Fitch Ratings has affirmed the 'A' rating for the expected re-marketing
--$65 million Wisconsin Health and Educational Facilities Authority
(WHEFA) refunding revenue bonds, series 2009B, issued on behalf of
Aurora Health Care
In addition, Fitch affirms the 'A' rating for approximately $1.3 billion
in other revenue bonds issued through WHEFA on behalf of Aurora Health
Care, Inc. (AHC).
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues, a first mortgage
lien, and a debt service reserve fund.
KEY RATING DRIVERS
STEADY OPERATING PERFORMANCE: AHC's profitability margins have been very
consistent over the past four years, with 10.4% operating EBITDA and
11.6% EBITDA achieved in 2013. Despite its large base of over 1,500
employed physicians, AHC has generated operating and operating EBITDA
margins that are consistent with rating category medians. Stable
performance is expected for 2014.
LIMITED OPERATING RISK: The 'A' rating incorporates AHC's lower
operating risk profile resulting from its leading market share position
and large base of employed physicians which allows for greater variance
when compared to Fitch's median 'A' category financial ratios.
IMPROVING LIQUIDITY METRICS: As expected, AHC's liquidity profile
improved moderately to $1.3 billion at fiscal 2013 (Dec. 31 year-end)
equal to 125.2 days of cash on hand (DCOH) and 80% cash to debt;
improved from 106.3 DCOH and 64.3% cash to debt at fiscal 2012. While
AHC's liquidity metrics remain weak relative to Fitch's 'A' category
medians, further incremental improvement over the near term is expected
via steady cash flow. Fitch also notes that a significant improvement in
AHC's pension liability further reduces balance sheet risk going forward.
MANAGEABLE LEVERAGE: With the remarketing of its $65 million of series
2009B-1 to a three-year-term mode (Aug. 15, 2017), AHC maintains a
manageable 33.6% variable rate debt mix. While AHC's overall debt burden
remains somewhat elevated, leverage has moderated significantly over the
past four years. AHC has maintained steady coverage of maximum annual
debt service (MADS), which was 3.3x by operating EBITDA in 2013, equal
to Fitch's 'A' category median. MADS as a percent of revenue was 3.1% in
2013, equal to Fitch's 'A' category median, and down significantly from
3.8% in 2008.
LEADING MARKET POSITION: AHC's market leading position and geographic
reach allow it to mitigate some of the economic pressures of its service
by enabling good physician recruitment, steady volumes, and solid payor
contracts. In 2013 AHC maintained a leading 38.2% share against the
Wheaton Franciscan System with 20.9%, and Froedtert & Community Health
System (rated 'AA-'/Stable Outlook by Fitch) with 18.4%.
SUSTAINED CASH FLOW: Fitch expects AHC to maintain its current level of
operating profitability, which should provide sufficient cash flow to
finance its capital needs and support balance sheet levels.
AHC is an integrated healthcare system consisting of 14 acute care
hospitals and one psychiatric hospital (3,145 licensed beds), over 1,500
employed physicians, 153 clinic sites, and approximately 70 retail
pharmacies located in the eastern third of Wisconsin. In 2013 (fiscal
year ended Dec. 31) AHC had total perating revenues of $4.25 billion.
Fitch's analysis is based on the consolidated system. Through March 31,
2014, total revenue of the Obligated Group (OG) was $713 million,
representing approximately 70.4% of the consolidated total revenue of
the system. At March 31, 2014, the total assets of the OG represented
84% of consolidated assets.
STEADY CASH FLOW
Despite its large base of employed physicians, AHC has been able to
generate operating and operating EBITDA margins consistent with the
rating category. In fiscal 2013, AHC continued its solid operating
profitability trend with operating and net EBITDA margins of 10.4% and
11.6%, respectively. Through the first quarter of 2014, AHC had a $23
million physician accrual which inflates operating income positively, as
well as some old receivables (reserved for in 2013), which will be
adjusted at fiscal year-end. As such, AHC is budgeting for a stable
operating EBITDA margin for 2014, below the 14% generated through the
March interim period.
BALANCE SHEET IMPROVEMENT
Overall, AHC's liquidity metrics are light for the rating category,
which management has worked to offset via efforts to reduce balance
sheet risk within its capital structure and treasury. Fitch notes that
liquidity at March 31, 2014 (113.7 DCOH) was impacted by AHC's annual
pension contribution, following an improved year-end balance in 2013 of
125.2 DCOH. Fitch believes liquidity should continue to demonstrate
modest improvement over time as AHC's capital needs wane and pension
Management expects steady cash levels in 2014 as capital needs remain
manageable and steady cash flow is maintained. Capital spending below
$300 million in 2014 and beyond should allow for nominal balance sheet
replenishment at current operating cash flow levels over the next few
LEVERAGE IS MANAGEABLE
Despite elevated debt levels for the category, AHC's steady operating
performance results in consistent debt service coverage that is adequate
for the rating. Debt-to-capitalization fell to 55.3% in 2013 from 74.5%
in 2008, and coverage of MADS at 3.8x by EBITDA in 2013 is commensurate
for the rating level. Fitch notes that AHC's covenant calculation was
4.1x in 2013, which is based on OG performance and was well ahead of the
On behalf of AHC, Bank of America Merrill Lynch (BAML) will re-market
$65 million in series 2009B-1 bonds to a new long-term rate mode, with a
mandatory tender at Aug. 15, 2017. This will stretch the current
mandatory put out by three years. Pro forma MADS is measured at $131.7
million, which represents a small decrease from $132.3 million under
AHC has worked to diversify its bank and letter of credit (LOC) renewal
risk over the prior few years. Currently, AHC has three different LOC
banks extending commitments into 2015. Fitch views AHC's counterparty
diversification positively, and its overall variable rate debt exposure
is manageable (33%) with cash-to-demand debt of 255.5% as of March 31,
2014. AHC has one swap outstanding, with a notional value of $91.1
million, and a net fair value of $2.7 million as of March 31, 2014. AHC
is not currently required to post collateral, and the swap expires in
AHC covenants to provide annual and quarterly disclosure for the first
three quarters of each fiscal year through the Municipal Securities
Rulemaking Board's EMMA system. The content of AHC's quarterly
disclosure is viewed favorably and includes a management discussion, a
balance sheet, an income statement, a cash flow statement, and
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014).
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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