TEXT - Fitch rates Catholic Health East, Pa. revs
Dec 12 - Fitch Ratings has assigned 'A+' ratings to the following revenue bonds issued by or on behalf of Catholic Health East (CHE): --$37,095,000 Greene County (GA) Development Authority Health System revenue bonds series 2012; --$75,000,000 St Mary Hospital Authority Health System revenue bonds, series 2012. In addition, Fitch affirms the 'A+' rating on approximately $1 billion of bonds outstanding issued through various issuing authorities on behalf of CHE. The Rating Outlook is Stable. The Greene County (GA) bonds are expected to be issued as fixed rate bonds. Bond proceeds will be used to fund the construction of a replacement facility at St Mary's Good Samaritan Hospital in Greensboro, GA, fund capitalized interest and pay costs of issuance. The St Mary bonds are expected to be issued as variable rate demand bonds supported by a letter of credit issued by BNY Mellon Bank, N.A. Bond proceeds will be used to fund a certain costs related to CHE's CareLink electronic medical record and clinical care system. The Greene County bonds are expected to price the week of Dec. 17th and the St Mary bonds are expected to price the week of Jan. 7th through negotiated sale. SECURITY: The bonds are secured by a pledge of gross revenues of the obligated group. KEY RATING DRIVERS: GEOGRAPHICALLY DIVERSE SYSTEM: CHE is a large, geographically diverse integrated healthcare system operating 33 acute care hospitals across 11 states. Fitch views the system's size, scope of operations, and geographic dispersion as a primary credit strength that helps protect the organization from adverse economic events severely affecting any of its core markets. STRATEGIC REPOSITIONING: CHE has entered into non-binding letters of intent (LOI) to divest Mercy Health System of Maine and St Michael's Medical Center in Newark, NJ and to merge with Trinity Health (revenue bonds rated 'AA') to form a unified system. Fitch views CHE's repositioning efforts positively as it should better position the organization strategically for healthcare reform as well as improve CHE's financial performance and profile going forward. IMPROVING LIQUIDITY: CHE has posted year over year improvement in unrestricted liquidity in each of the last four years. At Sept 30, 2012, CHE's unrestricted cash and investments totaled $1.73 billion which equates to 151.5 days cash on hand, 14.1 times (x) cushion ratio (based on pro forma maximum annual debt service ) and 118.3% cash to debt which are consistent with Fitch's 'A' category medians. IMPROVING PROFITABILITY: Although CHE's operating profitability remains weak relative to Fitch's 'A' category medians, the corporation has posted year over year improvement in operating and operating EBITDA margin in each of the last three fiscal years. Through the nine months ended Sept. 30, 2012, operating and operating EBITDA margins were 1.4% and 7.1% (inclusive of bad debt expense). HIGH MEDICAID EXPOSURE: CHE had a high percentage of Medicaid payors at 17.4% of gross revenues in 2011. Combined with a 48.2% Medicare payor base, CHE has a relatively high amount of governmental payors, which is a credit concern and exposes the organization to reimbursement cuts/reductions at the state and/or federal level. WHAT COULD TRIGGER AN UPWARD MOVEMENT IN THE RATING OR OUTLOOK MERGER WITH TRINITY HEALTH: On Oct. 17, 2012, CHE and Trinity Health signed a non-binding LOI to merge both systems with a goal of reaching a Definitive Agreement in spring 2013. Execution of a Definitive Agreement would likely result in a revision in Outlook to Positive from Stable. CREDIT PROFILE ORGANIZATIONAL OVERVIEW CHE is headquartered in Newton Square, PA and is a large integrated Catholic health care system with 33 acute-care hospitals, 24 freestanding and hospital-based long-term care facilities, 11 assisted-living facilities, four continuing care retirement communities, seven behavioral health and rehabilitation facilities, and a number of home health, ambulatory, and other community based health services operating across 11 states. In fiscal 2011, on a fully consolidated basis, CHE had total operating revenue of $4.3 billion. RATING RATIONALE The 'A+' rating is supported by CHE's geographic diversification, continued implementation of organizational restructuring, improved liquidity position, and light debt burden. Fitch