Fitch Rates Hawai'i Pacific Health's series 2013 Bonds 'A-'; Outlook Stable

Business Wire

SAN FRANCISCO--(BUSINESS WIRE)--

Fitch Ratings has assigned an 'A-' rating to the approximately $171 million Department of Budget and Finance of the State of Hawai'i revenue bonds series 2013A and B issued on behalf of Hawai'i Pacific Health (HPH). In addition, Fitch has affirmed the 'A-'rating on HPH's outstanding debt listed at the end of the press release.

The Rating Outlook is Stable.

The series 2013 bonds will be issued as fixed rate debt. Proceeds will be used to fund a portion of the expansion at Kapi'olani Medical Center, refund its series 2004A and 1998 bonds, and pay costs of issuance. The bonds are expected to price the week of Sept. 9. In conjunction with this financing, HPH will convert its letter of credit-backed variable rate demand bonds (series 2004B) to a variable rate direct bank loan.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group.

KEY RATING DRIVERS

EFFECTIVE OPERATING PLATFORM: HPH is the largest healthcare provider in the state of Hawai'i, and its inpatient and outpatient market footprint, in addition to its physician alignment initiatives and longstanding investment in an electronic medical record (EMR), well positions the organization for a value-based reimbursement environment.

TRANSFORMING PAYMENT MODELS: HPH has signed a five-year accountable care agreement with its largest commercial payor, Hawai'i Medical Service Association (HMSA)/Blue Cross Blue Shield), which has a large upside component if certain quality metrics and cost containment measures are met. Fitch believes this should allow HPH to share in the savings created from the system's excellent clinical outcomes and emphasis on chronic disease management.

IMPROVED OPERATING PERFORMANCE: HPH's operating performance improved sharply in 2012 and through the 11 months ended May 31, 2013 (interim period) reflecting stronger volumes, good rate increases, and effective cost management. However, the volume increases have been driven, in part, by the closure of one its competitors, Hawai'i Medical Center - West (HMC), in December 2011. HMC has been acquired by the next leading provider in the state, Queen's Health Systems, and the facility is expected to reopen in the spring of 2014.

LARGE CAPITAL PROJECT: Capital spending over the next few years will be elevated due to the $180 million project at Kapi'olani Medical Center for Women and Children, which will modernize and expand its intensive care units. The construction is expected to take three years and should not disrupt operations as a new tower is being built adjacent to the current facility.

MODEST DEBT BURDEN: Despite the increase in debt, HPH's debt burden remains modest and historical coverage of pro-forma MADS by EBITDA is solid reflecting HPH's improved operating performance.

RATING SENSITIVITIES

SUSTAINED OPERATING IMPROVEMENT: Despite HPH's recent improved operating performance, positive rating action is precluded given the changing market dynamics with HMC reopening and the undertaking of a large capital project. Continuation of profitability and debt service coverage metrics in line with the 'A' category medians and further strengthening of balance sheet metrics would likely result in upward rating movement.

CREDIT PROFILE

Hawai'i Pacific Health is the largest healthcare provider system in the state of Hawai'i and is a major employer in the state. The system includes four hospitals, three physician groups, and 49 outpatient clinics and service sites. It has over 6,300 employees, including more than 400 employed physicians, and is affiliated with 1,300 private practice physicians. The four hospitals in the system have 566 acute care beds and 76 bassinets with approximately 35,000 admissions annually. Fitch's analysis is based on the consolidated system. Interim financials (11 months ended May 31, 2013) are only available for the obligated group (OG). The OG comprised 94% of total revenue and 90% of total assets of the consolidated system in fiscal 2012 (June 30 fiscal year end).

Transforming Delivery of Care

HPH has signed a five-year accountable care agreement with HMSA, which will be effective Jan. 1, 2014. The agreement has an underlying fee for service payment methodology, which Fitch believes will protect HPH from downside risk while HPH is managing to quality metrics, patient management services, and medical cost. Management expects this initiative to bend the cost curve over time and its strategy of physician alignment and ability to obtain information through its EMR should allow it to be successful under this new payment model.

