Fitch Ratings has assigned an 'AA' rating to bonds to be issued on behalf of Catholic Health Initiatives (CHI) by various issuers in Colorado, Tennessee, Ohio and Washington. The total bond size is expected to be between $300 million and $470 million. Fitch has also affirmed the 'AA' rating on $2.2 billion of CHI's outstanding debt and the 'F1+' rating on approximately $696 million outstanding variable-rate demand bonds (based on CHI's internal liquidity). The Rating Outlook is Stable.
Bond proceeds will be used to finance certain capital improvements and equipment acquisitions at the facilities owned or operated by CHI and to reimburse CHI for prior capital expenditures. These bonds will be issued as fixed rate bonds secured by a capital obligation agreement under a supplemental master trust indenture and will be on parity with CHI's outstanding debt.
The 'AA' rating is supported by CHI's strong revenue and profit dispersion which provides the system with ample financial flexibility, solid liquidity and superior management practices. The affirmation of the 'F1+' rating reflects CHI's solid liquidity position and sound internal procedures that ensure timely access and transfer of funds in the event of a failed remarketing. Unrestricted cash and investments for CHI at June 30 2008, based on audited financial statements, was approximately $3.8 billion. CHI's provides self liquidity on $696 million of outstanding variable-rate debt of the total $2.2 billion of outstanding debt. CHI has demonstrated sufficient liquidity to cover its variable demand obligations to support its 'F1+' short-term rating.
Despite the substantial slide in profitability and coverage which occurred in 2008, CHI's fundamental credit strengths of good liquidity, diversification of risk because of the size and variety of institutions in the system, sustained revenue growth, increased utilization, and positive quality indicators are consistent with the category. While the decline in operating performance was not totally unexpected (in 2007, CHI's management team projected decreased profitability and liquidity because of the cost of the ongoing implementation of the CHI system-wide initiative to standardize and centralize key business functions, debt repayment as part of the restructuring of its auction rate debt, and the system's continuing growth strategy), the recent market volatility and its effects on liquidity, significantly increased the magnitude of the decline.
Certain key financial ratios fell below 'AA' medians in 2008 due to expense growth exceeding revenue growth, investment losses from market volatility, and declines in profitability from the system's joint operating agreements. Operating income declined to 1.9% vs. 4.9% in last year while operating EBITDA dropped to 8.7% from 11.5% in 2007. Historic proforma maximum annual debt service coverage dropped to 3.5 times (x) vs. 8.0x in 2007. Balance sheet ratios are stable and comparable to prior years. In 2008, CHI generated 215.3 days cash on hand, a 23.4x cushion ratio and 186.2 cash to debt ratio versus 'AA' medians of 246.4 days, 20.9x and 162.9%, respectively. Management at CHI reacted quickly to the performance slide including a restructuring of the overall management structure, more centralization of certain operational functions, and a reduction in its long term capital program.
Fitch's primary credit concern is the costs of CHI's ongoing capital program, to be financed primarily from debt and operations. Fitch believes that this level of capital investment is necessary to maintain CHI's competitive position in its various markets and expects this trend to continue, but a sustained decline in operating performance could threaten the system's ongoing capital program and curtail the system's future growth strategy over the near term.
The Stable Outlook is based on Fitch's belief that management's quick and appropriate response to the recent profitability decline and other operational issues, will restore CHI to its historic operating trends. CHI's management has provided projections indicating that operating margins for fiscal years 2009 will be comparable to 2008 with recovery beginning to occur in 2010. Fitch believes that CHI's solid balance sheet provides sufficient cushion for any temporary decline in performance but failure to meet these projections could result in negative rating pressure.
CHI is the second largest not for profit integrated health care delivery system in the U.S. The system sponsors market-based organization (MBOs) in 20 states, with 77 acute care hospitals, including 23 critical access hospitals, 42 long term care, assisted living and residential facilities, two community health service organizations and two accredited nursing colleges. The portfolio is further diversified between rural, suburban, and increasingly urban, components. The system produced $8.4 billion in total revenues in 2008. CHI covenants to provide quarterly and annual disclosure to bondholders. Disclosure has been excellent, including detailed statements with management discussion and analysis which are available at CHI's website, www.catholicnealthinitiatives.net.
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