Fitch Ratings has assigned a 'BBB-' rating to the following
Housing and Redevelopment Authority of the City of Saint Paul,
Minnesota bonds, issued on behalf of HealthEast Care System
(HealthEast):
--$151.3 million hospital facility revenue bonds, series
2015A.
HealthEast will also issue approximately $133.7 million in
series 2015B-D taxable variable-rate bonds, to be directly placed
with three banks, and are not rated by Fitch.
Together, the series 2015 bonds will be used to fund a portion
of capital expenditures, to advance refund the series 2005 bonds,
to retire other outstanding debt, to reimburse HealthEast for prior
capital expenditures, and to pay costs of issuance. The bonds are
expected to price the week of June 8 via negotiation.
In addition, Fitch affirms the following Housing and
Redevelopment Authority of the City of Saint Paul, Minnesota bonds
at 'BBB-':
--$192.5 million hospital facility revenue bonds, series
2005.
The Rating Outlook is Stable.
SECURITY
The series 2015 bonds are expected to be secured by a security
interest in gross receivables of the obligated group and a mortgage
on the obligated group's primary hospital facilities. A debt
service reserve fund is not expected to be funded, which reflects
an erosion in bondholder security from current levels.
KEY RATING DRIVERS
MANAGEABLE DEBT BURDEN: Post-issuance, HealthEast's debt burden
will moderate some with a material decline in maximum annual debt
service (MADS) to $22.6 million from $37.4 million. Through the
six-month period ended Feb. 28, 2015 HealthEast generated 3.0x
coverage of pro forma MADS by EBITDA. Further, ongoing capital
needs are manageable near $25 million annually, and no additional
debt is anticipated over the near term.
LIQUIDITY RECOVERY EXPECTED: As anticipated, HealthEast's
liquidity weakened further due to capital outlays related to its
electronic health record (EHR) project largely completed in late
2014. As of Feb. 28, 2015, HealthEast had $119.3 million in
unrestricted cash and investments, equating to 47.4 days of cash on
hand (DCOH) and 5.3x pro forma cushion ratio. Both are well below
Fitch's 'BBB' category medians of 145 DCOH and 10.5x cushion ratio,
though improvement is expected as cash flow improves and project
outlays diminish.
SHORT-TERM PROFITABILITY DECLINE: As expected, HealthEast's
operating performance has begun to recover, to a 1.5% operating and
6.8% operating EBITDA margin through Feb. 28, 2015 (including $7.3
million in non-recurring EHR expenses), from a 0.8% operating and
5.6% operating EBITDA margin through fiscal 2014 (including $21.2
million in non-recurring EHR expenses). Further improvement to a
2.5% operating margin is anticipated in fiscal 2015, supported by
ongoing strategic initiatives.
COMPETITIVE BUT FAVORABLE MARKET: HealthEast maintains a leading
market position in the St. Paul service area, and benefits from the
solid socioeconomic characteristics in the area. Inpatient market
share was 30.1% in the east metro primary service area as of
mid-2014, followed by 28.3% for Allina (rated 'AA-' with a Stable
Outlook by Fitch) and 23.6% for HealthPartners.
RATING SENSITIVITIES
IMPROVED LIQUIDITY: Fitch has remained tolerant of HealthEast's
relatively weak financial profile for the rating category during
its execution of key strategic initiatives. With lower capital
spending and improved cash flow, balance sheet metrics are expected
to strengthen going forward. Management is projecting to reach 60
DCOH by fiscal 2015 and improved profitability to operating margins
above 3% over the longer term. Failure to demonstrate a sustained
trend of improvement in profitability and liquidity metrics would
likely prompt negative rating pressure.
CREDIT PROFILE
HealthEast is an integrated healthcare system located in St
Paul, MN, incorporated in 1986. The system includes three acute
care hospitals and a long-term acute care hospital (LTACH) in the
St. Paul area, 14 outpatient clinics, over 1,126 medical staff
members, and approximately 7,300 employees. St. Joseph's Hospital
is located in downtown St. Paul with 239 staffed beds, St. John's
Hospital is located in a suburb of St. Paul with 184 staffed beds,
and Woodwinds Hospital is located in a suburb of St. Paul with 86
staffed beds. HealthEast also has a long-term acute care hospital,
Bethesda Hospital, with 126 staffed beds. The system generated
$943.6 million in total revenues in fiscal 2014 (year ended Aug.
31).
Fitch's analysis is based on the consolidated system, which
includes all three acute care hospitals, the LTACH, the employed
medical group, the HealthEast Foundation, and other controlled
affiliates. The obligated group consists of the corporate parent,
the three acute care facilities and the LTACH, which together
generated 85.2% of total revenues as of Feb 28, 2015.
NEW ISSUE DEBT
HealthEast plans to issue approximately $285 million in series
2015A-D debt including $151.3 million in fixed-rate tax-exempt term
bonds and $133.7 million in taxable variable-rate debt directly
placed with three banks. The series 2015B-D bonds are expected to
be issued simultaneously with the series 2015A bonds, and all will
be additionally secured by a mortgage lien. With this issuance,
HealthEast will bring the $34 million series 2005-3 A&B Midway
Bonds into the obligated group debt structure. This debt is
currently held by the Port Authority of the City of Saint Paul, and
the Midway facility leased back to HealthEast.
Fitch notes that HealthEast's pro forma debt structure is more
aggressive, with approximately 40% uncommitted capital. The
earliest renewal date for the bank loans is 2020. The current draft
of the bank documents include a semiannual 40 DCOH test that
increases to 65 days by FYE 2018, ahead of the 40 DCOH bond
indenture requirement. Fitch notes that a failure to meet the DCOH
covenant would be an event of default under the bank documents.
Total pro forma long-term debt is estimated at $330.1 million,
reflecting no new system debt. Pro forma MADS is estimated at $22.6
million, providing significant debt service relief from the current
$37.4 million. Through Feb. 28, 2015, HealthEast generated 3.1x
coverage of pro forma MADS by operating EBITDA, and pro forma MADS
was equal to 2.3% of total revenue. However, cash-to-pro forma debt
was somewhat thin at 36.1%.
Fitch expects HealthEast's leverage to moderate over time as it
completes its remaining Epic capital spend by fiscal 2016 and
returns to stronger cash flow levels which replenish liquidity.
HealthEast does not anticipate further debt issuance over the near-
to medium-term, and its average age of plant of 10 years in fiscal
2014 is consistent with the rating category.
DISCLOSURE
HealthEast will covenant to provide annual disclosure within 150
days and quarterly disclosure within 60 days to the Municipal
Securities Rulemaking Board's EMMA system. Disclosure includes
detailed financial statements, volume statistics, payor mix, an
operating and capital budget, and management discussion and
analysis.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
(pub. 30 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985620
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPrimary AnalystEmily E. Wadhwani,
+1-312-368-3347DirectorFitch Ratings, Inc.70 W. Madison Street,
Chicago IL 60602orSecondary AnalystEmily Wong,
+1-415-732-5620Senior DirectororCommittee ChairpersonJames LeBuhn,
+1-312-368-2059Senior DirectororMedia RelationsElizabeth Fogerty,
New York, +1-212-908-0526elizabeth.fogerty@fitchratings.com