Good Financial Profile

HPH's operating performance significantly improved in fiscal 2012 with a 5% operating margin compared to 1.8% in fiscal 2011 and 3.2% in fiscal 2010. Strong operating performance has continued through the interim period with the OG reporting a 9.3% operating margin. These figures compare favorably to Fitch's 'A' category median of 3.3%. However, HPH's strong profitability over the last two years has been aided, in part, by the closure of HMC, which resulted in strong volume growth at its Pali Momi and Straub facilities. Queen's Health Systems acquired HMC and is expected to reopen this facility in spring 2014. HPH is budgeting for a 4.1% operating margin for the system in fiscal 2014. Fitch will monitor the impact of HMC's opening on HPH's patient volumes and profitability.

Strong profitability has generated very good debt service coverage with maximum annual debt service (MADS) coverage of 3.9x in fiscal 2012 and 6.4x in the interim period for the OG. Debt burden is low with MADS accounting for 2.7% of total revenue in fiscal 2012 and 2.5% through the interim period for the OG.

Balance sheet metrics do not compare as favorably to the 'A' category medians. Total unrestricted cash and investments for the OG was $306.6 million as of May 31, 2013 compared to $348.1 million for the system as of June 30, 2012. The system has a higher unrestricted cash and investments balance due to investments held at other non-obligated HPH affiliates including its foundations, HPH Partners and Providers Insurance Corporation. Days cash on hand was 146.4 at June 30, 2012 for the system and 127.6 for the OG as of May 31, 2013 compared to the 'A' category median of 196.3 days. Pro forma cash to debt as of May 31, 2013 for the OG was 81% compared to the 'A' category median of 129.2%.

Large Capital Project

HPH's capital spending is projected to total $92 million in fiscal 2014, $111 million in fiscal 2015, $115 million in fiscal 2016, $63 million in fiscal 2017, and $69 million in fiscal 2018. The largest project is for Kapi'olani, with the total cost being funded by the 2013 bond proceeds ($125 million), $30 million from philanthropy ($26.5 million raised to date) and the remainder from cash flow. The project will significantly enhance the space for intensive care patients with private patient rooms. The NICU will be expanded to 70 beds from 46. Also, an additional 12 med/surg beds, clinical space and a new IT center will be funded as part of the project. Over the longer term, Kapi'olani will likely require a replacement bed tower, which management says is seven-10 years away.

Conservative Debt Profile

Total pro forma outstanding debt is approximately $377 million with 13% underlying variable rate. The variable rate exposure is being converted from variable rate demand bonds (letter of credit from JP Morgan) to a direct bank loan with JP Morgan that will have a seven-year initial period with a mandatory tender date in 2020. The direct bank loan will be at an indexed floating rate. HPH has two fixed payor swaps outstanding with a collateral posting threshold of $2.5 million for each swap. As of May 31, 2013, HPH was posting approximately $6.6 million of collateral.

Disclosure

HPH covenants to provide annual and quarterly disclosure through the Municipal Securities Rulemaking Board's EMMA system.

Outstanding debt affirmed at 'A-':

$61,210,000 Hawaii Pacific Health (HI) (Hawaii Department of Budget and Finance) special purpose revenue bonds series 2010B

$101,940,000 Hawaii Pacific Health (HI) (Hawaii Department of Budget and Finance) special purpose revenue bonds series 2010A

$50,000,000 Hawaii Pacific Health (HI) (Hawaii Department of Budget and Finance) special purpose revenue bonds series 2004B1 and B2 (LOC: JPMorgan Chase Bank, N.A.)

$30,000,000 Hawaii Pacific Health (HI) (Hawaii Department of Budget and Finance) special purpose rev bonds series 2004A

$11,840,000 Hawaii Pacific Health (HI) (Hawaii Department of Budget and Finance) special purpose revenue bonds series 1998

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=800914

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