CHICAGO, December 11 (Fitch) Fitch Ratings has affirmed the 'A+' rating on the
following bonds issued by the Illinois Finance Authority on behalf of Southern
Illinois Healthcare Enterprises, Inc. (SIHE).
--$69 million series 2005 revenue refunding bonds;
--$51.75 million series 2008 variable rate demand bonds.
The Rating Outlook is Stable.
Bond payments are secured by a pledge of the gross revenues of the obligated
KEY RATING DRIVERS
STRONG PROFITABILITY AND LOW DEBT BURDEN: Operating profitability has been
consistently strong with operating margin averaging 3.9% since fiscal 2008.
SIHE's strong profitability and low debt burden, with maximum annual debt
service (MADS) equal to a light 2% of revenue in fiscal 2013, allow for strong
MADS coverage by EBITDA of 8.3x.
ROBUST LIQUIDITY METRICS: Strong cash flows and moderate capital spending
increased unrestricted liquidity by 48% since fiscal 2010 to $349.7 million at
Sept. 30, 2013, equating to a very strong 39.0x cushion ratio and 265.5% cash to
INCREASED CAPITAL SPENDING: Capital expenditures are expected to increase in
fiscal years 2014 and 2015 primarily due to investments in renovating and
expanding surgical suites and a new cancer center. The projects are expected to
be funded by a debt issuance in early fiscal 2015 and cash flows, with no
adverse impact to liquidity metrics.
LEADING MARKET SHARE: A stable leading primary service area market share of
50.6% in fiscal 2012 has supported consistent revenue generation and is
approximately twice the share of its nearest competitor.
UNFAVORABLE PAYOR MIX: With Medicare and Medicaid accounting for a high 63% of
gross revenues, SIHE remains vulnerable to potential state and federal budget
cuts. Additionally, bad debt expense remains high at 8.4% of patient service
revenue in fiscal 2013.
MAINTENANCE OF CREDIT PROFILE: Fitch believes that SIHE has the capacity to
absorb the additional debt expected to be issued in early fiscal 2015 at the
current rating. However, Fitch expects that SIHE will maintain coverage metrics
that are consistent with the 'A+' rating and that capital projects will not
negatively impact unrestricted liquidity.
SIHE is a three-hospital health system headquartered in Carbondale, IL,
approximately 105 miles from St. Louis. Total revenues equaled $439.9 million in
fiscal 2013. SIHE covenants to disclose both annual and quarterly financial
statements through the Municipal Securities Rulemaking Board's EMMA system.
STRONG PROFITABILITY AND LOW DEBT BURDEN
Operating profitability has consistently exceeded the 'A' category medians, with
operating margin averaging 3.9% since fiscal 2008 relative to Fitch's 'A'
category median of 3.3%. Operating margin declined to 0.7% in fiscal 2012
primarily due to an unexpected drop in high acuity cardiology and neurology
volumes. Volumes rebounded in fiscal 2013 and operating margin rebounded to
3.8% in fiscal 2013.
Consistently strong profitability and a low debt burden allow for strong debt
service coverage. SIHE's debt burden is low with MADS equal to 2% of revenue in
fiscal 2013, comparing favorably to Fitch's 'A' category median of 3.1%. MADS
coverage by EBITDA is strong at 8.3x in fiscal 2012 and the interim period,
easily exceeding Fitch's 'A' category median of 3.8x.
ROBUST LIQUIDITY METRICS
Unrestricted cash and investments increased 48% since fiscal 2010 to $349.7
million at Sept. 30, 2013. The liquidity growth reflects SIHE's strong cash
flow generation and moderate capital spending. Liquidity metrics are strong
across the board with 298.6 days cash on hand, 39.0x cushion ratio and 265.5%
cash to debt, easily exceeding Fitch's 'A' category medians of 196.3 days, 15.6x
and 129.2%. The strong liquidity provides significant cushion for payment of
INCREASED CAPITAL SPENDING
Capital spending is projected to increase to $59 million in fiscal 2014 and $101
million in fiscal 2015 after a period of more moderate capital spending,
averaging $30 million since fiscal 2008. The increased capital spending
includes strategic investments in renovated and expanded surgical suites, a new
cancer center and a new energy center to insulate SIHE from adverse weather
events such as tornados. SIHE broke ground on the new cancer center in fall
2013 with an expected completion date in fiscal 2015.
The projects are expected to be funded by a debt issuance in early fiscal 2015
with a maximum par amount of $80 million and cash flows from operations with no
impact to SIHE's liquidity position. The expected bond issuance has not yet
been board approved and is not incorporated into Fitch's credit analysis. Fitch
will assess the impact of the additional debt on SIHE's credit profile as plans
become more certain. However, Fitch believes that SIHE currently has the
capacity to absorb the additional debt at the current rating level.
Additionally, Fitch views the capital projects favorably as they should bolster
SIHE's already strong competitive position and help to reduce outmigration.
The increased capital spending reflects strategic choices as opposed to capital
requirements to maintain its existing facilities. Historic capital spending,
averaging 130% of depreciation expense, has sustained a low average age of plant
of 8.8 years at Sept. 30, 2013 relative to Fitch's 'A' category median of 10.3
LEADING MARKET SHARE
SIHE's stable leading primary service area market share, equal to 50.6% in
fiscal 2012, is approximately twice the share of its nearest competitor and has
supported consistent revenue generation. The limited competition is a primary
credit strength. However, the service area is characterized by high levels of
outmigration to St. Louis area hospitals. Management is taking steps to
decrease outmigration, including the recruitment of additional specialists in
oncology, cardiology, orthopedics and surgical specialties; construction of the
new cancer center and renovated surgical suites; and SIHE's participation in the
The BJC Collaborative, founded in 2012 by BJC HealthCare in St. Louis, is a
partnership amongst six health care systems located in Illinois, Missouri and
Eastern Kansas. The collaboration allows members to remain independent while
achieving cost savings, sharing clinical data, developing clinical protocols and
improving access to high acuity services through BJC's flagship Barnes Jewish
Hospital in St. Louis.
UNFAVORABLE PAYOR MIX
Credit concerns include a challenging payor mix and relatively high bad debt
levels. Medicare and Medicaid account for over 60% of gross revenues, leaving
the system vulnerable to potential federal and state budget cuts. Additionally,
SIHE received roughly $18 million in supplemental government funding in fiscal
2013, or 4% of total operating revenue. Bad debt as a percent of revenue
remains high in fiscal 2013 at 8.4%, but did decrease from 9.1% in fiscal 2012.
Fitch Ratings, Inc.
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Chicago, IL 60602
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