Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued on behalf of Resurrection Health Care Obligated Group (RHC, d/b/a Presence Health):
--$91.9 million Illinois Finance Authority Revenue Refunding Bonds, Series 2009;
--$119.1 million Illinois Finance Authority Variable-Rate Demand Revenue Bonds, Series 2005B;
--$119.8 million Illinois Finance Authority Variable-Rate Demand Revenue Bonds, Series 2005C;
--$30.2 million Illinois Health Facilities Authority Revenue Bonds, Series 1997B;
--$100.4 million Illinois Health Facilities Authority Variable-Rate Demand Revenue Bonds, Series 1999A;
--$100.4 million Illinois Health Facilities Authority Variable-Rate Demand Revenue Bonds, Series 1999B.
The 'BBB+' is an underlying rating. The series 2005B-C bonds are supported by irrevocable direct-pay letters of credit (LOC's) from JP Morgan Chase (Issuer Default Rating of 'AA-'/'F1+' by Fitch) and Bank of America Merrill Lynch (Issuer Default Rating of 'A'/'F1' by Fitch). The series 1999A-B bonds are insured by Assured Guaranty Municipal Corp., whose insurer financial strength is not rated by Fitch.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an interest in the pledged revenues of the obligated group, a mortgage, and a debt service reserve fund.
KEY RATING DRIVERS
IMPROVING PROFITABILITY: RHC's operating profitability improved in fiscal 2011 marking the third consecutive year of year over year improvement. In fiscal 2011 RHC generated operating and operating EBITDA margins of 1.3% and 8.1%, respectively, compared to 0.4% operating margin and a 6.7% operating EBITDA margin in fiscal 2010.
ADEQUATE LIQUIDITY CUSHION: RHC maintains a solid level of unrestricted cash and investments, equaling $791.4 million as of Sept. 30, 2011, equating to 228.2 days of cash on hand (DCOH) and 145.1% cash to debt, both favorable to Fitch's 'BBB' rated medians of 128.6 DCOH and 79.8% cash to debt. Liquidity ratios for Presence Health are expected to remain within Fitch's 'BBB' category median levels.
MANAGABLE DEBT BURDEN: RHC's debt metrics continue to moderate and are consistent with Fitch's 'BBB' category medians. Maximum annual debt service (MADS) of $45.2 million equated to a moderate 3.2% of total revenues. Coverage in fiscal 2011 by
EBITDA and operating EBITDA was 3.4 times(x) and 2.6x, respectively and an improvement over the prior year.
MERGER WITH PROVENA HEALTH: The rating affirmation at 'BBB+' incorporates RHC's merger with Provena Health (Provena, not rated by Fitch), creating the newly-named Presence Health system. While the two obligated groups and debt are expected to remain separate, the combined entity will have system-wide revenues of nearly $2.6 billion and an expansive geographic footprint from the Chicago suburbs to Champaign and Danville 140 miles to the south.
COMPETITIVE SERVICE AREA: In conjunction with the merger, RHC continues to execute on strategic physician alignment strategies that strengthen its physician relationships and bolster its market presence. Still, RHC's market share within its primary service area encompassing 40 zip codes was largely flat at 21.1%, and utilization trends have been mixed. The system's success will be driven by its ability to align physicians and execute on its strategic growth strategy.
WHAT COULD TRIGGER A RATING ACTION
ACCELERATED IMPROVEMENT: Fitch views the merger positively, and expects it to result in increased efficiencies and economies of scale via expense savings, improved payor and vendor contracts, and reduced overhead. Should the economies of scale and cost saving expected from the merger significantly exceed expectations over the next 24-36 months positive rating action is possible.
CREDIT PROFILE
Fitch's affirmation of the 'BBB+' rating on RHC reflects the system's improving operating results, adequate liquidity and moderate debt burden. Through fiscal year ended June 30 2011, RHC generated $17.8 million in operating income on total revenues of $1.4 billion or a 1.3% operating margin which is an improvement from the prior year's operating income of $6.2 million (0.4% operating margin) and an operating loss of $35.6 million (negative 2.5% op margin) in fiscal 2009.
RHC's merger with Provena closed on Nov. 1, 2011, and each of their obligated groups remain separate. Longer term plans to consolidate the separate master indentures and obligated groups, and any impact to the bond rating, will be evaluated as they progress.
Fitch notes through the three-month period ended Sept. 30, 2011 RHC's operating profitability suffered due to several "one time" items related to the merger, IT upgrades and the effect of recovery audit contractor (RAC) take-backs. This trend is not expected to continue through fiscal 2012. On a combined basis, the newly-named Presence Health system is budgeting for an operating margin of 1.2% and total net patient revenues in excess of $2.7 billion through fiscal year ending Dec. 31 2012.
RHC's unrestricted cash and investment position improved over prior year, due in part to healthy cash flow in excess of capital spending, and increased asset valuation. At Sept. 30, 2011, RHC's $791.4 million of unrestricted cash and investments equated to 228.2 days of cash on hand (DCOH), a 17.5x cushion ratio and 145.1% cash to debt, exceeding Fitch's 'BBB' category median ratios. However, Fitch notes that RHC liquidity ratios are inflated due to the inclusion of self-insurance reserves in its unrestricted cash and investment position. RHC's pension funding status improved in fiscal 2011 to 54.5% for its church plan and 73.9% for its West Suburban plan (subject to ERISA), and RHC will contribute $48 million annually going forward, down from the $62 million contribution in 2010. Still, material liquidity growth will be limited against future pension contributions.
RHC's debt burden is moderate. At Sept. 30, 2011 RHC had $545.6 million in long term debt, of which $238.9 million (43.7%) were in variable rate mode with credit support provided by letters-of-credit (LOC) issued by JP Morgan Chase Bank, N.A. and Bank of America Merrill Lynch. The LOCs expire Sept. 13, 2013. RHC is not counterparty to any swaps.
RHC's exposure to Illinois Medicaid remains an ongoing concern. Medicaid represents about 20% of RHC's gross revenues making it susceptible to payment delays and program changes at the state level. Still, the provider tax program will remain in place through 2013, and RHC is a net receiver, netting $38.6 million in program reimbursement in fiscal 2011.
The Rating Outlook is Stable. While Fitch views the merger with Provena positively, the expected benefits from the merger have yet to be realized. Positive rating action could result if the system exhibits significant improvements in cash flow due to realized merger synergies, or in the event of a full merger of the two obligated groups.
Post-merger, RHC, now d/b/a Presence Health, is the second largest health care system in the Chicago area, with 11 acute care hospitals and one long-term acute facility, over 3,100 beds, 28 long term care and senior residential facilities, outpatient services, home health, hospice, and behavioral health, serving the greater Chicago and East-Central Illinois region. Prior to the merger, RHC had $1.4 billion in total operating revenue and $17.8 million in operating income for the fiscal year ended June 30, 2011. Provena had $1.2 billion in total operating revenue and $8.5 million in operating income for the fiscal year ended Dec. 31, 2010.
RCH covenants to provide quarterly disclosure for the first three quarters within 60 days of each quarter-end, and annual disclosure within 180 days of fiscal year-end to the Municipal Securities Rulemaking Board's EMMA system. RHC will change its fiscal year period from June 30 to Dec. 31, and will report both audit periods to EMMA for 2011.
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.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was informed by information from the financial advisor, Kaufmann Hall.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Jun. 20, 2011);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (Aug. 12, 2011).
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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