CHICAGO - (Business Wire) Fitch Ratings has affirmed the 'AA-' unenhanced rating for Hospital Sisters Services, Inc.'s (HSSI) approximate $588 million of Illinois Finance Authority and Wisconsin Health and Educational Facilities Authority revenue bonds. In addition, Fitch has affirmed the 'F1+' short-term rating on approximately $90.3 million Wisconsin Health and Educational Facilities Authority series 2008B and 2003B revenue bonds outstanding and approximately $127.4 million of Illinois Finance Authority series 2008A revenue bonds outstanding. The Rating Outlook is Stable. The 'F1+' short-term rating reflects the sufficiency of HSSI's cash and investment available to fund the cost of maturing the series 2008A&B and series 2003B bonds while in a unit pricing (i.e. commercial paper) mode. On May 31, 2009, after assigning appropriate discounts based on underlying ratings and maturity of its holdings (per Fitch's rating criteria related to self liquidity [see Fitch's report 'Guidelines for Rating Variable Rate Demand Bonds and Commercial Paper Issued with Internal Liquidity' dated March 7, 2006]), HSSI had liquid cash and fixed income investments of approximately $752.58 million. Based on Fitch's criteria, HSSI's eligible cash and investments would cover the entire cost of any un-remarketed roll over of the series 2008 A&B bonds and 2003B bonds while in a unit pricing mode by at least 3.45 times (x), well above the required threshold of 1.25x to achieve the 'F1+' short-term rating. HSSI has written procedures in place to ensure payment on the series 2008A&B and 2003B bonds and provides Fitch monthly investment reports which are used to monitor its cash and investment position available for self liquidity.
The 'AA-' rating reflects HSSI's superb balance sheet strength, strong debt service coverage, a relatively low debt burden, and sustained positive operating performance. Liquidity indicators are robust and are considered a primary credit strength. On May 31, 2009 HSSI's unrestricted cash and investments totaled $1.12 billion which translates in 285.6 days cash on hand, a cushion ratio 32.1x and cash-to-debt of 191%, which exceed Fitch's 2008 'AA' medians of 246.4 days cash on hand, 20.9x and 162.9%, respectively. HSSI's debt burden is modest as maximum annual debt service (MADS) represents a light 2.1% of annualized fiscal year end (FYE) 2009 revenues and debt to capitalization of 22.9%. Both compare favorably to Fitch's 'AA' medians of 2.7% and 31.3%, respectively.
HSSI's operating performance continues to improve since the management and organization changes implemented in fiscal 2007. Management has implemented a restructuring of the system with the intent of optimizing scale benefits focusing on initiatives in labor cost management, revenue cycle and supply chain management. This process is a multi-year, multi-faceted plan that is projected to improve upon recent operating performance. At FYE 2008, HSSI's produced operating and operating EBIDTA margins of 2.2% and 9.5% on total revenues of $1.56 billion. Through the 11-month interim period ending May 31, 2009, HSSI reported 2.4% operating and 9.8% operating EBIDTA margins on total revenues of $1.54 billion. This consistent operating performance has enabled HSSI to cover its MADS with operating EBITDA by 4.7x, 4.3x, and 4.6x on May 31, 2009, FYE 2008, and FYE 2007, respectively.
Credit concerns are HSSI's location in mid-sized markets with little projected growth, the concentration of system revenue at one facility, and its reliance on its Wisconsin operations to cover losses at its Illinois facilities. Specifically troubling are the continued operating losses reported at St. John's-Springfield, which accounted for 24.3% of total system revenues in fiscal 2008. St. John's has recorded losses from operations over the last two years averaging $12.2 million per year, and is projected to lose another $12.4 million in FYE 2009. The operating improvement plan currently under way at St. John's is critical to the overall operating success of the system. Historically, HSSI's more profitable Wisconsin operations have offset the weaker performance of the Illinois facilities. Any deleterious change to the Wisconsin healthcare operating environment would likely place pressure on HSSI's already low operating margins and be a negative credit factor.
The Stable Outlook reflects the system's incremental operating improvement and substantial balance sheet strength. Management has implemented several improvement initiatives to better balance operating profitability across the system. Realization of those initiatives combined with HSSI's existing balance sheet strength could result in upward movement of the rating.
HSSI is composed of 13 inpatient hospitals in Illinois (eight facilities) and Wisconsin (five facilities). In fiscal 2008, the system had 2,132 beds in operation and total revenues of $1.56 billion. HSSI covenants to provide bondholders with audited annual information within 120 days of fiscal year-end and unaudited quarterly statements within 45 days of quarter-end to the national recognized municipal securities information repositories and through Digital Assurance Certification, L.L.C. The content of HSSI's disclosure to-date has been excellent and includes a balance sheet, income statement, cash flow statement, utilization statistics, and management discussion and analysis.
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Fitch Ratings, Chicago
Anthony A. Houston, 312-368-3180
Jim LeBuhn, 312-368-2059
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
