CHICAGO - (Business Wire) Fitch Ratings has assigned a 'AA' rating to approximately $289 million of Indiana Finance Authority Health System revenue refunding bonds, series 2008C expected to be issued on behalf of Sisters of St. Francis Health Services, Inc. (SSFHS). In addition, Fitch affirms the outstanding long-term ratings on approximately $650.9 million of bonds issued for SSFHS. The Rating Outlook is Stable.
The series 2008C bonds are expected to be issued as traditional fixed rate debt. Bond proceeds will be used to refund SSFHS's outstanding MBIA insured series 2006A&B variable rate demand bonds.
The 'AA' rating is supported by SSFHS's strong liquidity position, modest debt burden and solid debt service coverage, and strong market position in each of its four regions. At June 30, 2008 SSFHS's unrestricted cash and investments totaled $1.38 billion, which translates into 264 days of cash on hand, a cushion ratio of 31.4 times (x) and 165% of cash-to-long-term debt. SSFHS's strong cash flow generation combined with a modest debt burden has produced solid historical debt service coverage. Maximum annual debt service (MADS) of $43.8 million represents 2.1% of 2007 total revenues, which compares favorably to Fitch's 'AA' median of 2.7%. Solid earnings before interest, depreciation and amortization (EBIDA) margins (which exclude unrealized gains and losses on investments) of 14.9% and 14.7% in 2007 and 2006, respectively, has resulted coverage of MADS of 7.2x in 2007 and 7.1x in 2006.
SSFHS owns and operates 12 hospitals along the I-65 corridor between Chicago and Indianapolis. Management has organized the system into four distinct regional markets serving Central Indiana, Northern Indiana, Western Indiana and South Suburban Chicago. In total the system directly operates approximately 2,356 staffed beds. In each of the operating regions, SSFHS holds either the No.1 or No.2 market positions. Revenue generation is well diversified with no region accounting for more than a third of the total system revenues, while three of the four regions produced operating EBIDA margins in excess of 11%.
Fitch's main credit concerns are the competitive Indiana market, the continued operating challenges in the South Suburban Chicago Region (SSCR) and SSFHS's sizable capital budget over the next five years. Due to the lack of certificate of need regulations, hospital providers in Indiana face substantial competition from one another as well as entrepreneurial physicians. The competitive environment increases the general business risk faced by providers and has driven up the overall level of capital spending in the larger metropolitan areas of Indiana. The SSCR continues to present operating challenges. In fiscal 2006 and 2007, SSCR posted operating losses of $21.8 million and $25.6 million (negative operating margins of 5.6% and 6.5%), respectively. Management has installed a new Regional CEO and has implemented a $20 million operational improvement plan for the region. Management is projecting a $10.3 million operating loss for the SSCR in fiscal 2008. Finally, SSFHS's four-year capital budget totals $1.1 billion, of which, roughly 50% represents 'approved' capital projects. Projected annual capital expenditures range from $300 million-$400 million per year. Only $125 million of the capital budget is expected to be funded through additional debt with the balance generated through operating cash flow.
The Rating Outlook is Stable. SSFHS has maintained financial and operating profile consistent with Fitch 'AA' medians even with the challenges in the SSCR. Management has been consolidating certain system functions which should allow for continuation of solid operating performance. In addition, physician alignment strategies should blunt some of the inherent business risk in SSFHS Indiana regions. The expected issuance of approximately $125 million of additional debt in the third quarter of 2008 is factored into the rating.
SSFHS is a regional health care system that owns and operates 12 hospitals along the I-65 corridor between Chicago and Indianapolis. Organized into four distinct markets serving Central Indiana, Northern Indiana, Western Indiana and South Suburban Chicago, the system directly operates approximately 2,356 staffed beds and has 398 employed physicians. In fiscal 2007, SSFHS had total revenues of $2.1 billion. SSFHS is required to provide audited financials with 120 days of each fiscal year-end and quarterly financials with 45 days of each fiscal quarter end.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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 Ratings
Jim LeBuhn, 312-368-2059
Anthony Houston, 312-368-3180 (Chicago)
Media Relations:
Cindy Stoller, 212-908-0526 (New York)
