Fitch Rates Ascension Health Alliance's Series 2016 Bonds 'AA+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned 'AA+' ratings to $1.9 billion of series 2016 bonds expected to be issued by various conduit issuing authorities on behalf of Ascension Health Alliance (Ascension). The individual bond issues are listed under the Debt Profile section.
Fitch has also assigned an 'F1+' short-term rating to $100 million of variable rate demand bonds (series 2016E-2) based on Ascension's self-liquidity.
The series 2016 bonds are expected to be issued as a mix of tax-exempt and taxable fixed-rate bonds, tax-exempt mandatory tender bonds and tax-exempt variable rate demand bonds. The majority of the bond proceeds will be used to refund and refinance certain outstanding debt, with net new money of approximately $250 million. Pro forma maximum annual debt service (MADS) is expected to equal approximately $381 million. The series 2016 fixed rate and mandatory tender bonds are expected to price April 26 through negotiation and the series 2016 variable rate demand bonds are expected to price May 10 through negotiation.
Additionally, Fitch has affirmed: (1) the 'AA+' ratings on approximately $4.9 billion of senior and subordinate bonds issued by or on behalf of Ascension through various conduit issuing authorities; and (2) the 'F1+' short-term rating on approximately $888 million of variable-rate and short-term debt currently outstanding and $1 billion of Ascension taxable commercial paper program based on Ascension's self-liquidity.
The Rating Outlook is Stable.
Senior bond payments are secured by an interest in the pledged revenues of the senior credit group.
KEY RATING DRIVERS
BROAD OPERATING PLATFORM: Ascension is the largest non-profit Catholic health system in the United States with 110 general acute care hospitals, two long-term acute care hospitals, 8 psychiatric hospitals and four rehabilitation hospitals. Operations include approximately 2,000 sites of care in 24 states and the District of Columbia. Fitch believes that the broad operating footprint and resulting diversity of operations insulates Ascension's overall credit profile from adverse economic, demographic and operational changes in any one of its markets.
STRONG MANAGEMENT PRACTICES: Ascension's management practices and information systems are key credit strengths with a continued focus on operational improvement initiatives, centralization, standardization, synergistic acquisitions of new entities and divestitures of entities that are no longer congruent with the system's strategic goals.
CONSISTENT PROFITABILITY: Operating profitability has been consistent over the past six years with operating and operating EBITDA margins averaging 3.9% and 9.3%, respectively, since fiscal 2009. Operating margin equaled 4.0% in fiscal 2015 and 3.7% in the six month interim period ending Dec. 31, 2015 (the interim period) while operating EBITDA margin equaled 9.6% and 9.3%, respectively.
LIGHT DEBT BURDEN: Ascension's pro forma debt burden remains light with pro forma MADS equal to 1.9% of fiscal 2015 operating revenue relative to Fitch's 'AA' category median of 2.4%. MADS coverage by operating EBITDA of 5.2x in fiscal 2015 and the interim period is strong relative to Fitch's 'AA' category median of 4.4x.
SOLID LIQUIDITY: Despite significant unrealized losses in the interim period, pro forma liquidity metrics remain solid for the rating category with 239.9 days cash on hand, 33.5x cushion ratio and 188.3% cash to pro forma debt.
SHORT-TERM RATING: At Feb. 29, 2016, Ascension's eligible cash and investment position under Fitch's criteria would cover the maximum mandatory put on self-liquidity bonds on any given date in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating.
CONSISTENT CREDIT PROFILE: Fitch expects Ascension Health Alliance's liquidity metrics to remain solid, operating profitability to remain in line with historical results and the debt burden to remain light, allowing for strong MADS coverage.
Ascension, headquartered in St. Louis, MO, is the largest non-profit Catholic health care system in the United States. The system operates 110 general acute care hospitals, two long-term acute care hospitals, 8 psychiatric hospitals and four rehabilitation hospitals. Operations include approximately 2,000 sites of care in 24 states and the District of Columbia. Fitch's analysis is based upon Ascension's consolidated financial statements. Consolidated total operating revenues equaled $20.5 billion in fiscal 2015.
Ascension continues to actively manage its operating portfolio through mergers, acquisitions and divestitures. Since Fitch's last review in August 2015, Ascension acquired 13 hospitals in Wisconsin, Tennessee and Michigan. The largest transaction was an agreement with Wheaton Franciscan Healthcare (Wheaton) under which the operations of eight hospital campuses, including two specialty hospitals and three long term care facilities, in southeast Wisconsin were transferred to Ascension on March 1, 2016. The transferred healthcare operations had total operating revenue of $1.4 billion in fiscal 2015. Additionally, Ascension acquired Crittendon Hospital Medical Center located in suburban Detroit on Oct. 1, 2015 and four hospitals in Tennessee that were previously owned by Capella and Saint Thomas Health on Aug. 1, 2015.
Substantially all of the acquired hospitals have been added to the credit group. The transactions are not expected to have a material impact on Ascension's credit profile. Fitch views the transactions and Ascension's proactive approach to managing its operating portfolio as a credit strength.
BROAD OPERATING PLATFORM
Ascension is the largest non-profit healthcare system in Fitch's portfolio. The system's wide geographic diversity and large scale of operations is a primary credit strength as it helps to insulate the system from adverse economic, demographic and operational challenges in any individual market. Additionally, Ascension has been expanding its presence in insurance and non-acute service lines such as long term care, home health, senior housing and outpatient rehabilitation in order to prepare for value based reimbursement models.
STRONG MANAGEMENT PRACTICES
Fitch views Ascension's management practices as a credit strength which should allow the organization to extract further efficiencies based on the system's size and scale. The system's strong management practices are evidenced by a history of successful operating improvement initiatives, continued consolidation of shared corporate services and a willingness to close or divest operations. Ascension's broad operating platform has allowed the management team to identify industry trends and to test strategies in individual markets that can then be exported throughout the system. The management team has a track record of successfully testing new technologies and strategies in individual markets and then incrementally implementing them throughout the system.
Operating profitability has been consistent with operating and operating EBITDA margins averaging 3.9% and 9.3%, respectively since fiscal 2009. Operating margin equaled to 4.0% in fiscal 2015 and 3.7% in the interim period, while operating EBITDA margin equaled 9.6% and 9.3%, respectively. Operating profitability remains light relative to Fitch's 'AA' category medians for both operating margin and operating EBITDA margin of 4.9% and 11.5%, respectively.
The acquisition of the Wheaton hospitals does not have a material impact on Ascension's operating profitability. Including the Wheaton hospitals, operating and operating EBITDA margins would have equaled 4.0% and 9.7%, respectively, in fiscal 2015 and 3.5% and 9.3%, respectively, in the interim period.
Operating profitability reflects the system's continued operating improvement initiatives, investment in physician alignment and sub-acute business lines and the continued investment in Ascension's Symphony software platform. Symphony is a system-wide administrative data and process management and standardization project. Implementation started in 2010 and is estimated to cost a total of $1.9 billion and to generate $2.4 billion in total savings. Total savings are expected to far outpace ongoing total costs and the Symphony project should further bolster profitability going forward.
LIGHT DEBT BURDEN
Ascension's pro forma debt burden remains light including the addition of the $250 million of net additional debt from the series 2016 transaction. Pro forma MADS is equal to 1.9% of fiscal 2015 revenue. The light debt burden mitigates Ascension's light operating cash flows. Ascension's light debt burden and adequate operating cash flows combine to generate strong debt service coverage. Pro forma MADS coverage by operating EBITDA equaled 5.2x in both fiscal 2015 and the interim period, exceeding Fitch's 'AA' category median of 4.4x.
The addition of the Wheaton hospitals further decreases Ascension's debt burden, with MADS as a percent of fiscal 2015 revenue decreasing to 1.7%. The increased revenue base and cash flow generation increase pro forma MADS coverage by operating EBITDA to 5.6x in fiscal 2015 and 5.5x in the interim period.
Unrestricted cash and investments decreased to $12.4 billion at Dec. 31, 2015 from $13.1 billion at June 30, 2015. The decrease was due to adverse investment performance resulting in approximately $748 million of unrealized losses. Unrestricted liquidity was bolstered by $221 million received in March 2016 in conjunction with the Wheaton transaction and will be further bolstered by $250 million in reimbursement proceeds from the series 2016 transaction. Including the proceeds received from the Wheaton transaction and the reimbursement, pro forma unrestricted cash and investments would increase to approximately $12.8 billion. Pro forma liquidity metrics remain solid for the rating category with 239.9 days cash on hand, 33.5x cushion ratio and 188.3% cash to pro forma debt, compared to Fitch's 'AA' category medians of 289.4 days, 27.0x and 201.7%, respectively.
The short-term 'F1+' rating is based on the sufficiency of Ascension's liquid resources and written procedures to fund the potential purchase price of debt supported by self-liquidity on each mandatory tender date. Based on Fitch's Rating Criteria related to Self-Liquidity, Ascension had eligible cash and investments in excess of the 125% threshold of its maximum put exposure for the 'F1+' rating.
Subsequent to the series 2016 bond issuance, Ascension will have approximately $6.8 billion of total par amount of consolidated debt outstanding. The pro forma debt portfolio will be comprised of 65% underlying fixed rate bonds and 35% underlying variable rate bonds. The system was counterparty to approximately $2.4 billion in interest rate swaps at Dec. 31, 2015. No related collateral was required to be posted.
SERIES 2016 BONDS
--$928,205,000 Wisconsin Health and Educational Facilities Authority tax-exempt fixed-rate bonds series 2016A;
--$78,120,000 Alabama Special Care Facilities Authority of Birmingham tax-exempt fixed-rate bonds series 2016B;
--$91,650,000 Alabama Special Care Facilities Authority of the City of Mobile tax-exempt fixed-rate bonds series 2016C;
--$392,460,000 Wisconsin Health and Educational Facilities Authority as tax exempt mandatory tender bonds series 2016D1-5;
--$83,030,000 Michigan Finance Authority as tax exempt mandatory tender bonds series 2016E-1;
--$100,000,000 Michigan Finance Authority series tax-exempt variable rate demand bonds 2016E-2 (supported by self-liquidity)
--$250,000,000 Ascension taxable fixed-rate bonds series 2016A.