CHICAGO--(Business Wire)--
Fitch Ratings has assigned an underlying 'A' rating on the
approximately $200 million of series 2008 bonds issued on behalf of
The Saint Cloud Hospital (SCH) and CentraCare Health System (CHS) by
the City of St. Cloud (MN), and affirmed at 'A' the approximately $233
million of outstanding debt. The Rating Outlook is Stable.
The series 2008 bonds were originally scheduled to sell in early
November 2007 but were delayed. The series 2008A-C bonds will be
structured as variable-rate demand revenue bonds and are now scheduled
to sell the week of Feb 11. The bond proceeds will be used to
construct a new 322,000-square-foot patient bed tower for St. Cloud
Hospital that will include single occupancy rooms and expansions for
intensive care units, surgical suites, women's & children's services,
cardiology and oncology. In conjunction with the issuance of the
series 2008 bonds, CHS has entered into a forward-starting floating-
to fixed-rate swap which will effectively convert the 2008 bonds to a
synthetic fixed-rate obligation.
The series 2008A bonds will have a liquidity facility from
JPMorgan Chase Bank, N.A. (rated 'AA-/F1+' by Fitch); the series 2008B
bonds from The Bank of Nova Scotia (rated 'AA-/F1+'); and the series
2008C bonds from The Royal Bank of Canada (rated 'AA'/F1+'). Ratings
based on bank support will be assigned closer to sale date.
The 'A' rating and affirmation are supported by CentraCare Health
System's (CHS) strong operating performance and pro-forma debt service
coverage, products of its dominant market position, integrated
delivery model, and the benefits of the favorable regulatory
environment in Minnesota. With no other competitor of its size in its
12-county service area, CHS had an 86.7% market share in 2006, which
has remained relatively stable in recent years.
CentraCare's core alignment of St. Cloud Hospital and its 186
physician CentraCare Clinic has resulted in steady inpatient and
outpatient utilization growth, positively contributing to CHS's strong
operating performance. Since suffering losses from operations in 2003,
CHS has demonstrated positive operating margins above 4.4% since 2004
and reported a 4.4% operating margin on total revenue of $649.7
million for its fiscal year-end June 30, 2007, well above Fitch's 'A'
rated median of 3.2%. Furthermore, EBITDA margins exceeded 13.7%
through the same period and equaled 16.8% for fiscal 2007, again well
outpacing the 'A' rated median of 12.1%. While CentraCare's maximum
annual debt service (MADS) will increase to $24.4 million from $18.5
million, historical pro-forma coverage of MADS in 2007 is a strong 4.9
times (x). Finally, the State of Minnesota's hospital bed moratorium
sets a very high barrier for any competitor wishing to establish a
hospital within CentraCare's primary market.
The Stable Rating Outlook reflects Fitch's expectation that
CentraCare will successfully complete its modernization and expansion
project and continue its market dominance. Fitch has historically
commented on CHS's low capital investment relative to depreciation,
which equated to a very low 50.6% in 2004. Since that time, CHS's
capital expenditures as a percentage of depreciation climbed to 241%
and 171% in fiscals 2007 and 2006, respectively. CHS's long-range
financial plan calls for continued capital investment of approximately
$250 million over the next five years. Fitch believes that future
capital spending plans will be funded from cash flow and philanthropy,
which will limit further growth of CHS's liquidity position over the
near term. Although Fitch anticipates a slight decrease in overall
operating profitability and a slight decline in liquidity relative to
expenses over the near term, a return to historical operating
profitability and liquidity measures in line with the mid to upper end
of the rating category is expected over the medium term. Furthermore,
Fitch is confident that management's planned capital spending will be
contingent on operating performance.
Primary credit concerns center around CHS's recent growth in
salary expense, an increased debt burden, and rising levels of bad
debt. CentraCare's salary expense has been in excess of 56.1% since
2003 which is well above Fitch's 'A' rated median of 49.7%. After
reaching a high of 63% in 2003, management initiated various
mitigation strategies that reduced its compensation expense to 57.7%
in fiscal 2006. The ratio rose to 59.1% in fiscal 2007, due primarily
to a temporary increase in labor expenses associated with the
implementation of CHS's electronic medical record. Although Fitch does
expect this ratio to be higher than the median given CHS's level of
integration and its employment of 218 physicians, we anticipate that
management will continue to mitigate these expenses and hone its focus
on productivity enhancement and compensation incentives. Upon issuance
of the 2008 bonds, CentraCare's debt burden will be slightly weaker
than Fitch's 'A' rated medians, with debt-to-EBITDA increasing to 3.6%
from 2% as compared to the median of 3.1%. Additionally, pro-forma
MADS as a percentage of total revenue increases to 3.8%, which is
slightly weaker than the median of 3.1%. Finally, bad debt expense has
grown due to increased market penetration of high-deductible health
plans. However, bad debt expense equaled just 1.9% of total revenues
in 2007, well below Fitch's 'A' rated median of 5.7%.
CHS, located in St. Cloud, Minnesota (about 80 miles northwest of
Minneapolis), operates a 489-licensed bed hospital (The Saint Cloud
Hospital), a 186-member multi-specialty physician clinic, two critical
access hospitals, three long-term care facilities, and other related
entities. CHS had total operating revenue of approximately $650
million in fiscal 2007. CHS has covenanted to provide quarterly and
annual disclosure of financial statements to bondholders. Recent
quarterly disclosure to Fitch and bondholders has been timely and
includes a balance sheet, income statement and utilization statistics.
Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.
Fitch Ratings
Anthony Houston, +1-312-368-3180 (Chicago)
James LeBuhn, +1-312-368-2059 (Chicago)
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
Copyright Business Wire 2008
