|[January 29, 2013]
Fitch Rates Deaconess Health System Series 2013A Bonds 'A+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings assigns a long-term rating of 'A+' to approximately
$64.160 million of series 2013A revenue bonds expected to be issued by
the Indiana Finance Authority (IFA) on behalf of Deaconess Health System
Obligated Group (Deaconess).
In addition, Fitch affirms its 'A+' rating on the following outstanding
debt issued through the IFA and the Indiana Health Facility Financing
--$19,305,000 fixed rate revenue bonds series 2011A;
--$57,340,000 fixed rate revenue bonds series 2009A;
--$40,000,000 variable rate demand bonds, series 2009B;
--$54,765,000 fixed rate revenue bonds series 2004A.
Total outstanding debt of $222.3 million includes $22.3 million in
series 2004B bonds supported by a Letter of Credit (LOC) from JPMorgan
Chase Bank, N.A. and $28.6 million in series 2012A-C bank loans with
Fifth Third Bank, which Fitch does not rate. The 2009B bonds are
supported by an LOC from Bank of America Merrill Lynch, which Fitch was
not asked to rate. The series 2004A bonds are insured by Ambac Assurance
Corp, whose Insurer Financial Strength is not rated by Fitch.
The series 2013A bonds are expected to be fixed rate and proceeds will
be used to refund the series 2004A bonds and a portion of the series
2009A bonds. The bonds are expected to price the week of Feb. 11, 2013
In conjunction with the issuance of the series 2013A bonds, Deaconess
expects to issue $21.5 million in series 2013B bonds, which will be
issued as a bank loan with Fifth Third Bank. Proceeds will be used to
refund the series 2004B bonds. Fitch was not asked to rate the bonds.
Debt payments are secured by a pledge of the gross revenues of the
STRONG PROFITABILITY: Supported by robust revenue growth and expense
management, profitability continues to exceed Fitch's 'A' category
medians. Through the fiscal year ended Sept. 30, 2012, operating margin
was 6% compared to Fitch's median of 2.8%.
SOLID MARKET POSITION: Market share in the primary service area (PSA)
remains very strong at 60.6% as the system continues to leverage its
physician network, strategically expand service lines, upgrade
facilities, and coordinate care with other regional community hospitals
IMPROVING LIQUIDITY: Unrestricted cash and investments have nearly
doubled since 2008, totalling $334.3 million at the interim period ended
Dec. 31, 2012. Liquidity metrics of 201.1 days cash on hand, 17.3x
cushion ratio, and 147.6% cash to debt all compare favorably to
MODEST DEBT BURDEN: Debt metrics are currently in line with rating
category medians, and are expected to improve in the next few years as
ongoing capital needs are funded through equity and projected maximum
annual debt service declines. Upon completion of the 2013 financing,
Deaconess will have restructured all but one series of its variable rate
demand bonds with bank loans, reducing put and interest rate risk.
The 'A+' rating reflects Deaconess' demonstrated ability to post strong
operating results, its improved balance sheet, and modest capital plans,
supported by the system's leading market position, integrated delivery
network, and strategic facility expansions and upgrades in recent years.
Operating margin rebounded to 4.9% and 6% in fiscal 2011 and 2012
respectively, following two years of operating margin of 3.7%, which is
strong relative to the rating category median of 2.8% but softer than
Deaconess' historical results. Similarly, operating EBITDA margins
solidly exceed the rating category median of 9.8% at 12.3% in 2011 and
13.2% in 2012. In fiscal 2012, revenues were bolstered by the Indiana
Hospital Assessment Fee (HAF) program, providing Deaconess a net benefit
of $8.3 mllion. Excluding the gain from HAF, operating margin remains
robust at 4.7%. Profitability continued to strengthen through the
three-month interim period ended Dec. 31, 2012, producing an operating
margin of 7.6% compared to the prior year period's 5.2%. Improvement in
operating performance reflects management's focus on expense management
and revenue cycle initiatives, as well as growth in acute care services
through its integrated physician platform and expanded ambulatory care
network. Management's target for operating margin in the coming years is
4.7% excluding supplemental funds, which Fitch believes is attainable.
