News Column

Fitch Affirms University of Chicago Medical Center's (IL) Rev Bonds at 'AA-'; Outlook Stable

June 3, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings affirms the 'AA-' long-term rating on the University of Chicago Medical Center, Illinois' (UCMC) outstanding debt, which is listed at the end of the press release.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of unrestricted receivables.

KEY RATING DRIVERS

SOLID MARKET POSITION IN COMPETITIVE SERVICE AREA: UCMC is among the leading academic medical centers in the U.S. and maintains a strong reputation for clinical excellence in the provision of advanced high-acuity services. Its relationship with the University of Chicago (the university; revenue bonds rated 'AA+' by Fitch) and focus on research differentiates it in a highly competitive and consolidating market.

INTEGRAL RELATIONSHIP WITH THE UNIVERSITY: UCMC plays a fundamental role in the highly integrated clinical and research platform between UCMC and the university's Biological Sciences Division, which includes the Pritzker School of Medicine. UCMC has increased its transfers to the university over the last few years in order to support the academic programs in biology and medicine.

MAJOR CAPITAL SPENDING COMPLETE: UCMC's new hospital pavilion project (Center for Care and Discovery (CCD)) opened on time in February 2013 and within budget at a total cost of $700 million. Volume has been robust despite the lack of parking at the facility (adjacent parking garage to open in March 2015). Approximately $100 million of the project cost was supposed to be funded from philanthropy and the amount raised to date is only $25 million. Liquidity ratios have declined since Fitch's last rating review due to the higher than expected equity contribution, however, liquidity ratios remain adequate for the rating level and absolute liquidity levels have rebounded.

CONSISTENT STRONG PROFITABILITY: Operating cash flow has remained strong driven by good volume growth and continued focus on expenses. Operating EBITDA margin was 12.6% in fiscal 2013 (June 30 year end) compared to 15.5% the prior year and was 13.5% through the nine months ended March 31, 2014.

HIGH DEBT BURDEN: UCMC's debt burden remains high as the majority of the CCD was funded from debt. MADS accounted for 3.9% of total revenue in fiscal 2013. Debt service coverage has improved over the last few years and was 4.4x in fiscal 2013 compared to 4.6x in fiscal 2012 and was 4.8x for the nine months ended March 31, 2014.

RATING SENSITIVITIES

SUSTAINED STRONG CASH FLOW: Fitch expects UCMC to sustain its strong cash flow to support its high debt burden. A reduction in capital needs in the near term should facilitate continued liquidity growth.

CREDIT PROFILE

UCMC is currently licensed to operate 605 beds in four hospitals including the newly opened CCD, Bernard A. Mitchell Hospital (adult facility), Chicago Lying-in Hospital (women's hospital), and Comer Children's Hospital, which are all located in Chicago on the main campus of the university. Total revenue for the fiscal year ended June 30, 2013 was $1.3 billion.

Relationship with the University

The 'AA-' rating reflects UCMC's excellence and reputation in advanced high-acuity clinical services, the integral role of UCMC within the university, and its solid financial profile. Located on the main campus of the university, UCMC is the principal teaching affiliate of the university's Pritzker School of Medicine. UCMC provides a comprehensive array of services and its focus and clinical excellence is in quaternary care. The university is the sole corporate member of UCMC. UCMC benefits from the closed medical staff model as all active physicians and a recently created Dean of Clinical Practice position has improved the coordination among the physicians in the faculty practice plan.

Strong Volume Growth

UCMC has had strong volume growth in a market that has experienced a decline in discharges. Over the last two years, UCMC's discharges increased 15% compared to the top 20 hospitals in its service area, which in aggregate declined by 1% compared to the state which had a 6% reduction. Volume growth has been driven by improved physician productivity as the number of faculty physicians has stayed constant. Also aiding volume growth is UCMC's partnerships with other providers in the area such as the joint venture with Silver Cross Hospital on a cancer center. Other affiliations are in the process.

Major Capital Spending Complete

The CCD opened in February 2013 compared to the original projection of January 2013 and houses the programs for adult complex cases in one building with a focus on cancer, gastrointestinal, neuroscience, advanced surgery and high-tech imaging. Given the increase in volume, UCMC received the approval to add 38 medical/surgical beds back in the Mitchell facility, which was supposed to be decanted after the CCD opened. In addition, there are two shelled floors in the CCD and UCMC submitted a certificate of need application to open 166 beds in the CCD, but most of these beds are being relocated from Mitchell (net increase of 12 beds).

