Fitch Ratings has assigned a 'BBB' rating to approximately $134.7
million series 2014A revenue bonds expected to be issued by the Illinois
Finance Authority on behalf of Centegra Health System and Affiliates
In addition, Fitch downgrades the following revenue bonds to 'BBB' from
--$195.0 million Illinois Finance Authority (Centegra Health System and
Affiliates), series 2012
The Rating Outlook has been revised to Stable from Negative.
Proceeds from the series 2014A bonds will be used to pay for
construction, renovation or remodeling of certain of Centegra's health
facilities, finance the costs of construction and equipping the new
hospital, funding capitalized interest and pay certain costs of
issuance. The series 2014A bonds, which will be issued as fixed rate,
are expected to price the week of May 19, 2014 via negotiation.
In addition to the series 2014A bonds, Centegra is expected to issue
approximately $58.3 million direct placement bonds, which will not be
rated by Fitch but are considered in its analysis.
Debt payments are secured by a pledge of the unrestricted receivables of
the obligated group.
KEY RATING DRIVERS
ELEVATED DEBT BURDEN: The rating downgrade to 'BBB' from 'A-' reflects
the impact to Centegra's financial profile upon issuance of
approximately $193 million in new debt ($134.7 million of which is rated
by Fitch), which will be used to construct a new 128-bed hospital in
Huntley, Illinois, a growing community in northwest Illinois, about 16
miles from the flagship McHenry campus. Pro-forma maximum annual debt
service (MADS) is estimated at $24.9 million (as provided by the
underwriter); up from current MADS of about $14.5 million. Historical
coverage of pro-forma MADS is light at 1.7x in fiscal 2013 relative to
the 'BBB' category median of 3.1x. However, Fitch notes that interest
will be capitalized through fiscal 2017 and debt service will stabilize
at $24.9 million in 2019.
MODEST PROFITABILITY: Relative to Fitch's 'BBB' category medians,
Centegra's profitability ratios are light reflecting the system's
investments in physician alignment, IT and outpatient facilities over
the last few years. Operating margins of 0.2% in fiscal 2013 and 0.5%
through the nine months ended March 31, 2014 are light compared to the
'BBB' category median of 1.8%. While Centegra has generated relatively
consistent operating EBITDA margins of 7.1% through the third quarter,
7.5% in fiscal 2013 and 7.9% in fiscal 2012, it is weak for the rating
category. Fitch expects Centegra's strong management practices,
integrated physician operating platform and the benefits of the new
project to generate solid cash flow to provide adequate coverage for its
significantly larger debt burden.
LEADING MARKET POSITION, COMPETITIVE SERVICE AREA: Centegra's leading
market share position in a growing service area with a favorable
demographic profile is a key credit strength. Centegra controls about
43.3% inpatient market share as of March 2014 in its primary service
area of McHenry County. Competitive activity from two Advocate Health
Network facilities (Advocate Good Shepherd and Advocate Sherman
Hospital) could pressure the scale of the benefits expected to accrue
upon opening of the new facility.
STRATEGIC INVESTMENT PROGRESS: To meet the expected population growth in
its service area, Centegra is focusing on physician alignment, clinical
effectiveness and community health management. With three hospitals, two
fitness centers, and various clinics and specialty services located
throughout McHenry County, Centegra has been increasing its access
points and is well positioned for managing the future delivery of care.
Fitch views entegra's proactive and strategic initiatives as a credit
positive and will likely prove integral to the success of the new
MAINTAIN FINANCIAL PROFILE: Management will need to meet or exceed
current pro forma financial metrics through the opening of the new
hospital. The heavy debt burden allows little negative variance to
Centegra is a three-hospital system with a total of 341 licensed and 306
staffed beds located in McHenry County, IL with total operating revenues
of $398.9 million in fiscal 2013.
LIGHT PRO FORMA LIQUIDITY AND CAPITAL METRICS
The 'BBB' rating reflects the dilution in Centegra's capital related and
liquidity ratios resulting from the additional debt to levels more
consistent with Fitch's 'BBB' hospital universe. At March 31, 2014,
Centegra's unrestricted cash and investments totaled $192.1 million,
which equates to 170 days cash on hand, 12.9x cushion ratio and 91.3%
cash-to-debt. On a pro-forma basis, cushion ratio declines to 7.7x
compared to the 'BBB' category median of 10.2x while cash-to-debt
weakens to a very light 48.4% relative to the 'BBB' category median of
Centegra will have approximately $400 million in debt outstanding, 85%
fixed rate and 15% variable rate, after the series 2014 debt issuance.
This is a 47% increase from the $210.5 million in debt currently
outstanding. The obligated group includes Centegra, Memorial Medical
Center, Northern Illinois Medical Center and NIMED, its real estate
holding company that was brought into the obligated group with the 2012
financing. Pro forma MADS as a percent of fiscal 2013 revenue is high at
6.2% compared to the 'BBB' category median of 3.5%. Pro forma MADS
coverage is 1.7x at March 31, 2014, which is also light against the
'BBB' category media of 3.1x. Debt service in fiscal 2016-2018 is $18.03
million, which would result in debt service coverage of about 2.3x using
the March 31, 2014 interim results.
NEW HOSPITAL PROJECT
The decision to construct a new facility in Huntley stems from
Centegra's solid utilization in a service area that is experiencing
population growth. On July 24, 2012, Centegra received CON approval from
the Illinois Health Facilities and Services Review Board to build a
128-bed acute care hospital in Huntley, IL, which is only the second CON
granted for a new hospital facility versus a replacement facility in the
state in about 30 years. Two competitors have filed a lawsuit contesting
the construction of the new facility and the circuit court upheld the
CON board decision. The case is currently under appeal. Management
anticipates an outcome before the end of the year. Construction is
underway and the new hospital is expected to open in August 2016 (fiscal
2017; June 30 year-end). Stabilization is expected by 2019, which is
when debt service increases to $24.9 million. Fitch believes the new
facility could help Centegra expand its footprint in the growing
southern portion of McHenry County.
LIGHT OPERATING PROFITABILITY
Operating performance has been weak for the rating level and has been
affected by its strategic investments, relatively flat volumes and an
unfavorable shift in payor mix. Fitch expected improved performance in
fiscal 2013 from the prior year but profitability was affected by
several one-time expenses including physician acquisition and by the
roll-out of its electronic medical record system in May. Operating
profitability continues to be relatively weak through March 31, 2014
(nine month interim). Operating margin remained a thin 0.5% and
operating EBITDA was 7.1%, down slightly from 7.5% in fiscal 2013. Fitch
expects Centegra to maintain or improve operating performance.
Deterioration could be cause for concern.
STRONG MARKET SHARE POSITION
Centegra maintains a leading market share in a favorable service area
with good demographics and socio-economic indicators within McHenry
County. Centegra's market share declined slightly after the opening of
Sherman Health's replacement facility in December 2009 and is now 43.3%
as of March 2014 compared to 44.8% in fiscal 2013 and 45.6% in fiscal
2012. Sherman holds 13.8% of the market share as of March 2014, up from
11.7% in 2012. Advocate Good Shepard Hospital has about 12.7% market
share. Centegra has been focusing on growing its employed physician
model (Centegra Physician Care; CPC) over the last five years and as of
March 2014 63% of all admitted physicians are from CPC, up from just
over 30% in fiscal 2008.
Centegra will covenant to provide annual audited financials within 150
days of fiscal year end and unaudited quarterly financials for the first
three fiscal quarters within 45 days of quarter end and within 60 days
of the fourth quarter.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria'
(May 20, 2013).
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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