Fitch Ratings assigns an ‘A+’ rating to Catholic Health East’s (CHE) composite issue series 2009 bonds, which are expected to total up to $250 million. In addition, Fitch affirms the ‘A+’ rating on CHE’s outstanding parity debt. The Rating Outlook is Stable.
Bonds are expected to be issued by:
–Athens – Clarke County Unified Government Development Authority (Georgia);
–Fulton County Development Authority (Georgia);
–Massachusetts Health and Educational Facilities Authority;
–Montgomery County Higher Education and Health Authority (Pennsylvania);
–New Jersey Health Care Facilities Financing Authority;
–Saint Mary Hospital Authority (Pennsylvania).
The series 2009 bonds will be issued in exchange for up to the full $333 million outstanding amount of CHE’s series 2007 index floaters, lowering CHE’s outstanding debt and significantly reducing the exposure for the cost of funds swap associated with the 2007 bonds.
The ‘A+’ rating is supported by CHE’s geographic diversification, manageable debt burden, continuing implementation of standardized business practices and systems throughout the organization, and ongoing evaluation and restructuring of underperforming assets. While financial performance for the 12 months ended Dec. 31, 2008 fell substantially short of targets, management has acted to stabilize profitability and protect the balance sheet. In addition to corrective measures implemented in response to declining volumes and liquidity losses, CHE management has accelerated elements of its broad clinical transformation efforts, which should provide profitability improvements beginning in 2009. With financial flexibility somewhat compromised due to investment losses, the realization of CHE’s turnaround plans and process improvement efforts are critical to rebuilding liquidity and forestall negative rating pressure.
Unaudited financial results for 2008 are down from the prior year, with reported operating income at $26.5 million or 0.6% operating margin. Prior year results were $117.3 million and 2.8%, respectively. While the operating profitability of core health care services improved year over year, health plan and foundation losses were severe. On a bottom line basis, excluding unrealized losses and non-recurring items, 2008’s excess margin fell to negative 0.1% from 4.7% in 2007. Coverage of pro forma maximum annual debt service declined to 2.4 times (x) from 4.0x.
While patient volumes declined generally across the system, the drops in the Atlanta and Miami markets were particularly sharp, with losses in these markets accounting for the bulk of the operating profitability erosion. Among other initiatives, CHE management has implemented staffing reductions and organizational changes designed to address performance shortfalls over the near term. In addition, CHE continues to pursue restructuring alternatives in many of its underperforming markets. Given management’s record in turning around or divesting poorly performing entities, Fitch believes CHE’s budgeted improvements are attainable.
The primary credit concern is CHE’s deteriorated liquidity position, which has historically been light for ‘A’ category Fitch-rated hospitals. With 2008’s investment losses and swap collateral postings, unrestricted cash and investments dropped to 116 days from 167 days at the end of 2007. Although unrestricted liquidity has improved slightly since then due to strong cash collections and reduced posting requirements, and will also improve through the 2009 bond transaction, the remaining financial cushion is thin for a credit of this rating level. However, this concern is offset by several credit strengths, including CHE’s size and geographic diversification, the expectation of stronger operating cash flow based on management’s improvement initiatives, portfolio restructuring and divestiture activities and CHE’s ability to resize its significant capital spending plans to preserve cash. Over the long term, Fitch believes that CHE’s vision, as expressed in its 10-year strategic clinical transformation initiative, is consistent with the broad themes of U.S. health care reform and access imperatives, and provides a viable platform for financial strength and stability. The Stable Outlook reflects this belief as well as Fitch’s expectation that CHE will resume its consistent operating performance as the economy and investment markets begin to recover.
Headquartered in Newton Square, PA, CHE is a large Catholic integrated health care system with 35 acute-care hospitals, 36 freestanding and hospital-based long-term care facilities, 12 assisted-living facilities, 5 continuing care retirement communities, 8 behavioral health and rehabilitation facilities, 32 home health/hospice agencies and numerous ambulatory and community-based health services operating across 11 states. In 2008, based on unaudited internal statements, CHE reported total operating revenues of $4.2 billion. CHE covenants to supply bondholders with annual and quarterly disclosure, which includes management discussion, utilization statistics and full financial statements. Disclosure information is posted to the nationally recognized municipal securities information repositories and to DAC.
Note: In conjunction with this action, ratings on certain series 2007 bonds that were never issued are withdrawn. Associated issuers are the Camden County Improvement Authority (NJ), the Delaware Health Facilities Authority, the Miami Health Facilities Authority (FL), the New Jersey Health Care Facilities Financing Authority, and the North Carolina Medical Care Commission. Also, certain duplicate listings in Fitch’s database were identified and corrected.