Fitch Ratings has affirmed the 'A' rating on the following Scottsdale
Healthcare Corporation's (SHC) outstanding debt.
--$122,655,000 Scottsdale Industrial Development Authority (AZ)
(Scottsdale Healthcare) hospital revenue refunding bonds series 2008A
--$89,700,000 Scottsdale Industrial Development Authority (AZ)
(Scottsdale Healthcare) hospital revenue bonds series 2006F (insured:
Assured Guaranty Municipal Corp.)
--$37,400,000 Scottsdale Industrial Development Authority (AZ)
(Scottsdale Healthcare) hospital revenue refunding bonds series 2006D
(insured: Assured Guaranty Municipal Corp)
--$58,350,000 Scottsdale Industrial Development Authority (AZ)
(Scottsdale Healthcare) hospital revenue refunding bonds series 2006C
(insured: Assured Guaranty Municipal Corp.)
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues of SHC. A
fully funded debt service fund and a deed of trust (mortgage) provide
additional security for the bonds.
KEY RATING DRIVERS
INTEGRATION UNDERWAY: SHC affiliated with John C. Lincoln Health Network
(JCL) as of Oct. 1, 2013, and a new parent organization was created,
Scottsdale Lincoln Health Network (SLHN), which provides a common
governance and management structure over the two entities. Integration
is underway and a major milestone will be implementing a common
information technology platform, which is a priority. The debt of SHC
and JCL remains separately obligated at this time, however, management
continues to evaluate opportunities to consolidate the debt.
SOLID FINANCIAL PROFILE: SHC's liquidity and profitability is solid for
its rating level although operating performance through the five months
ended May 31, 2014 is slightly behind budget due to costs associated
with the integration as well as lower volumes than expected. SLHN has a
long term plan to reduce costs to offset future pressure on
UPCOMING CAPITAL NEEDS: SHC plans to install Epic and its information
technology capital budget totals near $200 million over the next three
years in addition to routine capital needs of about $60 million a year.
Management may finance a portion of the increased capital needs over the
next year. Fitch will evaluate the impact of the financing on SHC's
rating when plans are finalized.
MODERATE DEBT BURDEN: SHC's debt burden is moderate and debt service
coverage is strong. MADS accounted for less than 3% of total revenue and
debt service coverage by EBITDA was 5.4x in fiscal 2013 (Sept. 30 year
BENEFITS FROM AFFILIATION: Fitch expects SHC to benefit from the
affiliation with JCL due to its enhanced market position, greater scale
and increased strategic opportunities. Additional debt plans will be
evaluated at the time of issuance.
SHC includes three acute care community hospitals: Scottsdale
Healthcare, Osborn (346 licensed acute care beds), Scottsdale
Healthcare, Shea (413 licensed acute care beds), and Scottsdale
Healthcare - Thompson Peak (92 licensed acute care beds. JCL includes
two hospitals in Phoenix: John C. Lincoln North Mountain Hospital (266
beds) and John C. Lincoln Deer Valley Hospital (204 beds). JCL's total
annual revenue is approximately $580 million. There is no SLHN audit.
SHC's total revenue in fisca 2013 was $885 million. Fiscal 2013 figures
referenced in this report are for the 12 months ended Sept. 30, unless
otherwise noted. SHC's fiscal year was changed to Dec. 31 from Sept. 30
SCOTTSDALE LINCOLN HEALTH NETWORK CREATED
As of Oct. 1, 2013, SLHN was formed from the affiliation between SHC and
JCL. SHC's board is now the same as SLHN's board, which comprises an
equal number of board members from the preceding SHC and JLC boards.
There is one management team and strategic planning for SLHN is
underway. Fitch views the affiliation positively as the two entities
have the ability to collaborate on strategic initiatives especially in
the fairly competitive greater metropolitan Phoenix area. Areas of focus
include a common information technology platform as well as growing an
aligned physician base. Fitch believes that the combined entity's
operating performance is in line with Fitch's A category medians.
SOLID FINANCIAL PROFILE
SHC has good liquidity, solid profitability, and strong debt service
coverage. At Dec. 31, 2013, SHC had $550.6 million of unrestricted cash
and investments that equated to 230.4 days cash on hand and 140.3% cash
Profitability has been consistent, but is slightly behind budget through
the five months ended May 31, 2014 due to integration costs as well as
softer volume than expected with an operating margin of 3.1% compared to
a budget of 4.5%. Operating margin ($20.6 million operating income) was
2.3% in fiscal 2013 compared to 3.3% in fiscal 2012. Operating EBITDA
margin ($91 million operating EBITDA) was a solid 10.3% in fiscal 2013
compared to 11% in fiscal 2012 and the A category median of 10.7%. SHC
has a favorable payor mix with less than 10% of revenue from Medicaid.
Management has an overall plan to reduce costs and improve revenue for
SLHN by $200 million for fiscal 2014 - 2016 to offset the expected
decline in reimbursement. Although operating performance is behind
budget year to date 2014, management believes that benefits from the
integration should be realized in the latter half of the year and result
in fiscal 2014 performance in line with its original fiscal 2014 budget.
INCREASED CAPITAL NEEDS
SHC plans to install Epic which will increase its capital plan over the
next three years. A portion of this is expected to be financed by
additional debt and Fitch will evaluate the impact of the financing when
plans are finalized.
CONSERVATIVE DEBT PROFILE
SHC's total outstanding debt was $393 million at Sept. 30, 2013 with 63%
underlying fixed and 37% underlying variable rate. SHC's bonded
variable-rate debt includes $34.3 million direct bank loan at an indexed
floating-rate, with a put option by the bank in 2018; and $89.3 million
in seven-day auction-rate bonds.
SHC has floating to fixed rate swaps outstanding for a total notional
amount of $110.275 million. These swaps are insured and currently
require no collateral posting. SHC also has fixed receiver swaps
outstanding for a total notional amount of $150 million and no
collateral posting has been required ($25 million threshold).
Overall debt burden is moderate as MADS of $23 million accounts for a
relatively low 2.6% of fiscal 2013 revenue. Debt service gradually
declines over the life of the bonds. Debt service coverage by operating
EBITDA is strong at 4.1x for the five months ended May 31, 2014, 3.9x
for fiscal 2013 and 4.1x for fiscal 2012 compared to the A category
median of 3.4x.
SHC has covenanted to provide annual and quarterly disclosure through
the Municipal Securities Rule Making Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20,
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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