Fitch Ratings has assigned an 'A+' rating to the following Kansas Development Finance Authority bonds issued on behalf of the Kansas University Health System (KUHA):
--$100 million health facilities revenue bonds, series 2011H;
--$25 million variable-rate demand health facilities revenue bonds, series 2011J.
The series 2011H bonds are expected to price the week of Oct. 10 via negotiation, and the series 2011J bonds are expected to price the week of Oct. 24 via negotiation. They will be used to finance, refinance and reimburse the costs of capital expenditures, and to pay costs of issuance. The series 2011J variable-rate demand bonds (VRDBs), will be supported by an irrevocable direct-pay letter of credit (LOC) provided by U.S. Bank National Association. Fitch was not asked to provide a rating based on bank support.
In addition, Fitch affirms the 'A+' ratings on the following bonds issued on behalf of the Kansas University Health System:
--$178.1 million health facilities revenue and refunding bonds, series 2006;
--$55.2 million variable-rate health care revenue bonds, series 2004.
The 'A+' is an underlying rating on the series 2004 bonds, which are supported by an irrevocable direct-pay LOC with U.S. Bank National Association.
The Rating Outlook remains Stable.
SECURITY
The bonds are secured by a pledge of gross revenues of the obligated group and a security interest in significantly all assets of the Trust Estate.
KEY RATING DRIVERS
Minimum Impact of Capital Project and Debt: The three-floor addition to KUHA's heart center is not expected to have a significant impact on leverage metrics and once completed in 2012 should have positive impact on profitability.
Robust Operating Performance: KUHA continues to generate healthy operating profitability against Fitch's 'A' category medians, driven by steady market share growth, strategic service line expansion, and increased utilization.
Outpatient Cancer Centers Expand Service Footprint: With the acquisition of, a multi-site community-based oncology program operating under the name Kansas City Cancer Center, KUHA will be the leading provider for cancer services in the service area. The acquisition is expected to be accretive to KUHA's bottom line.
Strong Affiliation with the University of Kansas (the university): KUHA continues to strengthen its relationship with the university and recently completed a medical office building (MOB) which is leased by the University under a 30-year agreement and houses the affiliated physician group.
Light but Conservative Balance Sheet Profile: KUHA's liquidity metrics are mixed for the rating category. This is moderately offset by a very conservative investment mix and relatively conservative capital structure.
CREDIT PROFILE
KUHA is issuing $125 million in long-term debt, which will be used primarily to finance, refinance, and reimburse for various capital expenditures. The bonds will be used to finance a $63.5 million three-floor expansion of KUHA's heart care center, which will address capacity issues and includes a 32-bed telemetry unit and two additional floors constructed for future use, opening in 2012. The 2011 issuance will also reimburse KUHA for $50 million in prior expenditures on the heart center project and for its new medical office building which opened in July 2011, as well as other projects on campus. In conjunction with the planned fall 2011 transaction, KUHA will use $50 million of its own cash reserves to repay a $50 million line of credit used for working capital purposes, part of which was the acquisition price of community-based oncology program.
Following the 2011 issuance, KUHA will have approximately $375.9 million in long-term debt outstanding, of which $357.7 million is secured under the master trust indenture. A total of $81 million (23%) will be variable rate demand bonds. KUHA's cash to debt will move from 127.3% at unaudited fiscal year ended June 30, 2011 to 85% on a pro forma basis for the same time period. Further, pro forma debt to capitalization is measured at 41.9% through June 30, 2011, equal to Fitch's 'A' category median of 41.9%. Pro forma MADS is estimated at $26.8 million as provided by the underwriter, which KUHA covered at 3.6 times (x) by EBITDA and 3.0x by operating EBITDA through the 2011 unaudited fiscal year end.
It is Fitch's expectation that KUHA will continue to generate top-line revenue growth and strong cash flow, and preserve its liquidity against the additional debt level. Management expects revenues to exceed $1 billion in fiscal 2012, and that operating cash flow will be sufficient to bolster liquidity against its significant capital plans.
For additional information, please see 'Fitch Upgrades University of Kansas Hospital Authority Revs to 'A+; Stable Outlook' dated Aug. 12, 2011.
University of Kansas Hospital Authority is a 620 licensed bed tertiary and quaternary teaching hospital located in Kansas City, KS. KUHA had total operating revenue of $923.61 million in unaudited fiscal 2011. Under the continuing disclosure agreement KUHA will provide annual financial and utilization information to the Municipal Securities Rulemaking Board's EMMA system and to bondholders within 150 days of each fiscal year-end and quarterly financial information with 60 days of each fiscal quarter end. Disclosure to Fitch has been timely and comprehensive.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in Fitch's Revenue Supported Rating Criteria, this action was informed by information from Piper Jaffray as underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.
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=637130
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
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