Fitch Rates CoxHealth's (MO) 2013A Revs at 'A'; Outlook Stable

Thu Mar 21, 2013 2:41pm EDT

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NEW YORK--(Business Wire)--
Fitch Ratings has removed CoxHealth's rating from Negative Watch and assigned an
'A' rating to the expected issuance of $199.6 million of Missouri Health and
Educational Facilities Authority (MHEFA) bonds, Series 2013A issued on behalf of
CoxHealth. Fitch also affirms the following MEHFA bonds also issued on behalf of
CoxHealth: 

-- $162,5000,000 Fixed-Rate Revenue and Refunding Bonds, Series 2008A 

-- $70,000,000 Variable-Rate Revenue and Refunding Bonds, Series 2008B 

-- $34,635,000 Variable-Rate Revenue Bonds, Series 2008C 

-- $31,130,000 Revenue Capital Appreciation Bonds, Series 1992H 

-- $15,080,000 Fixed-Rate Revenue Bonds, Series 1993I 

The Rating Outlook is Stable. CoxHealth's rating had been on Rating Watch
Negative due to the pending debt issuance. 

The 2013A bonds are expected to be issued as fixed rate. Proceeds from the bonds
will be used to finance a new to patient tower on CoxHealth's main campus ($115
million), fund the acquisition of and capital projects at Skaggs Medical Center
(renamed Cox Medical Center Branson) ($50 million), refund all of Cox Medical
Center Branson's (Cox Branson) outstanding debt ($30 million), and pay for
capitalized interest and the cost of issuance. Maximum annual debt service
(MADS) increases to $29.8 million from $22.9 million and that figure was
provided by the underwriter. After issuance, CoxHealth will have $512.9 million
in total bonded debt with 80% composed of fixed-rate bonds. 

SECURITY 

Gross revenue pledge from CoxHealth and a mortgage (only on Cox Medical Center
South campus and Cox Walnut Lawn campus, including Ambulatory Surgery Center at
the Walnut Lawn campus). 

KEY RATING DRIVERS 

INTEGRATED MODEL A STRENGTH: Fitch views CoxHealth's integrated system, which
includes five hospitals, a high level of employed physicians, 83 clinic sites, a
single IT platform across the system, a health plan, and home care agencies, as
a credit strength, historically providing Cox with operational stability, but
increasingly positioning it well as health care reform progresses. 

NEW TOWER BEING FUNDED: The current debt issuance includes $115 million to fund
a new patient tower. Fitch believes the project is strategically necessary,
upgrading CoxHealth's main campus to all private rooms. The new tower, the
capital projects to be funded at Cox Branson with this debt issue, and the
projects CoxHealth completed with its 2008 bond issue address most of
CoxHealth's major long-term capital needs, which will allow CoxHealth to grow
into the debt over time. 

INCREASED DEBT LOAD MANAGEABLE: Concerns about the increase in debt
burden--maximum annual debt service increases $6.8 million to $29.8 million--are
mitigated by the addition of Cox Branson, which averaged $12.4 million in EBITDA
over the last two fiscal years, as well as the freeing up of $5.6 million in
yearly cash flow as CoxHealth makes its last payment under its five-year
Department of Justice settlement. 

STABLE OPERATING PERFORMANCE: Over the last two fiscal years (Sept. 30 year end)
and through the six month interim, CoxHealth has produced operating margins
between 2% and 2.5% and operating EBITDA margins between 7% and 7.4%. While
lower than Fitch's 'A' category medians of 2.8% and 9.8% respectively, the level
of performance is consistent reflecting the stability of CoxHealth's integrated
model. 

INCREASED MARKET SHARE: With the acquisition of Cox Branson, CoxHealth's
inpatient market share increased to just under 50% in its primary service area.
There still remains a solid second hospital competitor in Mercy Springfield with
approximately a 40% market share. 

RATING SENSITIVITIES 

MAINTENANCE OF OPERATING PERFORMANCE: Deviation from operating performance
either up or down could change the rating; however, Fitch expects CoxHealth to
maintain operating margins between 1.5% and 2%. 

CREDIT SUMMARY 

The 'A' rating reflects CoxHealth's solid market position, including a nearly
50% inpatient market share with the Cox Branson acquisition, and supported by a
stable integrated operating platform, with over 300 integrated physicians.
Located in Springfield, Missouri, CoxHealth clinical services cover a 24 county
service area in southwest Missouri and parts of northern Arkansas. CoxHealth
owns and operates four tertiary hospital facilities (802 licensed beds in
Springfield, Missouri), with over 300 integrated physicians. CoxHealth also
operates a skilled nursing facility, a psychiatric and rehabilitation facility,
over 83 outpatient sites, a home care company, a health plan, and a foundation.
In fiscal 2012, CoxHealth had operating revenues of approximately $1 billion. 

FINANCIAL PROFILE 

CoxHealth's operating performance has been stable over the last three audited
years with CoxHealth averaging a 2% operating margin and a 7.3% operating EBITDA
over this time. Three month fiscal 2013 results show CoxHealth maintaining the
stable operations, with a 1.9% operating margin and 7.4% operating EBITDA. 

