Fitch Ratings has assigned a 'BBB+' rating to the following
Kentucky Economic Development Finance Authority bonds, issued on
behalf of Owensboro Health (Owensboro):
--$68.1 million hospital revenue bonds, series 2015A;
--$25.1 million hospital refunding revenue bonds, series
2015B.
The bonds will be used to fund capital expenditures, to
partially refund outstanding indebtedness, to fund a debt service
reserve, and to pay costs of issuance. The bonds are expected to
price the week of July 27.
In addition, Fitch affirms the 'BBB+' ratings on the following
Kentucky Economic Development Finance Authority bonds, issued on
behalf of Owensboro Medical Health System (dba Owensboro Health;
Owensboro):
--$451.3 million hospital revenue bonds, series 2010A;
--$64.6 million hospital revenue bonds, series 2010B.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a security interest in net revenues and
receivables of the obligated group, a mortgage lien, and a debt
service reserve.
KEY RATING DRIVERS
SIGNIFICANT DEBT BURDEN: With the series 2015 new issuance,
Owensboro's leverage will remain very elevated relative to the
'BBB' category medians but in line with historical metrics. Pro
forma maximum annual debt service (MADS) of $41.6 million increases
marginally from prior MADS of $37.9 million, and equates to a high
8.4% of annualized fiscal 2015 revenues. Coverage of pro forma MADS
was 2.1x through the 10 months ended March 31, 2015 and is expected
to remain sufficient near 2x going forward.
DOMINANT MARKET POSITION: The bonds are being issued to support
Owensboro's regional platform strategy, which Fitch believes is
integral to preserving its leading market position in the region.
The series 2015 bonds will be used in part to construct five care
centers around the region, to provide mainly primary and urgent
care services. Fitch believes this will be key to maintaining
Owensboro's dominant market position (92% share) and support its
population health strategy going forward.
SUSTAINED CASH FLOW IMPROVEMENT: Following weaker results in
fiscal 2014 (May 31 year-end) Owensboro generated a 15.8% operating
EBITDA margin and a 17.2% EBITDA margin through the 10-month
interim period ended March 31, 2015. Results were supported by
better clinical volumes and strong expense management. Owensboro is
ahead of its 2015 budget, which called for a more modest 13%
operating EBITDA margin.
WEAK LIQUIDITY AGAINST DEBT: As expected, Owensboro's balance
sheet reflects pressure from sizeable debt issuance, as well as
approximately $35 million in equity contributions towards its
hospital project during fiscal 2014 (year ended May 30). At March
31, 2015, unrestricted cash and investments of $211.2 million,
equated to 170.7 days cash on hand (DCOH), a 5.1x pro forma cushion
ratio and 37.5% cash to pro forma debt. While DCOH compares
favorably to the 'BBB' category median of 145 DCOH, Owensboro's
cushion and cash to debt metrics are not consistent with 'BBB'
category medians of 10.5x and 93.6%, respectively.
RATING SENSITIVITIES
STEADY PROFITABILITY; IMPROVED LIQUIDITY: Fitch expects
Owensboro to sustain recent profitability allowing for adequate
debt service coverage of near 2x. In addition, liquidity metrics
are expected to improve supported by strong cash flow and limited
routine capital spending near $15 million annually. Failure to
maintain current cash flow levels or to strengthen liquidity
metrics could pressure the rating over the near term.
CREDIT PROFILE
Owensboro Health is a 447-licensed-bed health system located in
Owensboro, KY, approximately 100 miles southwest of Louisville, KY.
Total revenues for fiscal 2014 were $448.2 million (year ended May
31).
Fitch's analysis is based on the consolidated entity. The
obligated group (OG) includes Owensboro Health Inc. (OHI; corporate
parent, operating acute facilities) and Owensboro Health Medical
Group (OHMG; owned & employed physician groups and MOB's). In
fiscal 2014, total assets and revenues of the OG were $965 million
and $440.8 million, respectively, or 99.5% of total assets and 98%
of total revenues all of the consolidated organization.
REGIONAL STRATEGY
Approximately $65 million in series 2015 bond proceeds will be
used to fund the construction of five separate ambulatory care
sites located in Owensboro's service area. While Owensboro
maintains leading 92% inpatient share in Daviess County, and over
70% share in McLean and Hancock Counties, the system has an ongoing
need for a solid regional platform for ambulatory services. The
five sites will be located in key target markets to meet demand and
minimize outmigration. Fitch believes this will be integral to
preserving Owensboro's market position as a regional referral
center over the longer term, and key to its efforts in population
health going forward.
STEADIED OPERATIONS
Better clinical volume coupled with expense controls has
supported sustained improvements in operating cash flow in 2015.
Through the 10 month interim period ended March 31, 2015, Owensboro
had a 4% increase in admissions and commensurate increase in
patient revenue, coupled with reduction in bad debt due in part to
the state's successful Medicaid expansion. Owensboro expects to
finish ahead of its 2015 budget, and is focused on rebuilding
liquidity via profitability and ongoing expense management.
Owensboro's low 5.1 year average age of plant at March 31, 2015
signals minimal routine capital outlays near $15 million going
forward.
DEBT PROFILE
Post issuance, Owensboro will have approximately $563 million in
long-term debt outstanding, including the partial refunding of the
series 2010B bonds. Debt is 100% fixed rate, with no swaps. MADS is
measured at $41.6 million per the underwriter, and debt service is
level through 2045.
DISCLOSURE
Owensboro covenants to provide annual audited disclosure no
later than 180 days following fiscal year end and quarterly
disclosure no later than 45 days after quarter end for the first
three quarters, and no later than 60 days following the fourth
quarter. Disclosure is provided via the Municipal Securities
Rulemaking Board's EMMA System. Fitch has received timely and
thorough disclosure and maintained good access to management.
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. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987567
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPrimary AnalystEmily Wadhwani,
+1-312-368-3347DirectorFitch Ratings, Inc.70 W. Madison
StreetChicago, IL 60602orSecondary AnalystStephen Friday,
+1-212-908-0384Associate DirectororCommittee ChairpersonJames
LeBuhn, +1-312-368-2059Senior DirectororMedia RelationsSandro
Scenga, +1-212-908-0278sandro.scenga@fitchratings.com