CHICAGO–(BUSINESS WIRE)–Fitch Ratings has affirmed the ‘A’ rating on approximately $806.3
million of Illinois Finance Authority revenue bonds issued on behalf of
OSF Healthcare System (OSF).
The Rating Outlook is Stable.
SECURITY
A security interest in the unrestricted receivables of the Obligated
Group.
KEY RATING DRIVERS
REGIONAL GROWTH STRATEGY: OSF continues to execute on its growth
strategy to become the leading regional health care provider serving the
northern third of Illinois excluding the Chicago metropolitan area.
Among other initiatives OSF acquired Ottawa Regional Hospital (91
staffed beds), partnered with University of Illinois Medical School in
the development of a Simulation Center, and has further extended its
ambulatory care network and affiliation arrangements with various
community hospitals.
INTEGRATED SYSTEM: OSF’s significant physician employment (over 500
physicians employed) combined with a system-wide approach to leadership
emphasizing physician input, has led to physician alignment and a more
integrated approach to care which Fitch believes better positions the
corporation for health care reform.
IMPROVED OPERATING PERFORMANCE: OSF’s operating profitability has
historically been weak, but has improved in fiscal 2011 and through the
six months ended March 31, 2012, reflecting the benefits of its
investment in physician practices and IT.
MANAGEABLE DEBT BURDEN: Many of OSF’s leverage metrics compare favorably
to Fitch’s ‘A’ category medians with maximum annual debt service (MADS)
as a percentage of revenue of 2.8% and coverage of MADS by EBITDA of
4.0x through the six months ended March 31, 2012 reflecting a modest
debt burden. Moreover, with completion of the Milestone Project in 2010,
OSF’s future capital needs are expected to be manageable.
WEAK LIQUIDITY METRICS: OSF’s liquidity position has been negatively
impacted by the growth in accounts receivables to a very high 86 days as
of March 31, 2012. The growth in accounts receivable reflects the back
log of unpaid Medicaid invoices by the State of Illinois and the
conversion to new patient accounting processes. At March 31, 2012 OSF’s
days cash on hand of 157, cushion ratio of 13.1x and cash to debt of 86%
trailed the respective ‘A’ category medians of 194.1, 15.4x and 113.8%.
CREDIT PROFILE:
The ‘A’ rating reflects OSF’s continued regional growth strategy, good
market share and strong physician alignment. OSF’s flagship hospital,
St. Francis Medical Center, is a 616 licensed-acute care bed, Level I
trauma center that serves as a regional referral center for high-acuity,
complex clinical services. The system continues to extend its reach
throughout the region via on-going physician employment and alignment,
expansion of its ambulatory care network and affiliation arrangements
with various community hospitals. In April 2012 the U.S. Federal Trade
Commission won a preliminary injunction to stop the proposed merger of
OSF’s Saint Anthony Medical Center in Rockford, IL and Rockford Health
System because of potential antitrust issues. Management decided to end
the efforts to merge the two organizations, which have been in
discussions since May 2010. Fitch believes this development is
disappointing as further consolidation in the Rockford market would have
likely increased efficiency but OSF expects to continue to pursue
collaborative relationships with area providers.
OSF has benefited from its integrated delivery strategy, which results
in a strong referral network through its growing employed physician
base, which totaled 558 physicians as of March 2012. OSF is in the final
stages of restructuring its leadership and management to include a more
system-wide approach to leadership, which will enhance accountability.
OSF has maintained its strong market share position for its largest
facility in Peoria (OSF St. Francis Medical Center), holding 47.7% of
the market share in its primary market share in fiscal 2011, up from 47%
in fiscal 2010 and ahead of its closest competitor, Methodist Medical
Center, at 27.9%. Market share at its Bloomington/Pontiac facility has
increased while market share in the Galesburg/Monmouth and Rockford
markets have decreased.
OSF generated $20.6 million of income from operations (1.1% operating
margin) in fiscal 2011 after posting operating losses in fiscal 2009 and
2010, which resulted from the corporation’s investments in a new
clinical IT system, physician acquisitions and inpatient and ambulatory
capital spending. Operating EBITDA jumped to $156.4 million (8.4%
operating EBITDA margin) in 2011 from $86.6 million in fiscal 2010 (5.1%
margin) and $103.5 million in fiscal 2009 (6.3% margin). Through the six
months ended March 31, 2012 operating and operating EBITDA margins
further improved to 2% and 9.2%, respectively. Fitch expects
profitability to continue to improve as further efficiencies are
achieved. Fitch notes that OSF receives approximately $30-40 million a
year in supplemental disproportionate share and upper payment limit
funding and any reductions in funding would pressure profitability.
OSF’s liquidity position is light for the rating level reflecting the
growth in accounts receivable. At March 31, 2012 OSF’s unrestricted cash
and investments totaled approximately $739 million, which equated to
157.1 days cash on hand, 13.1x cushion ratio and 86% cash to debt
compared to the ‘A’ category medians of 194.1 days, 15.4x and 133.8%.
The growth in accounts receivable is due largely to the State of
Illinois not processing Medicaid claims, however excluding Medicaid
billings, OSF’s days in accounts receivable is still high at 57 days.,
which may be partially attributable to the implementation of its new
patient accounting and access center (PAAC) system and lockbox
technology.
OSF’s debt burden is manageable with MADS comprising 3% of total fiscal
2011 revenue compared to the ‘A’ category median of 2.9%. Total
outstanding debt as of April 2012 was $808.2 million and was 63% fixed
rate and 37% variable rate. Recent major projects include the expansion
of St. Francis Medical Center (Milestone Project), which opened in
August 2010. OSF’s future capital needs are modest with no large
projects projected in the near term. Total capital spending for fiscal
2012 and 2013 is projected at 125 million and 110 million, respectively.
The Stable Outlook reflects Fitch’s belief that profitability and
liquidity will continue to improve as OSF benefits from physician, plant
and IT investments. Fitch expects that management will improve the
collection of outstanding receivables which is expected to strengthen
liquidity and bring liquidity ratios more in line with category medians.
Headquartered in Peoria, Illinois, OSF Healthcare System owns and
operates a combined eight health care facilities (seven in Illinois, one
in Michigan) with 1,316 licensed acute care beds. Total revenue in
fiscal 2011 was $1.9 billion. OSF covenants to provide quarterly
financial information within 60 days of quarter-end (for the first three
quarters) and annual financial information within 150 days of fiscal
year-end to bondholders. Quarterly interim financials include
consolidated and consolidating balance sheet and income statements and
are available through the MSRB’s EMMA system.
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’, dated June 20, 2011;
–’Non-Profit Hospitals and Health Systems Rating Criteria’, dated Aug.
12, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
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