The consistent operations have supported solid historical debt service ($22.9
million) coverage, which averaged 3.5 times (x) over the last three audited
years. The rise in pro forma MADS to $29.8 million drops coverage to 2.9x from
3.8x in fiscal 2012, but this is based on just CoxHealth's results. Adding Cox
Branson's $12.7 million in EBITDA brings the pro forma coverage up to 3.4x. Cox
Branson was acquired on January 1, 2013 and that is the date when its operations
were consolidated into CoxHealth's. 

CoxHealth's liquidity has generally compared well with Fitch's A' category
medians, but liquidity was lower through the three month interim with
unrestricted cash and investments totaling $389.1 million, due to a $25 million
payment to acquire Cox Branson. Interim liquidity figures show 163.8 days cash
on hand, a pro forma cushion ratio of 13.1x, and pro forma cash to debt of
79.6%, all below category medians. However, with the bond issue CoxHealth will
put $25 million back on the balance sheet and add another $28 million of cash
and investments that was on Cox Branson's balance sheet, which will move
liquidity figures closer to the medians. 

Most of CoxHealth's debt is fixed, with CoxHealth's variable rate debt exposure,
at $105 million, a manageable figure. A Bank of Nova Scotia (Fitch rated
'AA-/F1+') letter of credit (LOC) for $70 million is due for renewal in 2014 and
the bank has indicated to CoxHealth that it will not renew. CoxHealth management
will likely privately place these bonds in a bank-qualified transaction, which
it did with the other $35 million in variable rate debt. Fitch is not concerned
about the LOC termination, given CoxHealth's liquidity and its access to the
market at the 'A' rating level. CoxHealth has one basis swap with a notional
amount of $200 million, no collateral posting requirements, and a mark-to-market
of a negative $2.7 million as of December 31, 2012. 

COX BRANSON ACQUISITION 

As of Jan. 1, 2013, Cox Branson, a 167-bed community hospital in Branson, MO,
became the fourth hospital in the CoxHealth system. As part of the acquisition,
CoxHealth contributed $25 million to the Skaggs Foundation (a non-profit
foundation in Branson, MO, whose general purpose is to support Cox Branson),
will borrow an additional $25 million for capital needs at Cox Branson, included
in the current bond issue, and has committed capital investments of another $35
million at Cox Branson over the medium term, which CoxHealth believes it will be
able to fund through the cash flow of Cox Branson. 

Fitch views the acquisition positively. For CoxHealth, it grows its market share
in its primary service area and provides access to a fairly well-insured
population as Branson is a vacation and retirement destination. CoxHealth should
be able to stem the outmigration of services in Branson, as well as redirect a
larger proportion of referrals up to Springfield. For Branson, joining CoxHealth
will provide it the opportunity to gain from CoxHealth's size, in terms of group
purchasing and managed care leverage, to upgrade its information technology to
the same systems CoxHealth uses, and to utilize the resources CoxHealth can
provide in rotating staff and physicians down to Branson to manage the
seasonality of Branson's local patient population. 

In fiscal 2012, Cox Branson had a slight operating loss of $898,000 on a revenue
base of $149.7 million. The operating loss was an improvement over fiscal 2011
results and the positive operating trend continued through the eight-month
fiscal 2013 interim period, with a 4.6% operating margin and 10.9% operating
EBIIDA margin. 

The $25 million in capital investments will finance the retrofitting and
expansion of the emergency department, a possible addition of an observation
unit, and renovation of the critical care areas. 

COXHEALTH TOWER PROJECT 

CoxHealth is issuing $115 million of the debt to finance the building of a new
patient tower that will be contiguous with its current patient tower and provide
for all private rooms at CoxHealth. The new nine story inpatient tower will have
multiple floors of inpatient and ambulatory space (approximately 65-80 net new
adult & pediatric patient rooms), three to four shelled floors, ambulatory and
inpatient operations for neuroscience, and a new post-partum and NICU center.
The total cost is projected at $130 million with $115 million in bonds funds,
$10 million in philanthropy (CoxHealth has a $5 million lead gift in place), and
$5 million in cash, if needed. 

A GMP is not currently in place but is expected to be signed around the time of
the issuance of the bonds. 

The project will provide significant upgrades to CoxHealth's current main
campus. Concerns about the general risks of a capital project of this size are
mitigated by the current management team's history of undertaking successful
capital projects. I n 2008, CoxHealth borrowed $105 million for a series of
projects, which included a new emergency room/trauma center, parking garage,
significant renovations and expansion of Cox Walnut Lawn Hospital, and the
building of an ambulatory surgery center. CoxHealth completed all of the
projects under budget and was able to use the remaining funds to renovate and
expand its intensive care unit. 

STABLE OUTLOOK 

The Stable Outlook reflects Fitch expectation that the factors that contribute
to Coxhealth's consistent operating performance and debt service coverage will
remain stable over the near term. 

DISCLOSURE 

CoxHealth has covenanted to provide quarterly and annual disclosure of financial
statements to bondholders. Recent disclosure to Fitch has been excellent and
includes a balance sheet, income statement, utilization statistics, statement of
cash flows and management discussion and analysis. 

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'(June. 6, 2012); 

--'Nonprofit Hospitals and Health Systems Rating Criteria'(July 23, 2012). 

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=681015

Nonprofit Hospitals and Health Systems Rating Criteria 

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418

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Fitch Ratings
Primary Analyst
Gary Sokolow, +1 212-908-9186
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10014
or
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Associate Director
or
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