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Fitch Affirms Guthrie Clinic's (PA) Revs at 'A+'; Outlook Revised to PositiveFitch Ratings has affirmed the 'A+' rating on the following bonds issued on behalf of Guthrie Clinic: --$101,655,000 Central Bradford Progress Authority revenue bonds series 2011; and --$71,695,000 Health Care Facilities Authority of Sayre revenue bonds series 2007. The Rating Outlook has been revised to Positive from Stable. SECURITY Bond payments are secured by a pledge of the gross revenues of the obligated group. KEY RATING DRIVERS COMPLETION OF LARGE CAPITAL PROJECTS: The Positive Outlook reflects Guthrie Clinic's improved operating profitability, the completion of several large capital projects and decreased projected capital spending which should allow for further strengthening of liquidity metrics. STRONG LIQUIDITY: Despite elevated capital spending, Guthrie Clinic maintained its strong liquidity metrics with 417.4 days cash on hand, 33.6x cushion ratio and 238% cash to debt at March 31, 2015, exceeding Fitch's 'A' category medians of 199.2 days, 17x and 131.2%. SOLID AND IMPROVING PROFITABILITY: Since decreasing to 9.0% in fiscal 2013, operating EBITDA margin improved to 9.7% in fiscal 2014 and 10.7% in the nine month interim period ending March 31, 2015 (the interim period), exceeding Fitch's 'A' category median of 9.5%. ABOVE AVERAGE DEBT BURDEN: Guthrie's debt burden remains high for the 'A+' rating level, with maximum annual debt service (MADS) equal to 3.3% of operating revenue in fiscal 2014. MADS coverage metrics are solid relative to Fitch's 'A' category medians but light relative to 'AA-' peers. STRONG PHYSICIAN ALIGNMENT: The Guthrie Clinic's large employed multispecialty physician group and wide network of clinical locations are key components of Guthrie's operating performance and leading market share of 52.1% in the primary service area (PSA). RATING SENSITIVITIES CONTINUED CREDIT PROFILE STRENGTHENING: Upward rating movement is likely to occur if operating cash flow continues to improve providing for coverage metrics consistent with 'AA-' category peers and/or liquidity metrics strengthen due to decreased capital spending. CREDIT PROFILE Guthrie Clinic is an integrated delivery system consisting of four hospitals and a large multispecialty physician group. The four hospitals are located in the Twin (News - Alert) Tiers region of New York and Pennsylvania. Total operating revenues equaled $590 million in fiscal 2014. Guthrie Health was renamed Guthrie Clinic in 2014 as part of a corporate restructuring plan and organizational integration. The entity formerly known as Guthrie Clinic, Ltd was renamed the Guthrie Medical Group. The organization was previously affiliated through an alignment agreement between the two entities. The two entities have been merged under a common governance and management system in order to streamline operations and to enhance the integrated model of care. The integration has no impact on the security provided through the existing master trust indenture. COMPLETION OF LARGE CAPITAL PROJECTS Guthrie Clinic completed a period of elevated capital spending in fiscal years 2013 and 2014. Large capital projects included two replacement hospitals, hospital renovations and a substantial expansion of the Clinic's network of regional clinics. Capital spending averaged $102 million in fiscal years 2013 and 2014 equating to 316.4% of depreciation. Capital spending is projected to decrease to $65 million in fiscal 2015 and $47 million in fiscal 2016. STRONG LIQUIDITY Liquidity strength has been maintained despite the elevated capital spending. Unrestricted cash and investments increased 8.1% since fiscal 2013 to $647.4 million at March 31, 2015 equating to 417.4 days cash on hand, 33.6x cushion ratio and 238% cash to debt and exceeding Fitch's 'A' category medians of 199.2 days, 17x and 131.2%, respectively. Given the decreased projected levels of capital spending, liuidity metrics should further strengthen in the near to mid-term. IMPROVING PROFITABILITY Guthrie Clinic's historically strong operating profitability declined in fiscal 2013 due to flat inpatient volumes, increased observation stays and slower than expected ramp up of new physicians. Operating EBITDA margin averaged 11.6% between fiscal 2008 and fiscal 2012, but declined to 9.0% in fiscal 2013. Operating EBITDA margin improved to 9.7% in fiscal 2014 and 10.7% in the interim period. The improved profitability reflects operating improvement initiatives commenced in fiscal 2013 (including primary care productivity, inpatient throughput, labor productivity, revenue cycle and supply chain initiatives) and rate increases. Interim performance also reflects increased inpatient volumes and outpatient surgeries. Volume growth reflects successful physician recruitment initiatives and the completion of the two replacement hospitals. Management is projecting 11.1% operating EBITDA margins in fiscal years 2015 and 2016. ABOVE AVERAGE DEBT BURDEN The Clinic's debt burden remains above average for the rating category, with MADS equal to 3.3% of operating revenue in fiscal 2014 relative to Fitch's 'A' category median of 3.1%. MADS coverage by operating EBITDA improved to 3.0x in fiscal 2014 and 3.5x in the interim period reflecting the improved operations and is now solid relative to the 'A' category median of 3.1x. However, coverage metrics remain light relative to 'AA-' category peers. STRONG PHYSICIAN ALIGNMENT Guthrie Clinic's large multispecialty physician group, with 289 employed physicians and 175 mid-level providers, and a wide network of clinic locations are key credit strengths. The Clinic's leading PSA market share increased to 52.1% in 2014 from 50.2% in 2012. The strong physician alignment should allow Guthrie to more easily control costs in a pressured reimbursement environment. Physician alignment should be further enhanced by the Clinic's new academic affiliation with The Commonwealth Medical College located in Scranton, PA. DEBT PROFILE Guthrie Clinic had approximately $272 million of total debt outstanding at March 31, 2015, composed of approximately 55% underlying fixed rate bonds and 45% underlying variable rate bonds. The Clinic is counterparty to three fixed payor swaps and total return swap, converting 100% of its variable rate bonds to a synthetic fixed rate. No collateral was required to be posted at March 31, 2015. DISCLOSURE Guthrie Clinic covenants to provide annual disclosure within 120 days of the fiscal year end and quarterly disclosure within 60 days of the end of each quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 16, 2014); --'Nonprofit Hospitals and Health Systems Rating Criteria' (June 9, 2015). Applicable Criteria Revenue-Supported Rating Criteria (pub. 16 Jun 2014) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986989 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986989 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 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 (News - Alert) 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. View source version on businesswire.com: http://www.businesswire.com/news/home/20150625006235/en/ |
