Fitch Ratings has assigned a 'AA' rating to the approximately $47,980,000 North Carolina Medical Care Commission revenue refunding bonds series 2011B issued on behalf of Cone Health and has assigned 'F1+' short-term ratings to the series 2011B and to the series 2004A bonds.
In addition, Fitch has affirmed the 'AA' long-term ratings on the following outstanding debt:
--$42,600,000 hospital revenue bonds, series 2001A;
--$42,600,000 hospital revenue bonds, series 2001B;
--$47,500,000 hospital revenue bonds, series 2004A;
--$60,170,000 hospital revenue bonds, series 2011A;
--$48,140,000 hospital revenue bonds, series 2008.
The Rating Outlook is Stable.
As part of the plan of finance, the system intends to issue $50 million series 2011C and $50 million series 2011D revenue bonds through the North Carolina Medical Care Commission as a direct placement with Bank of America, N.A. Fitch has not been requested to provide a rating for the series 2011C and 2011D series.
The series 2011B bonds are expected to be issued as multi-modal rate bonds initially set in a Windows mode and are expected to price the week of Aug. 1, 2011. Bond proceeds will be used, together with other internal Cone Health funds, to refund the series 2008 bonds currently outstanding in the amount of $48,140,000 and to pay for costs of issuance. The series 2011B and the series 2004A bonds are supported by self liquidity provided by Cone Health.
SECURITY
The bonds are unsecured general obligations of the Cone Health Obligated Group.
CREDIT SUMMARY
The 'AA' rating reflects Cone Health's consistent operating profitability and strong cash flow, which has generated exceptional liquidity levels and resulted in a moderate debt burden.
KEY RATING DRIVERS
--Strong Profile: The 'AA' rating reflects Cone Health's dominant market position, effective management, strong operating profitability, excellent liquidity, and a light debt profile. Cone Health's financial metrics are in line with or superior to Fitch's 'AA' rating category medians.
--Dominant Market Position: The system's market position is supported by a broad placement of inpatient and outpatient locations throughout the service area, as well a large, loyal referral base of employed and voluntary medical staff. Fitch views the strong North Carolina certificate of need program as a mitigating factor to competition risk.
--Solid Pro forma Capital Metrics: Cone Health's capital metrics are comparable to Fitch's 'AA' rating category median levels and reflect strong liquidity support against potential put and self liquidity risk.
--Variable Rate Risk: Debt structure with approximately 80% variable-rate debt presents put, interest rate, and bank renewal risk but is adequately offset by strong liquidity position with 408 days cash on hand (DCOH), and the system's leadership has shown an ability to effectively manage its debt and swap portfolio.
CREDIT PROFILE
Strong and Consistent Operating Performance:
Cone Health has demonstrated operating profitability and cash flow consistent with the 'AA' rating category. The system's operating margin averaged 3.8% between 2005 and 2010 and operating EBITDA margin averaged a solid 10% during this period. Profitability has been maintained for the six-month interim period ended March 31, 2011 with an operating income of $18.8 million, equal to operating margin of 4.2% and operating EBITDA margin of 9.9%, which are comparable to Fitch's 'AA' medians of 3.7% and 10.3%, respectively. Operating performance was driven by solid top line revenues growth, which averaged 5% over the 2005-2010 period and good expenses management, resulting in robust cash-flow.
Dominant Market Position:
Cone Health's dominant market position also provides substantial support for the rating. Cone Health is the leading provider of tertiary services within its service area, garnering a leading 67.5% market share in its primary service area of Guilford County, as compared to the nearest competitor's 19.9% market share. While notable competition exists in the region, including Novant Health (rated 'AA-' by Fitch, Stable Outlook), Wake Forest University Baptist Medical Center in Winston-Salem, Duke University Health System (rated 'AA' by Fitch, Stable Outlook) in Durham and UNC Hospital in Chapel Hill, the highly regulated environment in North Carolina mitigates these threats to a significant degree. Fitch believes Cone Health will maintain its historical position as a leading provider of high value tertiary services within its market.
Excellent Liquidity and Moderate Debt Load:
The strong cash flow has resulted in solid balance sheet metrics with excellent liquidity. The system had unrestricted cash and investments of $877 million (408 days of cash on hand, DCOH) through the six-month interim period, exceeding the Fitch 'AA' rating category median of 215 DCOH. The cushion ratio of 49.7 times (x) compares very favorably to the category median of 19.6x.
Cone Health's debt load remains moderate, despite the addition of the $100 million of new debt in the current transaction, with pro forma maximum annual debt service (MADS) coverage by EBITDA of 5.3x, MADS at a very manageable 1.9% of revenues and pro forma debt to cash at a comfortable 244%, all favorable to the category medians. The modest debt position and ample liquidity offset the risks associated with Cone Health's relatively aggressive debt structure with approximately 80% variable rated debt.
The master facility plan is meeting its projected time schedule and while there are risks present in all major construction projects, Fitch believes that Cone Health's excellent management practices and ample liquidity assure that the projects can be completed as planned.
The System:
Cone Health is a nonprofit, integrated tertiary healthcare system operating out of Greensboro, consisting of the 566-bed tertiary Moses Cone teaching hospital, the 175-bed Wesley Long community hospital, the 134-bed Women's Hospital, an 80-bed inpatient psychiatric hospital, and the 110-bed Annie Penn community hospital located 20 miles north in Reidsville. The system also contains several subordinate affiliates including physician practice groups, a foundation, a nursing home, two surgical centers, and other specialty services. Total revenues were $892 million in the fiscal year ending Sept. 30, 2010, of which $811 million was generated by the obligated group. MCHS covenants to provide annual disclosure no later than 120 days after each fiscal year end and quarterly disclosure no later than 60 days after each quarter end to the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009;
--'Revenue-Supported Rating Criteria', dated Dec. 29, 2009;
--'Moses Cone Health System New Issue Report', dated Feb. 2, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Moses Cone Health System (North Carolina Medical Care Commission)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=598945
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