008B) and Bank of America, N.A. (series 2008C).
Fitch expects to assign long-term and short-term ratings to the series 2008B&C bonds based on the banks' support at a date closer to pricing. The series 2008A bonds are expected to be priced the week of Sept. 8 while the series 2008B&C bonds are expected to be priced the week of Sept. 22. The series 2008A-C bonds will be secured by a gross revenue pledge of the Obligated Group, a mortgage, and a debt service reserve fund, which is viewed positively. Moreover, the liquidity and coverage covenants on the series 2008 bonds are expected to be similar to CoxHealth's existing covenant package.
The rationale for the 'A' rating reflects CoxHealth's solid balance sheet indicators, its good proforma debt service coverage, moderate debt burden, improved operating performance, and solid alignment with its medical staff. CoxHealth enjoys a leading inpatient market share position in its primary service area (37.3% compared to its nearest competitor at 35.6%), which has allowed it to strengthen its unrestricted cash position relative to its pro forma debt service and its operating expenses despite reserving $60 million to settle the ongoing investigation by the U.S. Department of Justice (DoJ) (see paragraph to follow).
Through the interim period ending May 31, 2008, CoxHealth reported unrestricted cash of $301.9 million resulting in a pro forma cushion ratio of 12.8 times (x) and days cash on hand of 203.9 days, compared to the 'A' category medians of 15.4x and 185.2 days, respectively. Furthermore, CoxHealth's pro forma maximum annual debt service (MADS) of $23.5 million is a moderate 3.2% of May 31, 2008 revenues ($487.9 million) and is covered by earnings before interest, depreciation, and amortization (EBIDA) at 3.7x, both in-line than Fitch's 'A' median of 3.1% and 4.0x, respectively.
CoxHealth has been subjected to a three-year investigation by the U.S. Department of Justice (DoJ) resultant from self-reported billing errors that occurred in 2005 and has recently signed a settlement agreement with the DoJ. The settlement calls for an initial payment of $35 million with five additional $5 million payments per year with an annual interest of 4% on the deferred amounts. In a separate agreement with the Office of Inspector General of the U.S. Department of Health and Human Services (HHS), CoxHealth agreed to participate in a five-year program of intensified legal compliance education for employees, physicians and others associated with CoxHealth, as well as heightened monitoring and reporting to HHS. Fitch believes CoxHealth's robust corporate compliance function protects bondholders from future substantial cash outlays due to compliance issues and believes the settlement now allows management to focus on the core operations of CoxHealth, which should further strengthen performance.
The Stable Outlook reflects the rapid operating improvement at CoxHealth since the billing irregularities of 2005, as evidenced by operating margins and operating EBIDA margins increasing to 3.8% and 9.8%, respectively through May 31, 2008 from (0.3%) and 5.8%, respectively in fiscal 2005. Further lending stability to the market is Springfield's unique managed care market, which is essentially closed; whereby each managed care contract is exclusive to either CoxHealth or one of its competitors. The closed nature of the market also extends to physicians, naturally aligning them with either CoxHealth or its competitors. CoxHealth enjoys an exclusive, long-term relationship with the Ferrell-Duncan clinic, a 100 physician multi-specialty group with primary offices located adjacent to CoxHealth's 565-bed South campus. Fitch views CoxHealth's relationship with this large physician practice and the closed managed care market as a credit strength.
CoxHealth has covenanted to provide quarterly and annual disclosure of financial statements to bondholders. Recent disclosure to Fitch has been excellent and includes a balance sheet, income statement, utilization statistics, statement of cash flows and management discussion and analysis.
Located in Springfield, Missouri, CoxHealth provides acute hospital and other health care services to a service area of 22 counties covering southwest Missouri and parts of northern Arkansas. CoxHealth owns and operates three tertiary hospital facilities licensed for a total of 802 beds in Springfield, Missouri. The system also operates a skilled nursing facility, a psychiatric and rehabilitation facility, over 50 outpatient physician clinic locations, a home care company, a health plan, and a foundation. In fiscal 2007 (ending Sept. 30), the system had total revenues of $948.2 million, over 32,661 inpatient admissions and 144,850 ER visits.
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