Fitch Ratings has assigned a 'AA' rating to the expected issuance of approximately $225 million of Indiana Finance Authority Health System revenue bonds, series 2009A (Sisters of St. Francis Health Services, Inc. Obligated Group; (SSFHS). In addition, Fitch affirms the outstanding 'AA' long-term ratings on approximately $950.3 million of bonds issued for SSFHS.
The Rating Outlook is Stable.
The series 2009A bonds are expected to be issued as traditional fixed-rate debt. Bond proceeds will reimburse the corporation $121.4 million for prior capital expenditures, provide funding for future capital needs primarily at its Indianapolis and Lafayette, IN, campuses and pay associated costs of issuance. The series 2009A bonds are expected to be priced through negotiation during the week of Oct. 19 or Oct. 26.
The 'AA' rating continues to be supported by SSFHS's strong liquidity position, modest debt burden and solid debt service coverage, and strong market position in each of its four regions. At Aug. 31, 2009, SSFHS's unrestricted cash and investments totaled $1.27 billion, which translates into 243 days of cash on hand, a cushion ratio (based on pro forma maximum annual debt service [MADS]) of 20.3 times (x) and 134% of cash-to-long-term debt. Improved operating efficiency due to the consolidation of various system functions has allowed the SSFHS to maintain solid operating margins. Profitability measures have been strong with operating EBITDA margins of 9.9%, 11.1% and 12.0% in fiscal 2006, 2007 and 2008, respectively. SSFHS's strong cash flow generation combined with a modest debt burden has produced solid historical debt service coverage. Pro forma MADS increases to $63.7 million from $54.4 million but remains modest at 2.9% of 2008 total revenues, which is in line with Fitch's 2009 'AA' median of 2.8%.
SSFHS owns and operates 12 hospitals along the I-65 corridor between Chicago and Indianapolis. Management has organized the system into four distinct regional markets serving Central Indiana, Northern Indiana, Western Indiana and South Suburban Chicago. In total the system directly operates approximately 2,258 staffed beds. In each of the operating regions, SSFHS holds either the No.1 or No.2 market positions. Revenue generation is well diversified with no region accounting for more than a third of the total system revenues, while three of the four regions produced operating EBIDA margins in excess of 11% in 2008.
Fitch's credit concerns are the competitive Indiana market, the recent market share erosion at St. Elizabeth's Regional Health (SERH) in Lafayette, IN, and ongoing challenges within SSFHS's South Suburban Chicago Region (SSCR). Due to the lack of certificate of need regulations, hospital providers in Indiana face substantial competition from one another as well as entrepreneurial physicians. The competitive environment increases the general business risk faced by providers and has driven up the overall level of capital spending in the larger metropolitan areas of Indiana.
The recent opening of the Clarian/Arnett Hospital in Lafayette, IN, in October 2008 has resulted in volume and market share losses at SERH. Through the eight-month interim period ended Aug. 31, 2009, SERH's inpatient admissions are down approximately 38% and total charges are roughly 24% lower compared to the year earlier period. While volume and charge drops are less than anticipated, the increased competition in the Lafayette market is expected to dampen profitability as compared to historical performance. With the installation of a new Regional CEO and implementation of a new operational improvement plan, financial performance of the SSCR has improved slightly with a $23.8 million operating loss in 2008 as compared to a $25.6 million loss in the year earlier period. However, SSCR remains a difficult operating and payor mix environment and continues to be dilutive to SSFHS's overall financial performance.
The Rating Outlook is Stable and reflects that SSFHS has maintained a financial and operating profile consistent with Fitch 'AA' medians in spite of volume losses at SERH and the ongoing challenges in the SSCR. In addition, physician alignment strategies should blunt some of the inherent business risk in SSFHS's Indiana regions. Management expects to fund future projected capital improvements from its cash flow.
SSFHS is a regional health care system that owns and 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 directly operates approximately 2,258 staffed beds and had 467 employed physicians as of Aug. 31, 2009. In fiscal 2008, SSFHS had total revenues of $2.2 billion. SSFHS is required to provide audited financials with 120 days of each fiscal year-end and quarterly financials within 45 days of each fiscal quarter end.
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Fitch Ratings, Chicago
Jim LeBuhn, 312-368-2059
Anthony
Houston, 312-368-3180
or
Cindy Stoller, 212-908-0526
(Media
Relations, New York)
cindy.stoller@fitchratings.com