Fitch Ratings has affirmed the 'AA' ratings on approximately $1.16 billion of revenue bonds issued on behalf of Franciscan Alliance (formerly known as Sisters of St. Francis Health Services, Inc.) through the following conduit issuers:
--Indiana Finance Authority;
--Indiana Health Facilities Financing Authority;
--Indiana Health and Educational Facility Financing Authority;
--Illinois Development Finance Authority.
The Rating Outlook is Stable.
SECURITY
Bond payments are secured by a pledge of the unrestricted receivables of the obligated group.
KEY RATING DRIVERS
Strong Liquidity Position: Liquidity metrics meet or exceed Fitch's 'AA' category medians.
Robust Operations: Historical operating profitability metrics have consistently exceeded Fitch's 'AA' medians resulting in strong coverage of maximum annual debt service (MADS).
Leading Market Share: All four operating regions maintain leading market positions.
Effective Management Practices: Management has demonstrated their willingness to make corrective management decisions to improve performance at the various locations.
CREDIT PROFILE
The affirmation of the 'AA' rating continues to be supported by Franciscan Alliance's (Franciscan) strong liquidity position, robust operations and solid debt service coverage, and strong market position in each of its four regions.
Unrestricted cash and investments increased 20% since fiscal 2008 to $1.77 billion at June 30, 2011. This equates to strong liquidity metrics relative to both operations and Franciscan's debt burden. Days cash on hand of 313 days, a 27.8 times (x) cushion ratio and cash to debt of 156% compare favorably to the respective 'AA' medians of 240 days, 22.4x and 159%, respectively.
Operating profitability has been consistently strong since fiscal 2008 due to solid revenue growth and effective expense control measures. While compound annual growth rate (CAGR) of net patient revenues has been 3.7% from 2009 through six month interim period ended June 30, 2011, total expense CAGR has been a modest 1.9%. Operating margin and operating EBITDA margins averaged 4.9% and 12%, respectively, since fiscal 2008 and equaled 5.2% and 12%, respectively, through the six month interim period ended June 30, 2011 (the interim period). Both metrics are strong relative to Fitch's 'AA' medians of 4.3% and 10.6%.
Strong cash flow generation has produced solid historical debt service coverage. Maximum annual debt service (MADS) coverage by operating EBITDA equaled 4.3x and 5.9x by total EBITDA in fiscal 2010, exceeding Fitch's 'AA' medians of 4.1x and 5.0x, respectively. MADS coverage improved in the interim period to 4.5x operating EBITDA and 6.9x EBITDA.
The system is organized into four regional markets serving Central Indiana, Northern Indiana, Western Indiana and South Suburban Chicago. Franciscan holds leading market share positions in its four regional markets. Revenue generation is well diversified with no region accounting for more than a third of the total net patient revenues. However, 75% of the system's operating EBITDA was generated by two regions in fiscal 2010.
Fitch's credit concerns are the competitive Indiana market and challenges within Franciscan's Western Indiana (WIR) and South Suburban Chicago (SSCR) regions. Due to the lack of certificate of need (CON) 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. SSCR remains a difficult operating environment with a high reliance on government payors and continues to be dilutive to Franciscan's overall financial performance.
The Stable Outlook is based upon Fitch's expectation that Franciscan will maintain a financial and operating profile consistent with Fitch's 'AA' category medians.
Franciscan is a regional health care system that owns and operates 14 hospitals along the I-65 corridor between Chicago and Indianapolis, operating in four distinct regional markets. The system directly operates approximately 2,129 staffed beds and has over 630 employed physicians as of June 30, 2011. Total revenues equaled $2.3 billion in fiscal 2010. Franciscan covenants provide audited financials with 120 days of each fiscal year-end and quarterly financials within 45 days of each fiscal quarter end. Disclosure is posted to the Municipal Securities Rulemaking Board's EMMA website.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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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