Fitch Affirms HealthEast Rev Bonds at 'BBB-'; Outlook Stable

Fitch Affirms HealthEast Rev Bonds at 'BBB-'; Outlook Stable | Bild: © ad-hoc-news

--$202,385,000 Washington County Housing & Redevelopment Authority (MN) (HealthEast Project) hospital revenue bonds series 2005;

--$48,622,000 Washington County Housing & Redevelopment Authority (MN) (HealthEast Project) hospital revenue bonds series 1998;

--$14,294,000 St. Paul Housing & Redevelopment Authority (MN) (HealthEast Project) hospital revenue bonds series 1997A & B.

The Rating Outlook is Stable.

SECURITY:

The bonds are secured by a gross revenue pledge and are governed by a master trust indenture that contains various standard business and financial covenants. In addition, there is a mortgage pledge.

KEY RATING DRIVERS

SOLID MARKET POSITION: HealthEast's leading market position in the St. Paul area and the high barriers to entry that exist within Minnesota continues to be a key credit strength.

CONSISTENT OPERATING PERFORMANCE: Operating performance has been solid and consistent since fiscal 2010 with strong performance in the first quarter of fiscal 2012.

WEAK LIQUIDITY: Fitch's main credit concern is HealthEast's weak liquidity position with ratios that are below the 'BBB' category medians.

ADEQUATE DEBT SERVICE COVERAGE: With solid operating performance, maximum annual debt service coverage has improved and is adequate but still below the 'BBB' category median ratios.

STRATEGIC INVESTMENTS: HealthEast has significantly invested in its plant, physician alignment strategies, and quality initiatives that should result in further improved financial performance over time.

CREDIT PROFILE:

The 'BBB-' rating affirmation reflects HealthEast's continued solid operating performance, offsetting to some degree its weak liquidity position.

In fiscal 2011 (Aug. 31 year end), operating income was $17.9 million (2% operating margin; excludes $6.5 million impairment of property and equipment) compared to $13.7 million (1.6% operating margin) the prior year. The continued solid operating performance has been driven by management's focus on cost reduction as volume was flat. Through the three months ended Nov. 30, 2011, operating performance was very strong with a 3.2% operating margin compared to 2.5% for the same prior year period. The improved operating performance was driven by a reduction in length of stay and continued non labor expense management. Performance is well ahead of the full fiscal 2012 budget of $18.4 million (2% operating margin), which includes one time meaningful use funds of $7.1 million.

HealthEast's main credit strength is its leading market position in the St. Paul area. In the east metro area of the Twin Cities market, HealthEast captured 38.7% of the discharges of the east metro area hospitals, followed by Regions Hospital with 27.8% and United Hospital (part of Allina Hospitals and Clinics, rated 'AA-' by Fitch) with 27.7%. Service area characteristics are favorable due to lower unemployment rates compared to the nation and above average income levels. HealthEast has significantly invested in several initiatives to secure and grow its market position.

These initiatives include upgrading its physical plant, expanding outpatient clinic locations, pursuing physician alignment relationships, and investing in process improvements to improve quality through measured outcomes. HealthEast is the only system in the Twin Cities to have all private patient rooms. Capital expenditures are beginning to return to a more normalized level after spending over 2 times (x) depreciation expense from fiscal 2008-2010. Total capital spending (routine and strategic) are projected at $37.9 million for fiscal 2012 and $32 million for fiscal 2013 (below 2x depreciation expense) and includes spending on its electronic health record, which continues to buoy operating performance via a more efficient and clinically aligned operating platform. HealthEast's investments in quality have totaled approximately $10 million a year and are projected at the same level for fiscal 2012.

Physician alignment has been a key area of focus with relationships ranging from medical directorships to employment depending on the service line. Total employed physicians have increased to approximately 330 with key additions in cardiovascular and spine.

Fitch's main credit concern is HealthEast's weak liquidity position, which provides HealthEast limited financial flexibility. Liquidity ratios have remained stable and future liquidity growth is expected to be pressured due to ongoing quality initiatives and pension requirements. At Nov. 30, 2011 days cash on hand, cushion ratio, and cash-to-debt were 55.9 days, 4.8x, and 47.3% compared to the 'BBB' category median ratios of 128.6 days, 8.8x, and 79.8%, respectively.

As of Nov. 30, 2011, HealthEast's total outstanding debt is $278.5 million and is 100% fixed rate. HealthEast does not have any outstanding swaps. Maximum annual debt service (MADS) coverage is adequate at 2.1x for fiscal 2011 and 1.8x for fiscal 2010 and improved to 2.4x for the first quarter 2012. Fitch used MADS of $26.5 million, which is for the system and occurs in 2017. Actual debt service coverage in fiscal 2011 was solid at 3.0x.

The Stable Outlook reflects Fitch's expectation that HealthEast will continue to maintain solid profitability. Given HealthEast's weak liquidity, stable operating profitability is imperative to maintaining the current rating. A deterioration in profitability or liquidity metrics could result in downward rating pressure.

HealthEast operates 509 staffed beds at three acute care hospitals in downtown St. Paul (St. Joseph), Maplewood (St. Johns) and Woodbury (Woodwinds), as well as a 140-bed long-term acute care hospital, and various outpatient imaging and surgery operations. The system also employs over 300 physicians practicing within its hospitals and throughout the community. At fiscal year-end 2011, HealthEast reported total operating revenue of $877 million. HealthEast provides annual and quarterly disclosure via the MSRB's EMMA system and Digital Assurance Certification (DAC). Interim disclosure includes detailed financial statements, volume statistics, payor mix, and management discussion and analysis.

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;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

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

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.