Fitch Ratings, as part of its ongoing surveillance effort, has affirmed its 'AA' ratings on approximately $995.4 million revenue bonds issued through the Illinois Health Facilities Authority and the Illinois Finance Authority on behalf of Advocate Health Care Network (Advocate).
In addition, Fitch affirms its 'F1+' short-term ratings on the following bonds based on self liquidity provided by Advocate:
--$43,225,000 Illinois Finance Authority revenue bonds, series 2008A-2;
--$51,140,000 Illinois Finance Authority revenue bonds, series 2008A-1;
--$51,145,000 Illinois Finance Authority revenue bonds, series 2008A-3;
--$27,695,000 Illinois Health Facilities Authority revenue bonds, series 2003C.
The Rating Outlook is Stable.
RATING RATIONALE:
--Advocate's modest debt burden combined with strong operating profitability has resulted in very strong coverage of maximum annual debt service (MADS) of 7.4 times (x) and 6.4x in 2009 and 2008, respectively.
--Advocate has substantial balance sheet strength with liquidity indicators (255 days cash on hand [DCOH], 42.9x cushion ratio and 258% cash to long-term debt) that handily exceed Fitch's 2009 'AA' category medians.
--Advocate Health Network is the largest healthcare provider in the State of Illinois and maintains a leading market share that is more than double its nearest competitor in the highly competitive Chicago metropolitan area.
--Advocate's integrated delivery approach includes employed and aligned physician staff which allows for effective managed contracting.
OUTLOOK:
--Advocate's leading market position combined with its employed and aligned medical staff is expected to sustain historical operating performance over the outlook period.
SECURITY:
The bonds are secured by a pledge of gross revenues of the obligated group, and a debt service reserve fund on the series 1993C bonds.
CREDIT SUMMARY:
The 'AA' rating reflects Advocate's low debt burden and strong operating profitability, robust liquidity position, a leading market position in the Chicago metropolitan area and the benefits of its aligned medical staff. Advocate's debt burden remains among the lightest in Fitch's health care portfolio. In 2009, MADS as percentage of revenues was just 1.5% and debt equated to 2.0x EBITDA; both of which are lighter than the 'AA' category medians of 2.6% and 3.4x, respectively. Advocate's historical operating profitability has been solid and compares favorably to similar 'AA' category providers. In 2008 and 2009, Advocate generated operating EBITDA margins of 10.7% and 9.5%, respectively. Through the nine-months ended Sept. 30, 2010, Advocate generated $384 million of operating EBITDA on total revenues of $3.38 billion or an 11.4% margin. Advocate's solid profitability combined with its light debt burden results in robust MADS coverage of 7.4x and 6.4x in 2009 and 2008, respectively.
At Sept. 30, 2010, Advocate's unrestricted cash and investments totaled $2.66 billion, which is improved from $2.19 billion at Dec. 31, 2009. Liquidity metrics at Sept 30, are very strong with 255 DCOH, a cushion ratio of 42.9x and cash and investments equating to 258% of long-term debt; all of which handily exceed the respective 'AA' category medians of 214.7, 19.6x and 149.9%.
Advocate continues to be the market-share leader in the six-county Chicago metropolitan area with a 15.4% market share through June 30, 2010 compared with its closest competitor, Resurrection Healthcare (rated 'BBB+' by Fitch), with a 6.8% market share. Advocate has eight acute care hospitals located in and around the city of Chicago, forming a ring around the city. Advocate's flagship facilities (Advocate Christ Medical Center, Advocate Lutheran General Hospital, Advocate Good Shepherd and Advocate Good Samaritan) are located in desirable suburban locations and maintain leading market-share positions in their service areas. Furthermore, Advocate has created a highly aligned medical staff through its 775+ employed physician FTEs and its 3,400 member physician-hospital organization (PHO). Fitch views Advocate's physician alignment favorably as it allows for greater care coordination and more effective managed care contracting.
Fitch's main credit concern revolves around the highly competitive service area in Chicago and the poor political and legal environment in Illinois. Although Advocate is the overall market-share leader in Illinois, the system has formidable competition from an array of academic medical centers such as Northwestern Memorial Hospital, the University of Chicago Hospitals and Rush University Medical Center (rated 'A-' by Fitch), as well as several suburban community medical centers such as Central DuPage Hospital (rated 'AA' by Fitch), Northwest Community Hospital and Evanston Northwestern Hospital. Each of these competing hospitals has expansion projects currently underway. Advocate's service area is one of the least favorable political and medical malpractice environments in the nation for health care providers. Due to its size relative to others in the market, Fitch believes Advocate may be subject to greater scrutiny by political interests and regulatory agencies in Springfield, IL.
The 'F1+' rating reflects the strength of Advocate's cash and investment position to pay the cost of a mandatory tender on the series 2003C and 2008A-1, 2008A-2 and 2008A-3 multi-annual put bonds. At Dec. 31, 2010, Advocate's eligible cash and investment position available for same-day settlement (see Fitch's report 'Criteria for Assigning Short Term Ratings Based on Internal Liquidity' dated Dec. 29, 2009) would cover the cost of the maximum mandatory put on any given date well in excess of Fitch's criteria of 1.25x. Advocate has provided Fitch an internal procedures letter outlining the procedures to meet any un-remarketed puts. In addition, Advocate provides monthly liquidity reports to Fitch to monitor the sufficiency of Advocate's cash and investment position relative to its mandatory put exposure.
The Stable Outlook reflects Advocate's leading market position combined with its employed and aligned medical staff that is expected to sustain historical operating performance over the outlook period. Advocate's substantial liquidity provides a large cushion against any changes in reimbursement and operations.
Advocate is counter-party to three floating to fixed rate swaps with a total notional value of $326.3 million. The market to market on the swaps at Dec. 31, 2010 was approximately negative $44.1 million with required collateral posting of roughly $15.1 million.
Advocate is an integrated health care system composed of 10 acute care hospitals, two integrated children's hospitals, a home health agency and over 200 sites located throughout the Chicago metropolitan area and in Bloomington, IL. Total revenues in fiscal 2009 were $4.07 billion. Advocate's disclosure is outstanding and includes annual audited financial statements as well as quarterly unaudited balance sheet, income statement, cash flow statement, an extensive MD&A, and utilization statistics. The information is submitted to the nationally recognized municipal securities information repositories. In addition, management holds quarterly calls with rating agencies and annual calls with investors.
Additional information is available at 'www.fitchratings.com'
This action was informed by sources of information identified in the Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated 08 Oct. 2010.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated 29 Dec. 2009.
--'Criteria for Assigning Short Term Ratings Based on Internal Liquidity', dated 29 Dec. 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493176
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