Fitch Ratings has assigned 'AA-' ratings to the following bonds issued by Allen County, Ohio, on behalf of Catholic Health Partners (CHP):
--$270,840,000 fixed-rate hospital facilities revenue refunding bonds, series 2012A;
--$50,505,000 adjustable-rate hospital facilities revenue bonds, series 2012B;
--$50,510,000 adjustable-rate hospital facilities revenue bonds, series 2012C.
The series 2012B and 2012C bonds will each be offered in a variable-rate mode and supported by self liquidity. Fitch will assign a short-term rating for the self liquidity bonds at a date closer to the pricing. The fixed-rate bonds are expected to price the week of April 23, 2012 while the variable-rate bonds are expected to price the week of May 7, 2012. Proceeds of the series 2012 bond issuance will be used to refund the series 2001A and series 2002A bonds issued through the County of Lorain, Ohio on behalf of CHP, to fund the costs of ongoing capital projects, to reimburse CHP for prior capital expenditures, and to pay costs of issuance.
In addition, Fitch affirms the 'AA-' rating on approximately $1,718 million in outstanding bonds issued through various authorities on behalf of CHP.
The Rating Outlook is Stable
KEY RATING DRIVERS:
STRONG MARKET POSITION: In the State of Ohio, CHP is the largest health care provider with 22 hospitals and a leading market share position in five of its six distinct regional markets in the state.
IMPROVED FINANCIAL PROFILE: While certain of CHP's financial metrics are light compared to Fitch's 'AA' category medians, the system's historical profitability is consistent with the 'AA-' rating while liquidity and debt metrics have strengthened with divestitures of operations in Pennsylvania and Tennessee.
EFFECTIVE MANAGEMENT CONTROLS: CHP's effective management controls are evidenced by the system's steady operating results despite weak service area characteristics and the recent decision to divest operations in Pennsylvania and Tennessee.
SOMEWHAT AGGRESSIVE CAPITAL STRUCTURE: Due to its lighter liquidity and leverage metrics, Fitch believes CHP's capital structure presents elevated risk relative to its 'AA' category peer group.
SECURITY:
General unsecured obligation.
CREDIT SUMMARY:
The factors supporting the 'AA-' rating remain largely unchanged from Fitch's last rating update in April 2010. The 'AA-' rating is supported by the size and scale of CHP's operations, solid market positions in each of its service areas, and CHP's improved financial profile since fiscal 2009.
In efforts to strengthen its operating performance, CHP divested three operating units in fiscal 2011 that had historically been dilutive to profitability. The three operating units (Northeast Region (Pennsylvania), Tennessee Region and Catholic Health Partners Housing Development) combined for a total operating loss of $15.6 million in fiscal 2011. Based upon FASB criteria, the discontinued operations have been excluded from operating income in the audited financial statements for fiscal 2010 and 2011. Fitch views the divestment of the three operating units positively as it improved the system's liquidity, reduced long term debt and is indicative of CHP's proactive management practices.
CHP's large scale and breadth of operations is a key factor supporting the 'AA-' rating. With $3.8 billion in annual revenues, CHP is the largest healthcare system in Ohio with a leading 12% market share and is among the larger healthcare systems in the nation. In addition to its size, CHP's diverse operating platform adds to its operating stability.
In Ohio, with 22 hospitals spread across six operating regions, CHP holds the leading market position in five of its six regional markets. In Kentucky, CHP operates two hospitals in Paducah and Richmond and holds the number two market share position in its primary service area. Both net operating revenue and operating income remain diversified. CHP's largest regional market, the Cincinnati area market, accounts for approximately 27% of net operating revenue, and all seven regions are accretive to operating profitability.
Consistent with expectations expressed in Fitch's last rating action, CHP's financial profile has continued to improve since fiscal 2009. However, financial metrics remain at the low end of the 'AA-' category. Unrestricted cash and investments increased 22% since Dec 31, 2009 to $2 billion at Dec. 31, 2011. Days cash on hand of 226 days, cushion ratio of 16.0 times (x) and cash to debt of 116.7% are all improved since FY 2009 as compared to the respective 'AA' category medians of 240.0, 22.4x and 159%.
Operating margin increased to 3.2% in fiscal 2011 as compared 2.8% in 2010 and 2009 while operating EBITDA margin declined to 10.1% from 10.5% and 11% in 2010 and 2009, respectively. The improvement in operating margin reflects management's continued focus on cost control. The decline in operating EBITDA margin reflects the combination of CHP's strong revenue growth, declining depreciation and amortization expense and constant interest expense. Historical coverage of pro forma maximum annual debt service (MADS) of $126.4 million by EBITDA is adequate at 3.3x and 3.8x in fiscal 2011 and 2010, respectively.
CHP's six Ohio markets represented approximately 90% of net operating revenue in Fiscal 2011. Ohio (rated 'AA+' by Fitch) was hit hard during the recession which exacerbated a longstanding slump in the manufacturing industry. However, Ohio's broad and diverse economy is showing signs of slow growth with the unemployment rate decreasing to 7.7% in January 2012, below the national average of 8.3%. Despite the concentration of services in Ohio, CHP's operations are spread out throughout the state, diversifying exposure to any one region. Fitch believes CHP's effective management controls have been crucial to the system's steady historical operating performance despite weak economic and demographic profiles in certain of its regional markets.
The Stable Outlook is based upon Fitch's expectation that CHP will maintain its operating performance while generating steady improvements in liquidity and debt metrics.
CHP plans to cash defease the series 2001A and series 2002A bonds issued through the Kentucky Economic Development Finance Authority in the fall of 2012. By the end of 2012, CHP expects to have approximately $1.85 billion in long-term debt outstanding, up from $1.72 billion as of Dec. 31, 2011. The bond portfolio will have an interest rate mix of 59% fixed-rate and 41% underlying variable rate. Given its asset allocation, Fitch is comfortable that CHP's available liquidity sufficiently offsets its variable-rate debt exposure. CHP has approximately $832 million in swap contracts with $582 million in fixed payor swaps and $250 million in constant maturity swaps. The fixed payor swaps effectively decrease CHP's pro forma variable rate exposure to approximately 9%, but expose CHP to collateral posting requirements. Collateral posting requirements have been volatile with $87.3 million posted as of Dec. 31, 2011 and $18.2 million posted as of Dec. 31, 2010. All of its outstanding swap contracts are with a single counterparty, which Fitch views negatively.
Headquartered in Cincinnati, Catholic Health Partners is a large multistate health care system with 24 acute care hospitals and 13 long-term care facilities located in Ohio, Kentucky and Indiana. CHP covenants to provide annual disclosure no later than 150 days after the end of each fiscal year and quarterly disclosure no later than 60 days after then end of each of the first three fiscal quarters. Disclosure is provided to bondholders via the Municipal Securities Rulemaking Board's EMMA system and its web site, 'www.health-partners.org'. Notices for the posting of quarterly information are communicated directly to those investors who register on CHP's web site. Fitch views CHP's disclosure practices as one of the best in the industry.
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.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
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