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Fitch Rates Adventist HealthCare, MD's Revenue Bonds 'BBB-'; Outlook StableFitch Ratings has assigned a 'BBB-' rating to the following bonds issued by Maryland Health and Educational Facilities Authority on behalf of Adventist HealthCare (AHC): --$244.75 million revenue bonds, series 2016A. Bond proceeds will provide monies for a replacement hospital ($197.2 million), routine capital expenses ($24 million), fund capitalized interest ($31.1 million) and debt service reserve accounts ($25.7 million), and pay issuance costs. The bonds are scheduled to sell via negotiated sale the week of Nov. 28, 2016. The Rating Outlook is Stable. SECURITY The bonds are secured by mortgages on hospital facilities, security interest in unrestricted revenues, and a debt service reserve fund. KEY RATING DRIVERS FINANCIAL STABILITY UNDER MARYLAND'S GLOBAL BUDGET REVENUE PROGRAM: Maryland's Global Budget Revenue (GBR) program delivers a predictable revenue stream providing relative stability to financial performance. Moreover, AHC secured a rate increase for the capital costs related to its replacement facility project that will cover about 91% of the projected additional depreciation and interest expenses once the new hospital opens. EXPANSIVE CAPITAL SPENDING: AHC is constructing a replacement hospital campus at a new 48-acre site about six and a half miles from its Takoma Park, MD facility, Washington Adventist Hospital (WAH). The project includes a new 170-bed (all private rooms) acute care hospital and state-of-the-art outpatient facilities. The projected cost is approximately $254.6 million and is being funded with $197.2 million of series 2016 bond proceeds, $46.5 million of cash equity and $11 million equity contribution in the form of land. HIGH DEBT POSITION: With the new money issuance for the replacement hospital project, AHC's debt burden escalates to high levels. Pro forma maximum annual debt service (MADS) of $37.7 million amounts to a high 5.05% of revenues as of Dec. 31, 2015. Pro forma leverage ratios are also weak, with 59.1% debt to capital and 8.7x debt to EBITDA. Regardless, the Maryland Health Services Cost Review Commission (MHSCRC) has already approved a rate increase of $15.4 million which covers about 77% of the projected principal and interest on the related bonds. Furthermore, an additional $2.8 million rate increase has been agreed to by the MHSCRC but not yet finalized. SOLID MARKET POSITION IN A FAVORABLE SERVICE AREA: AHC's two acute care hospitals and other healthcare facilities operate in the economically favorable Montgomery County, MD (rated 'AAA'/Stable Outlook) service area. Population, employment and wealth levels are healthy and AHC enjoys a solid inpatient market position and a growing outpatient presence. MODEST LIQUIDITY METRICS: Moderate cash flows, heavy capital spending, debt repayment and land acquisitions for potential development projects result in modest liquidity balances. As of Aug. 31, 2016, $206.8 million of unrestricted cash and investments amounts to 103.3 days operating expenses. While pro forma liquidity metrics are weak relative to Fitch's 'BBB' category medians, the financial stability provided by the GBR program coupled with MHSCRC's scheduled rate increase tempers credit concerns. RATING SENSITIVITIES CONSTRUCTION PROJECT MANAGEMENT: The 'BBB-' rating incorporates the appropriate management of the construction and move-in risks and assumes that the replacement hospital project will meet projections. Construction delays, cost overruns, higher than expected working capital requirements, and results that lag projections could result in negative rating action. MAINTENANCE OF OPERATING PROFILE: The 'BBB-' rating assumes that Adventist HealthCare's current operating profile, characterized by improved operating performance, adequate liquidity and a solid market position, remains stable. Should any of these weaken during the construction and transition period or liquidity declines, there could be negative rating pressure. CREDIT PROFILE AHC is the parent company of a diversified healthcare system located in Montgomery County, MD. AHC includes the main operating entities of the system, Shady Grove Adventist Hospital (SGAH), Washington Adventist Hospital (WAH), and Adventist Behavioral Health (ABH). SGAH is a licensed 290-bed acute care hospital that offers primary, secondary and tertiary level services with its main campus located in Rockville, MD. SGAH generates about 47% of total system revenues. WAH is a licensed 230-bed acute care hospital that offers primary, secondary and tertiary level services located in Takoma Park, MD. WAH will be replaced with a new campus in White Oak, MD that is being financed with the series 2016 bond proceeds. WAH comprises approximately 30% of total system revenues. The obligated group includes AHC and Adventist Rehabilitation Hospital of Maryland (ARH). ARH owns and operates the first and only comprehensive freestanding inpatient rehabilitation hospital in Montgomery County, MD. The obligated group accounts for 93% of total system revenue and 105% of total system assets in 2015. Non-obligated entities include a home health company, medical group, clinically integrated network, accountable care organization, social service entities, outpatient radiology centers, laboratory, and foundations. Fitch's analysis and financial figures and ratios cited in this report are based on the consolidated AHC system. FINANCIAL PERFORMANCE AND POSITION As mentioned above, AHC's financial performance reflects the benefit of Maryland's GBR program. After soft earnings in 2012 and 2013, better expense controls and improved care management protocols boosted results over the past few years. Operating and operatng EBITDA margins increased to 2.8% and 8.7%, respectively in 2015 from break-even and 6.0% in 2013. For the eight month period ending Aug. 31, 2016, operating and operating EBITDA margins were relatively stable at 2.4% and 8.3%, respectively. AHC's balance sheet indicates modest liquidity metrics and a large pro forma debt position. Moderate cash flows, heavy capital spending, debt repayment and multiple land acquisitions for potential development projects result in modest liquidity balances. As of Aug. 31, 2016, $206.8 million of unrestricted cash and investments amounts to 103.3 days operating expenses. After $10 million of reimbursement from bond proceeds, pro forma cushion ratio (5.75x) and cash to debt (38.5%) are also low as of Aug. 31, 2016. While pro forma liquidity metrics are weak relative to Fitch's 'BBB' category medians, the financial stability provided by the GBR program coupled with the scheduled rate increase to support the new debt service tempers credit concerns. AHC's pro forma leverage ratios are also weak, with 59.1% debt to capital and 8.7x debt to EBITDA as of Dec. 31, 2015. Again, the projected rate increase is expected to moderate the leverage position after the replacement hospital is complete. Additional information is available at 'www.fitchratings.com'. Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun
2015) Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
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