Fitch Affirms Gundersen Lutheran's (WI) Ratings at 'A+'; Outlook Revised to Positive
--$69,520,000 fixed rate revenue bonds, series 2012;
--$137,140,000 fixed rate revenue bonds, series 2011A.
The Rating Outlook is revised to Positive from Stable.
The bonds are secured by a gross revenue pledge of the obligated group.
KEY RATING DRIVERS
INTEGRATED OPERATING PLATFORM: Fitch believes a key credit strength is Gundersen's vertically integrated health system model which includes a nearly fully employed medical staff and a health plan. Fitch believes this has allowed for a very stable market share position in the competitive LaCrosse WI market as well as very stable, consistent operating results.
DIMISHED CAPITAL NEEDS: The Outlook revision to Positive reflects the completion of Gundersen's inpatient tower projects on its main campus. With modest capital needs and no additional debt plans, Fitch expects Gundersen's consistent cash flow generation to result in a moderation in leverage and a strengthening of the balance sheet going forward.
CONSISTENT OPERATING PROFITABILTY: Gundersen continues to produce consistent operating cash flow at levels which compare favorably to the 'A' category median. Since 2012, Gundersen has produced average 11.3% operating EBITDA and 13.2% EBITDA margins, both in excess of Fitch's 'A' category medians of 10.3% and 12.4%, respectively. Coverage of maximum annual debt service by EBITDA was a healthy 5.6x through the six month interim period ended June 30, 2016.
MANAGEABLE DEBT BURDEN: Gundersen maintains solid liquidity against a manageable debt burden. As of June 30, 2016 Gundersen had approximately $717 million in unrestricted liquidity and $399 million in debt. This equaled 179.8% cash to debt and 274.2 days of cash on hand (DCOH). Fitch notes a somewhat aggressive debt structure with 50% variable rate debt is manageable with ample liquidity to withstand interest rate and renewal risk. No pension exposure and modest operating lease expense also support Gundersen's relatively low leverage position.
STEADY PROFITABILITY EXPECTED: Gundersen Lutheran's cash flow generation should exceed its capital needs allowing for balance sheet growth and incremental debt moderation. Upward rating movement is possible over the next 24 - 36 months assuming liquidity growth and debt moderation to levels consistent with Fitch's 'AA' category medians.
Gundersen is an integrated health care system based in La Crosse, WI, consisting of a 325 licensed bed (257 staffed bed) hospital, four critical access hospitals (CAH's, not part of the obligated group) 27 medical clinics staffed with over 500 physicians, a health plan, and other affiliates. Total operating revenue for the obligated group was $1.01 billion in fiscal 2015 (December 31, year-end).
Gundersen provides disclosure for the obligated group only, though audited consolidated financials were made available to Fitch for review. The consolidated entity also includes a health plan, offered under separate licenses in Wisconsin and Minnesota.
Approximately $271 million (29.7%) in fiscal 2015 obligated group total revenues were capitation revenue from Gundersen's health plan.
PROJECTS LARGELY COMPLETED
The Outlook revision to Positive from Stable reflects an expectation of modest capital needs going forward now that key projects on Gundersen's main campus in LaCrosse - including the construction of a new inpatient tower and renovation of an existing inpatient tower - are now completed. Gundersen's future capital needs are expected to remain very modest near $65 million, which is approximately 110% of current depreciation. No additional debt is expected, and with EBITDA averaging nearly $130 million per year since fiscal 2012 these capital expenditures should be easily absorbed.
REGIONAL OPERATING PLATFORM
Fitch views positively Gundersen's integrated operating platform, which continues to expand beyond its 19-county primary service area surrounding LaCrosse, Wisconsin. Gundersen has been successful at aligning and integrating strategic critical access hospital and long term care partners in the region, and is pursuing additional growth via ambulatory clinic placement in key markets. Formidable competitors in Mayo Clinic health System and UnityPoint health (revs rated 'AA-' by Fitch) operate within Gundersen's secondary service area.
Going forward, Gundersen's fully integrated medical staff, long-standing electronic health record, and health plan have will provide necessary support for its population health strategy going forward.
As of June 30, 2016 Gundersen had total debt of 398.9 million total including current maturities. MADS equals $25.9 million, and debt service is level. Approximately $206.7 million (52.1%) is fixed rate long-term bonds. The remaining is variable rate, spread across five direct placement securities. Fitch notes that the direct placements are on parity with existing debt, with provision for cross-default. Renewals are staggered, with the next in 2019 on approximately $61.4 million in series 2008B debt.
Gundersen is also party to four fixed payer swaps with a $176.6 million total notional value. The swaps have two counterparties, with collateral posting required at a $15 million ceiling per counterparty. Gundersen had $15.5 million posted at June 30, 2016.
Per its covenant calculations (which match across both public and private debt instruments) Gundersen produced 5.5x debt service coverage, had a 31.5% capitalization ratio, and 280.2 DCOH at fiscal year ended Dec. 31, 2015.
Gundersen covenants to provide annual and quarterly disclosure on the obligated group. Annual audited reports are disseminated no later than 150 days following audit year end, and quarterly reports are disseminated no later than 60 days after the end of each quarter. Reported content includes financial statements, utilization, and key metrics.