Deaconess continues to prepare for healthcare reform and embraces
accountable care implementing various strategies to enhance physician
alignment, control quality, and increase community value. Deaconess grew
its employed physician base from 174 in 2011 to 189 in 2012. Through
Deaconess Clinic, the system currently operates two sites for
patient-centered medical homes, featuring special care centers for those
with chronically ill conditions. Given the success of the initial sites,
Deaconess intends to complete the development of four more centers in
fiscal 2013 as a way to improve patient health status while lowering the
cost of care, and position itself to undertake risk contracts in the
The PSA consisting of Vanderburgh, Posey, and Warrick counties is
characterized by stable population, several large corporate employers,
and unemployment rate below state and national averages. Deaconess
maintained its position as the leading provider in the region with 60.6%
market share in 2011, which has relatively consistent in the last three
years. Its main competitor in the market is St. Mary's Medical Center
(owned by Ascension Health, revenue bonds rated 'AA+' by Fitch) with a
market share of 33.7%.
Liquidity metrics continue to grow, with unrestricted cash and
investments up from $168.1 million in fiscal 2008 to $334.3 million at
Dec. 31, 2012 due to strong cash flow generation, manageable capital
expenditures, improvement in collection of receivables, and favorable
investment returns. Deaconess' liquidity, which has historically been
light for the rating category, was in line with the 'A' category medians
at fiscal year end 2012 and at Dec. 31, 2012. Days cash on hand of
201.1, cushion ratio of 17.3x, and cash to debt of 147.6% are all above
respective medians of 191.0, 16.3x, and 116.4%. Fitch expects liquidity
to strengthen over the near term given strong cash flow generation and
modest capital plans.
Deaconess' debt burden is manageable with debt to capitalization of
33.7% and MADS as a percentage of revenue of 2.9% in 2012 relative to
Fitch's 'A' category median of 40.7% and 2.8%. Maximum annual debt
service (MADS) coverage is strong at 5.0x MADS coverage by EBITDA
compared to the respective median of 4.1x. Pro forma MADS of $19.3
million occurring in 2013 declines to $15.4 million in 2015, and should
further improve coverage metrics. Deaconess does not have any major
capital plans in the near term, and anticipates funding its routine
capital needs through equity.
In late 2012, Deaconess refunded its series 1992, 1993, and 1999B
variable rate demand bonds totaling $30.3 million using fixed rate bank
loans with terms extending to the final maturity of the bonds. The
upcoming series 2013A issuance will provide funds to refund the series
2004A and a portion of series 2009A fixed rate bonds for debt service
savings. In conjunction with this issuance, Deaconess will also refund
the series 2004B variable rate demand bonds with a synthetically fixed
bank loan. Upon completion of the 2013 financing, Deaconess would have
restructured all but one series of its variable rate demand bonds,
resulting in a more conservative debt portfolio. The amount of
underlying floating rate debt will decrease from 41% to 28%. Deaconess
does not have any swaps outstanding.
The Stable Outlook reflects Deaconess' strong operating performance and
position in the market. Moreover, solid cash flow generation should
continue to strengthen the system's balance sheet.
Headquartered in Evansville, IN, Deaconess is an acute care provider
serving a 25-county, tri-state area. Deaconess operates a total of 701
operational beds over its five campuses, which includes Main, Gateway (News - Alert),
Cross Pointe, Women's and Health South. Fitch analyzed the financial
performance of Deaconess Health System. The obligated group comprised
83.2% of total patient revenue and 97% of total assets of the system. In
fiscal 2012, Deaconess had $676.6 million in total operating revenue.
Deaconess' disclosure, including quarterly and annual financial
statements with operating statistics, is posted to EMMA on a regular and
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', June 12, 2012;
--'Nonprofit Hospitals and Health System Rating Criteria', July 23, 2012.
In addition to the sources of information identified in Fitch's Rating
Criteria, this action was additionally informed by information from Bank
of America Merrill Lynch.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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