believes that the geographic diversity of CHE's operations helps to insulate the organization from changes in any specific market or region. Management continues to execute on its strategic plan to better align operations in certain markets and reduce its presence in other markets, which has included divestitures of underperforming assets and finalizing a joint operating agreement between Saint Joseph's Health System and Emory Healthcare. On Oct. 17, 2012, CHE and Trinity Health (revenue bonds rated 'AA') announced signing a non-binding LOI to merge both systems with a goal of reaching a Definitive Agreement in spring 2013. On Dec. 4, 2012, CHE announced the execution of a non-binding LOI with Prime Health to sell 357-bed Saint Michael's Medical Center located in Newark, NJ. On Dec. 7th, CHE announced the signing of a non-binding LOI with Eastern Maine Healthcare System (EMHS) to integrate Mercy Health System of Maine into EMHS. Fitch views CHE's intended divestitures efforts positively as it should allow the system to focus on markets in which it has better presence and scale. Fitch views the potential combination with Trinity Health as a credit positive. According to the announcement, the consolidation would create a health system operating in 21 states with 82 hospitals, 89 continuing care facilities and home health and hospice programs that provide nearly 2.8 million visits annually and roughly $13 billion in total operating revenues. CHE's liquidity position has shown year over year improvement since 2008. The primary driver behind fiscal 2011's liquidity improvement was the sale of the equity interest of the system's Mercy Health Plan for approximately $194 million. Along with better cash collections and stronger operations, CHE's liquidity ratios have improved and compare favorably to Fitch 'A' category medians. At Sept. 30, 2012, CHE's unrestricted cash and investments totaled $1.73 billion which equates to 151.5 days cash on hand, 14.1x cushion ratio (based on pro forma MADS) and 118.3% cash to debt. As provided by the underwriter, consolidated pro forma MADS is estimated at $122 million which equates to 2.8% of 2011 total revenue which is in line as compared to the 'A' category median of 2.8%. Historical coverage of pro forma MADS by EBTIDA of 3.2x in fiscal 2011 and 4.2x through the third quarter of 2012 (3Q'12) is consistent with the 'A' category median of 4.1x. Historical coverage of pro forma MADS by operating EBITDA is light at 2.4x in 2011 and 2.6x through nine month ended Sept. 30th. Fitch's primary credit concerns include CHE's light profitability for the rating level, high exposure to governmental payors and declining utilization trends. Since fiscal 2008, CHE has averaged breakeven profitability (0.3% operating margin), which compares unfavorably against Fitch's median of 2.6%. Negatively affected by poor performing facilities and a high mix of governmental payors (17.4% Medicaid), CHE has struggled to grow its income from operations. However, as management has successfully divested some of its underperforming assets, income grew to $48.3 million in 2011 (1.1% operating margin), which is the highest since fiscal 2007. Through nine months ended Sept. 30th, CHE has generated income from operations of $49.3 million equating to 1.4% operating margin and a 7.1% operating EBITDA margin (inclusive of bad debt expense). The system has a budgeted a 1.6% operating margin for fiscal 2013. On a consolidated basis, CHE's debt portfolio is 78% fixed-rate and 22% variable-rate. CHE has several outstanding swaps with a total mark-to-market valuation of negative $2.7 million as of Sept. 30, 2012. Overall, Fitch views the organization's debt profile favorably highlighted by limited put exposure and a majority of traditional fixed-rate debt. STABLE RATING OUTLOOK The Stable Rating Outlook reflects Fitch's expectation that CHE will further sustain its operating improvement and maintain solid balance sheet metrics. An Outlook revision to Positive is likely should CHE and Trinity move from the non-binding LOI to a Definitive Agreement. DISCLOSURE CHE covenants to provide annual and quarterly disclosure to bondholders, which includes management discussion, utilization statistics, and full financial statements to the MSRB's EMMA system. Management was candid and timely in its responses to Fitch during the credit review process.