The last remaining project is the parking garage, which should open in March 2015. This was financed by a $75 million direct bank loan in 2013 (draw down structure). Future capital spending is targeted at approximately 1.25x depreciation expense compared to an annual average of over 3x over the last four years. No additional debt is expected.

Strong Profitability

Profitability has been strong and has exceeded the AA category medians. In fiscal 2013, UCMC had $78.5 million operating income (5.9% operating margin; 12.6% operating EBITDA margin) compared to $119 million (9.2% operating margin; 15.5% operating EBITDA margin) the prior year and the 'AA' category median of 4.2% (operating margin) and 11.8% (operating EBITDA margin). Profitability has been driven by volume growth, stable payor mix, and implementation of lean initiatives. Operating margin has remained solid despite the increased cost of the CCD. In fiscal 2014, the operating margin budget is 3.3%, which Fitch expects UCMC to exceed as operating margin was 5.2% through the nine months ended March 31, 2014. UCMC targets to maintain operating EBITDA margins above 13%.

Good Liquidity

Days cash on hand has remained above 250 days over the last five years despite the greater than expected equity contribution needed for the CCD, increased transfers to the university and increased pension funding. UCMC's defined benefit plan is part of the university's and UCMC is projected to contribute $32.5 million a year till 2019 so the plan can reach 100% funded status.

Liquidity growth has been aided by good investment returns as well as a return to more normal accounts receivable since the state started paying its outstanding Medicaid balances. At March 31, 2014, UCMC had 288.8 days cash on hand and 114% cash to debt (full draw down of direct bank loan). A portion of UCMC's investments are invested with the university; however, the overall availability of its investments is fairly liquid.

High Debt Burden

Fitch's main credit concern is UCMC's above-average debt burden; however, debt ratios have improved since the last rating review. MADS is $52.1 million (including the full draw down of direct bank loan) and debt service is fairly level. MADS accounted for 3.9% of total revenue in fiscal 2013 compared to the 'AA' category median of 2.6% and debt-to-capitalization was 41.9% compared to the 'AA' category median of 32.7%.

Debt service coverage calculations do not include the transfers to the university, which have increased to $74.5 million in fiscal 2013 from $23 million in fiscal 2011. This transfer is at the sole discretion of the board.

Somewhat Aggressive Debt Portfolio

Total outstanding debt including the full draw down of the $75 million direct bank loan is approximately $893 million with 46% underlying fixed-rate and 54% underlying variable rate (45% variable rate demand bonds and 8% indexed floating direct bank loan). UCMC's LOC exposure is diversified among four different banks, and the expiration dates range from 2014 to 2017. UCMC's cash-to-putable debt is solid at 2.5x. UCMC has a $325 million floating to fixed rate swap with JPMorgan and Wells Fargo and is not posting any collateral currently. Collateral posting requirements are at a $50 million threshold for the JPMorgan swap at UCMC's current rating level. The Wells Fargo swap does not have collateral posting requirements unless UCMC's rating is downgraded to 'A+' or lower.

Disclosure

UCMC covenants to provide annual audited financials within 150 days of fiscal year end and unaudited quarterly financials for the first three fiscal quarters within 60 days of quarter end.

Outstanding Debt:

$72,080,000Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue bonds series 2012A

$90,000,000Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue bonds series 2011C

$46,250,000Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2011B (LOC: Wells Fargo Bank, N.A.)

$46,250,000Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2011A (LOC: Bank of America, N.A.)

$46,250,000Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2010B (LOC: Wells Fargo Bank, N.A.)

$46,250,000Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2010A (LOC: Bank of America, N.A.)

$140,000,000Illinois Finance Authority (IL) (University of Chicago Medical Center) variable-rate demand revenue bonds series 2009 D-1, D-2, E-1 and E-2 (LOC: JPMorgan Chase and PNC Bank)

University of Chicago Medical Center (IL) (Bank Bonds) bank bonds series 2009D-1 and D-2

$85,000,000Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue bonds series 2009C

$150,840,000Illinois Finance Authority (IL) (University of Chicago Medical Center) revenue refunding bonds series 2009A&B

$14,530,000Illinois Health Facilities Authority (IL) (The University of Chicago Hospitals and Health System) revenue bonds series 2003

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated 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=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832750

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Fitch Ratings, Inc.

Primary Analyst

Emily Wong, +1-415-732-5620

Senior Director

650 California St.

San Francisco, CA 94108

or

Secondary Analyst

Dana Sodikoff Ringer, +1-312-368-3215

Director

or

Committee Chairperson

Jim LeBuhn, +1-312-368-2059

Senior Director

or

Media Relations

Sandro Scenga, +1-212-908-0278

sandro.scenga@fitchratings.com

Source: Fitch Ratings


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