Nov 21 - Fitch Ratings affirms the 'A+' long-term rating on the following
Health and Educational Facilities Authority of the State of Missouri bonds
issued on behalf of St. Luke's Episcopal-Presbyterian Hospitals (St. Luke's):
--$39,930,000 fixed rate revenue bonds, series 2011;
--$54,210,000 fixed rate revenue bonds, series 2006.
The Rating Outlook is Stable.
The bonds are secured by a pledge of the gross revenues of the obligated group,
consisting of the hospital and its parent, St. Luke's Health Corporation.
KEY RATING DRIVERS
FAVORABLE PAYOR MIX: From its location in the affluent suburbs of St. Louis
County, St. Luke's benefits from a large base of managed care patients (42.7% of
gross patient revenues in fiscal 2012) and low exposure to Medicaid (3.2%). The
population in the St. Louis metro area is projected to grow 6% between 2010 and
COMPETITIVE MARKET: Fitch's main credit concern is the competitive market with
the presence of several large regional health systems. St. Luke's inpatient
market share has slightly declined over the last several years. However,
management is focused on its outpatient growth strategy, which has been the
center of St. Luke's capital investments.
DECLINE IN UTILIZATION: Hospital volumes declined further in fiscal 2012, driven
by the economic environment. Management indicated that volume has rebounded in
the first quarter of fiscal 2013 ended Sept. 30, 2012.
MODEST PROFITABILITY: Due to the decline in utilization, total operating
revenues were flat year over year, and operating margin dropped to 2.5% in
fiscal 2012 from 4.3% the year prior. Further negative variance was prevented
through favorable managed care rate increases, effective labor management, and
expense control. Profitability through first quarter 2013 improved compared to
the same prior year period but is still down relative to historical levels.
STRONG BALANCE SHEET: Overall balance sheet strength is supported by adequate
liquidity and low debt burden. Unrestricted cash and investments of $203.3
million and total long-term debt of $97.1 million at Sept. 30, 2012 produced
183.5 days cash on hand, 24.5x cushion ratio, and 209.5% cash to debt.
LOW DEBT BURDEN: Despite depressed profitability, debt service coverage ratios
are still strong due to St. Luke's low debt burden. Maximum annual debt service
(MADS) coverage was 5.0x in fiscal 2012 and 5.9x in fiscal 2011.
St. Luke's has continued its expansion of service lines in enhancing its
capacity to provide a broader continuum of care. Since 2008, the organization
has added an outpatient center, wellness center, rehabilitation hospital, home
health services, hospice services, cardiovascular step-down unit, private duty
services, and convenient care center. The hospital recently opened a newly
renovated 10-bay cancer infusion center. The new service lines have been
accretive to the organization and provide diversification from inpatient
revenues. In fiscal 2012, St. Luke's total revenue from outpatient activity was
54% of revenues.
St. Luke's primary service area (PSA), consisting primarily of counties of St.
Louis and St. Charles, is characterized by above average personal income levels
and favorable payor mix. In fiscal 2012, managed care contributed 42.7% to gross
patient revenues, and Medicaid exposure was low at 3.2%. The hospital had 13.3%
market share in its PSA in 2011 compared to 13.8% in 2009. The presence of
several large regional competitors in the area such as SSM Health Care (rated
'AA-') and BJC HealthCare remains a primary credit concern. Management indicated
that they have been able to negotiate favorable managed care rates in the
competitive environment due to the hospital's status as a low cost provider.
Operating profitability declined in fiscal year 2012 after two years of solid
performance due mainly to a decline in volume. Negative variance in
profitability was offset by favorable managed care rate increases, effective
labor management, and expense control, resulting in lower operating expenses
than budgeted. Total operating revenues remained flat in fiscal 2012 compared to
a 6% growth in fiscal 2011, and St. Luke's produced an operating margin of 2.5%
in fiscal 2012, compared to 4.3% in fiscal 2011 and Fitch's 'A' category median
of 2.8%. Supported by improved utilization levels, operating margin was 2.1%
through the first quarter ended Sept. 30, 2012, which is still down from the
fiscal year end but improved from the same prior year period with 1.6%. For
fiscal 2013, management is budgeting a modest increase in volume, and projects a
4.4% increase in total operating revenues and 3.8% operating margin, which
includes $3.5 million in anticipated receipt of meaningful use funds. Management
has a long-term target of maintaining 3% operating margin, which Fitch believes
is necessary to maintain the current rating level.
St. Luke's balance sheet remains strong with adequate liquidity and low
leverage. Unrestricted cash and investments totaled $203.3 million at Sept. 30,
2012, up slightly from $188.4 million one year prior. Although days cash on hand
of 183.5 lags the 'A' category median of 191.0 days, other balance sheet
indicators are very strong, reflecting its low debt burden with total long-term
debt of $97.1 million. At Sept. 30, 2012, cushion ratio was 24.5x and cash to
debt was 209.5% relative to respective category medians of 16.3x and 116.4%.
Leverage metrics remain favorable with 23.9% debt to capitalization and 2.5x
debt to operating EBITDA, both stronger than medians of 40.7% and 3.9x,
St. Luke's has two series of bonds outstanding, with a total outstanding par
amount of $94.1 million. Both series are uninsured fixed rate debt producing
level debt service. St. Luke's does not have any swap exposure.
The Stable Outlook reflects Fitch's expectation that St. Luke's will rebound its
profitability, which will be important in maintaining its current rating. The
inability to strengthen cash flow may place downward pressure on the rating.
St. Luke's Episcopal-Presbyterian Hospitals owns and operates an acute care
general hospital with 493 licensed beds, a skilled nursing facility with a
residential care services, St. Luke's Rehabilitation Hospital (a joint venture),
and related healthcare facilities in Chesterfield, Missouri, a suburb of St.
Louis. In fiscal year 2012, St. Luke's generated $439.9 million in total
operating revenues. St. Luke's covenants to provide annual disclosure within 180
days after year end, and quarterly disclosure within 45 days of the quarter end
through with the Municipal Securities Rulemaking Board.
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 12, 2012;
--'Non-Profit Hospitals and Health System Rating Criteria', July 23, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria