Fitch Ratings affirms the 'BBB+' rating on the following Silver Cross Hospital and Medical Centers (Silver Cross) outstanding debt issued by the Illinois Finance Authority:
--$260,000,000 fixed-rate revenue bonds, series 2009;
--$84,225,000 fixed-rate revenue refunding bonds, series 2008A;
--$15,415,000 fixed-rate revenue bonds, series 2005A;
--$14,950,000 fixed-rate revenue bonds, series 2005C;
--$5,160,000 fixed-rate revenue refunding bonds, series 1999, issued by the Illinois Health Facilities Authority.
The Rating Outlook is Stable.
The bonds are secured by gross revenues, a mortgage on the property, and debt service reserve.
KEY RATING DRIVERS
CONTINUED STRONG VOLUME GROWTH WITH NEW HOSPITAL: Silver Cross' replacement facility opened on time in February 2012 and within budget at a total cost of approximately $360 million. In fiscal 2012 (Sept. 30 year-end) and through the nine months ended June 30, 2013, utilization has been solid and above expectations, which has driven strong cash flow.
SIGNIFICANT DEBT BURDEN: Silver Cross' debt burden is high with maximum annual debt service (MADS) comprising approximately 9.9% of fiscal 2012 revenue compared to the 'BBB' category median of 3.5%. Fitch notes that Silver Cross' debt burden remains an outlier for the rating level and no additional debt can be supported at the current rating level.
GOOD CASH FLOW: Silver Cross has consistently produced strong operating cash flow and met expectations for fiscal 2012 and through the nine month interim period. Operating EBITDA margin and EBITDA margin at June 30, 2013 (nine-month interim) were solid at 14.4% and 15.2%, respectively.
LIGHT LIQUIDITY: Liquidity is growing but remains light for the category. Fitch expects liquidity metrics to continue to improve, as Silver Cross has limited capital needs.
PARTNERSHIPS WITH OTHER PROVIDERS: Fitch believes Silver Cross' successful partnerships with other providers in certain service lines has resulted in strong volume at the new facility, since it brings clinical expertise to its campus while limiting outmigration to Chicago as well as capturing market share from its competitors. Silver Cross is also in discussions with a major physician group, which is viewed favorably by Fitch and should further solidify the strong volume trend.
CONTINUED STRONG CASH FLOW EXPECTED: Fitch expects Silver Cross to maintain strong cash flow in order to service its very high debt burden. The inability to sustain strong operating cash flow would likely result in downward rating pressure. Although Silver Cross' financial profile is expected to improve over the near term, the rating will likely remain at the current rating level indefinitely due to its high debt burden.
Silver Cross is an acute care facility with 289 staffed beds located in New Lenox, IL, about 35 miles southwest of downtown Chicago. Silver Cross had total operating revenues of $281.3 million in fiscal 2012.
REPLACEMENT FACILITY VIEWED POSITIVELY
Silver Cross successfully transitioned into its replacement hospital in New Lenox, IL, which is located in Will County (GO bonds rated 'AA+'; Stable Outlook by Fitch) in 2012. Fitch views the location and move to the new facility favorably, as it has allowed Silver Cross to capitalize on a growing market and enhance service offerings through its various clinical partnerships. These partnerships are with leading health care providers, including Rehabilitation Institute of Chicago (rated 'A-'; Stable Outlook), a top-ranking facility in the country; a joint venture with University of Chicago Medical Center (rated 'AA-'; Stable Outlook) for cancer services; and a partnership with Lurie Children's Hospital of Chicago (formerly known as Children's Memorial Hospital, rated 'AA-'; Stable Outlook). As part of the new campus, Silver Cross opened two new medical office buildings, which should bolster physician alignment. Physician recruitment continues to be strong with an increase in Silver Cross' total medical staff to 683 at August 2013, up from 660 in fiscal 2012 and 602 in fiscal 2011. Silver Cross is in discussions with a major physician group in the area, which would not result in employment, but in alignment related to the utilization of the new facility for the physicians' patients in that geographic area.
The primary service area (PSA) is competitive but Silver Cross' market share continues to grow. As of March 2013, Silver Cross had 33.7% market share in its PSA while its primary competitor, Provena Saint Joseph Medical Center (now part of Presence Health; rated 'BBB+'; Stable Outlook), had 32.5%. Silver Cross' market share has improved from 27.2% in February 2012, the month the replacement hospital opened, reflecting its improved competitive position in the PSA.
VERY HIGH DEBT BURDEN
Fitch's main credit concern continues to be Silver Cross' substantial debt burden. MADS coverage by EBITDA in fiscal 2012 (Sept 30 year-end) was 1.7x, which is improved from 1.4x in fiscal 2011; however, non-operating gains was boosted in fiscal 2012 from the gain on sale of property and its dialysis unit, which generated $26 million in cash. Silver Cross sustained 1.7x MADS coverage at June 30, 2013 (nine-month interim) and Fitch expects it to exceed its budgeted 1.25x coverage for fiscal 2013.
Total outstanding debt is approximately $397.5 million with 94% underlying fixed rate and 6% underlying variable rate. Silver Cross has approximately $389.1 million traditional fixed-rate debt and $25 million direct bank loans (variable rate). The $15 million direct bank loan with PNC has a three-year term that was recently extended for two additional years with a two-year term-out provision and covenants that mirror the master trust indenture (MTI). The $10 million direct bank loan with First Midwest Bank is a five-year bullet with renewal option and two-year term-out provision and the covenants also mirror the MTI.
GOOD OPERATING CASH FLOW AND IMPROVED VOLUMES
Operating cash flow remains strong, continuing to reflect the positive shift in payor mix and strong volumes after the new hospital opening despite an overall national trend of declining volumes. Operating margin of negative 1.9% reflects the significant increase to depreciation and interest from the investment in the new hospital. However, operating EBITDA margin through the nine months ended June 30, 2013 was 14.4%, and Fitch expects Silver Cross to exceed its operating EBITDA margin budget of 11.8% for fiscal 2013. EBITDA margin of 14.9% at June 30, 2013 was also favorable to the 'BBB' category median of 10.4%.
Volume growth continues to be very strong with inpatient admissions up over 15% through August 2013 compared to a budget of 8%, and surgeries are up over 10%. Payor mix has improved since the opening of the new hospital with 48.6% governmental payors at June 30, 2013 (39.4% Medicare and 9.2% Medicaid) compared to 54.8% prior to the new hospital opening (42.4% Medicare and 12.4% Medicaid). Silver Cross projects continued growth in utilization through 2017. Fitch believes it is necessary for Silver Cross to sustain these improved volumes to continue to generate solid cash flow to service its high debt load.
Liquidity remains light for the category, reflecting the increased capital appending and debt issuance associated with the new hospital, but it has been steadily growing. At June 30, 2013, unrestricted cash and investments equaled $121.3 million, a 13.3% increase from fiscal 2012. Days cash on hand of 146 at June 30, 2013 is in line with the 'BBB' category median of 144.7 days. Cash to debt and cushion ratio of 30.6% and 4.2x are both very light compared to their respective medians of 91.7% and 10.2x. Fitch expects liquidity to grow after fiscal 2013 as capital needs are expected to fall to approximately $10 million a year.
Silver Cross currently covenants to provide annual audited financial statements and utilization statistics within 120 days of each fiscal year end and quarterly unaudited financial statements including a balance sheet, income and cash flow statements, and utilization statistics for the first three fiscal quarters within 60 days of each quarter-end.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
- Security Upgrades & Downgrades
- Silver Cross
- Fitch Ratings
Fitch Ratings, Inc.
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