Fitch Affirms Alexian Brothers Health System's (IL) Bonds at 'A-'; Outlook Stable
The Rating Outlook is Stable.
The bonds are secured by a pledge of the gross revenues of the ABHS obligated group. Additional security is provided by a mortgage pledge and debt service reserve fund.
KEY RATING DRIVERS
CONTINUED PROFITABILITY IMPROVEMENT: Operating profitability has continued to strengthen with operating EBITDA margin increasing to 16.9% in fiscal 2015 and 16.7% in the nine month interim period ending March 31, 2016 (the interim period). The improved operating profitability reflects continued cost management initiative and efficiencies gained through the Ascension (rated 'AA+') acquisition in 2012 and the Adventist Health System Sunbelt (Adventist, rated 'AA') affiliation agreement in 2015 through which AMITA Health was formed.
LEADING MARKET SHARE: ABHS's clinical reputation and strong physician alignment has resulted in a leading 49.7% market share in a competitive primary service area (PSA). The system's competitive position is further strengthened by its ownership by Ascension, the Adventist affiliation and a pediatric service line affiliation with Loyola University Health System (Loyola, owned by Trinity Health, rated 'AA').
ELEVATED DEBT BURDEN: ABHS's debt burden remains elevated with maximum annual debt service (MADS) equal to 3.6% of fiscal 2015 revenue. However, strong operating profitability produced strong MADS coverage by EBITDA of 4.5x in fiscal 2015 and 4.6x in the interim period.
LIGHT LIQUIDITY METRICS: Despite improvement, liquidity metrics remain light for the rating category with 159 days cash on hand, 10.5x cushion ratio and 84.2% cash to debt at March 31, 2016.
JOINT OPERATING COMPANY: Fitch expects that AMITA Health's financial performance will continue to be accretive to Alexian Brothers Health System through generated operating efficiencies and the organization's cash flow sharing agreement.
ABHS is headquartered in Arlington Heights, IL and the obligated group operates two acute-care hospitals, a behavioral hospital, a rehabilitation hospital, a women's and children's hospital, several long-term care facilities and an employed physician group in Chicago's northwest suburbs. The system was acquired by Ascension in 2012 and operations are consolidated in Ascension's financial statements. The ABHS bonds remain secured under the ABHS master trust indenture dated Oct. 1, 1992 and are not secured or guaranteed by Ascension. Fitch's analysis is based upon the ABHS obligated group's financial statements.
ABHS formed AMITA Health with Adventist Midwest Health through an affiliation agreement between Ascension and Adventist, the two health system's parent companies. The joint operating company became operational in February 2015. Including the ABHS hospitals, AMITA Health operates nine hospitals located in contiguous service areas in suburban Chicago. Each entity retains ownership of its assets, but splits cash flows generated by AMITA Health based upon terms in the joint operating agreement.
CONTINUED PROFITABILITY IMPROVEMENT
Operating profitability has continued to strengthen subsequent to the acquisition by Ascension in 2012. Operating EBITDA margin increased each of the past three fiscal years from 13.9% in fiscal 2013 to 16.9% in fiscal 2015. Strong operations continued in the interim period with operating EBITDA equal to 16.7%, easily exceeding Fitch's 'A' category median of 10.3%. The strong operating profitability reflects synergies achieved through the Ascension acquisition and the AMITA Health joint operating agreement with Adventist, including $20 million of operating synergies generated to date through AMITA Health. Continued operating efficiencies are expected to be realized as clinical service lines and administrative functions continue to be centralized through AMITA Health.
LEADING MARKET SHARE
ABHS's leading PSA market share has increased in each of the past three years from 47.6% in 2013 to 49.7% in 2015. However, the PSA only accounts for approximately 58% of discharges. The leading market share reflects ABHS's clinical reputation and strong physician alignment. The service area remains extremely competitive given its close proximity to Chicago and nearby suburban hospitals. The strong competitive position is bolstered by the system's ownership by Ascension, its affiliation with Adventist and its pediatric service line affiliation with Loyola. Fitch views the affiliations positively and expects them to further secure ABHS's leading PSA market share and lead to further operating efficiencies.
ELEVATED DEBT BURDEN
ABHS's debt burden has moderated but remains elevated with MADS as a percent of revenue decreasing to 3.6% in fiscal 2015 from 4.2% in fiscal 2013. The decrease is primarily due to decreased MADS. However, the debt burden remains elevated relative to Fitch's 'A' category median of 2.8%. Strong cash flows produced robust MADS coverage by EBITDA and operating EBITDA of 4.5x and 4.6x, respectively, in fiscal 2015 and 4.6x and 4.7x in the interim period, easily exceeding Fitch's 'A' category medians of 4.2x and 3.5x.
LIGHT LIQUIDITY METRICS
Unrestricted cash and investments increased 11% since fiscal year end 2013 to $389.6 million at March 31, 2016. Despite the improvement, liquidity metrics of 159 days cash on hand, 10.5x cushion ratio and 84.2% cash to debt remain light relative to Fitch's 'A' category medians of 205.3 days, 18.5x and 143.7%, respectively. Capital spending is expected to average approximately $21 million per year for the next three years which should allow for strengthened liquidity given the system's current cash flow trends.