News Column

Fitch Affirms Catholic Health System's (NY) Revs at 'BBB+'; Outlook Stable

May 28, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB+' rating on the following Catholic Health System (CHS) bonds issued through the Dormitory Authority of the State of New York and Erie County Industrial Development Agency:

--$13.6 million, series 2012A&B;

--$23.1 million, series 2008;

--$10.2 million, series 2007A&B;

--$50.3 million, series 2006.

The Rating Outlook is Stable.

SECURITY:

The series 2012A&B, 2008 and 2006 bonds are secured by pledge of gross receipts, mortgage, and certain property. Additionally, the series 2008 and 2006 bonds are supported by the respective HSBC Bank letters of credit (LOCs). The series 2007 bonds are supported by first mortgage liens on all property acquired by Our Lady Renaissance (OLV), all unrestricted accounts receivable, and the LOC from HSBC Bank.

KEY RATING DRIVERS

SOLID MARKET POSITION: CHS continues to hold the leading market position in Buffalo, NY with an improved 45.1% market share in 2012, up from 2011's 43.2% position. CHS' main competitor is Kaleida Health (KH) which had a 38.2% share in 2012. Fitch views the system's market share growth and successful strategy in expanding its presence favorably.

IMPROVING PROFITABILITY: In fiscal 2013 (Dec. 31, 2013; audited), CHS earned $31.9 million in income from operations, which is a four-year high and highlights an improving trend from fiscal 2010's $16.8 million gain. CHS' 3.5% operating margin and 8.2% operating EBITDA margin are solid for the 'BBB+' rating level (compared against Fitch's 'BBB' category medians of 1.8% and 9%, respectively) and support solid maximum annual debt service (MADS) coverage metrics of 3.6x by EBITDA and 3.5x by operating EBITDA.

SATISFACTORY BALANCE SHEET: Through the three-month interim period 2014 (March 31, 2014; unaudited), CHS had approximately $291 million in unrestricted cash and investments, which translated into 124.5 days cash on hand (DCOH), 13.4x cushion ratio, and 207.1% cash to debt. Fitch believes the system's balance sheet metrics are satisfactory and provide sufficient financial cushion at the 'BBB+' rating level.

INCREASING DEBT BURDEN: Over the next 12 months CHS plans to borrow approximately $100 million of additional debt to fund various projects throughout the system. Overall, Fitch believes the organization has some debt capacity at the current rating level.

RATING SENSITIVITIES

MAINTENANCE OF CURRENT PROFILE: Fitch expects CHS to maintain its leading market position, while sustaining consistent operating profitability that should support the incremental 2015 borrowing.

ABSORPTION OF ADDITIONAL DEBT: With the consideration of additional debt in 2015, which will increase the organization's total debt burden, Fitch believes it is imperative that CHS generate commensurate revenues to largely offset any leverage metric deterioration.

CREDIT PROFILE

CHS is a large healthcare delivery system headquartered in Buffalo, NY. Maintaining a top-tier market position, CHS had total revenue of $922.2 million in fiscal 2013. As a Catholic provider, CHS has close co-sponsor relationships with CHE Trinity (revenue bonds rated 'AA'; Stable Outlook by Fitch) and Ascension Health (revenue bonds rated 'AA+'; Stable Outlook).

SOLID FINANCIAL PROFILE

Fitch views favorably CHS' improving profitability trend coupled with a relatively low leverage position. In 2013, CHS generated $31.9 million in income from operations, which was a four-year high and continues to highlight an improving profitability trend from fiscal 2010's $16.8 million gain. CHS' 3.5% operating margin and 8.2% operating EBITDA margin are solid for the 'BBB+' rating level (compared against Fitch's 'BBB' category medians of 1.8% and 9%, respectively) and support solid MADS coverage metrics of 3.6x by EBITDA and 3.5x by operating EBITDA.

Overall, MADS of $21.7 million represented 2.4% of total revenues, which Fitch views as relatively low for the rating level compared against the 'BBB' category median of 3.5%. Additionally, CHS' currently low debt burden allows for the organization to consider additional debt in 2015, which Fitch believes can be adequately absorbed into the organization's financial profile.

Through the three-month 2014 interim period, CHS earned approximately $5.7 million in income from operations (2.5% operating margin), which was ahead of the $4 million gain (1.8% operating margin) recorded in the previous year's first-quarter. Management expects to finish fiscal 2014 with an approximate $28.7 million gain, which Fitch views as reasonable.

LEADING MARKET POSITION

CHS held a leading market position of 45.1% in Buffalo in 2012, having consistently grown over the prior three years. Fitch views favorably CHS' ability to grow its market position in a competitive environment, which reflects management's effective practices to expand key service lines and geographic footprint, while creating and strengthening physician relationships in the broader service area.

DEBT PROFILE

CHS' debt profile is approximately 26% fixed rate and 74% variable rate. The system has six outstanding swaps with HSBC Bank and JP Morgan Chase Bank (rated 'A+/F1'). As of April 30, 2014, the total notional amount of swaps outstanding was $80.3 million with a negative mark-to-market valuation of $10.1 million However, CHS is not required to post collateral related to its swaps. Overall, Fitch views the system's debt portfolio as aggressive, but notes the staggered maturities of its variable-rate debt instruments.

CONTINUING DISCLOSURE

CHS covenants to disclose annual audited financial statements and quarterly information to the MSRB's EMMA system.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 2013).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832002

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Michael Burger, +1 415-659-5470

Director

Fitch Ratings, Inc., 650 California Street, Fourth Floor, San Francisco, CA 94108

or

Secondary Analyst

Gary Sokolow, +1 212-908-9186

Director

or

Committee Chairperson

Eva Thein, +1 212-908-0674

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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