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Rating Update:

MOODY'S AFFIRMS A2 RATING ON EDWARD HEALTH SERVICES CORPORATION'S (IL) OUTSTANDING BONDS; OUTLOOK IS REVISED TO POSITIVE FROM STABLE

12 Nov 2010

AFFIRMATION AFFECTS TOTAL OF $282.4 MILLION OF DEBT

Illinois Health Facilities Authority
Health Care-Hospital
IL

Opinion

NEW YORK, Nov 12, 2010 -- Moody's Investors Service has affirmed the A2 rating on Edward Health Services Corporation's (EHSC) outstanding debt issued by the Illinois Finance Authority. The outlook is revised to positive from stable.

RATINGS RATIONALE

The rating applies to $282.4 million of rated debt listed at the conclusion of this report. The positive outlook reflects our belief that EHSC will be able to continue to generate strong levels of cash flow, stabilize volumes, and improve debt measures as debt is paid down and no new debt is planned.

LEGAL SECURITY: The Obligated Group, which consists of Edward Hospital, Edward Health Ventures, Edward Health and Fitness Center, Linden Oaks Hospital and Edward Health Services Corporation, is jointly and severally obligated on all parity debt. The bonds are secured by a security interest in each of the Obligated Group Members' Gross Receipts, but are not secured by a pledge on any real property. The pledge of Gross Receipts can only be enforced by the bond insurer.

INTEREST RATE DERIVATIVES: EHSC entered into a 30-year floating-to-fixed interest rate swap in the notional amount of $30 million, locking in a fixed rate of 3.59% on a portion of the Series 2001C variable rate bonds. The swap terminates in 2031 and the counterparty is JPMorgan with a $6.4 million swap liability as of September 30, 2010. No collateral posting is required unless EHSC's rating falls below Baa1. EHSC entered into two fixed payer swaps with a total notional amount of $109.6 million in conjunction with the Series 2008B-1 (Citibank N.A.) and Series 2008B-2 (Goldman Sachs & Co.) bonds, locking in a fixed rate of 3.93%. As of September 30, 2010 the swaps had a negative mark-to-market of $12.9 million and EHSC was posting $6.7 million in collateral.

STRENGTHS

*History of strong financial performance averaging 13.4% over the last five years with 13.8% in FY 2010, which is strong relative to A2 medians and achieved despite flat volumes

*Located in Aaa-rated Naperville, the fourth largest city in Illinois, EHSC benefits from strong population growth (11%) and wealth measures ($88,771 median household income); EHSC is Naperville's largest employer

*No significant future capital or plans to issue new debt; average age of plant is low at 7 years, reflecting new and updated facilities as a result of significant investment in facilities prior to FY 2010

*Strong cash with 237 days cash on hand as of June 30, 2010; cash-to-puttable debt is adequate at 192%

CHALLENGES

*Crowded competitive market with a dozen similarly sized hospitals within a 20-mile radius including the opening in 2008 of a new competitor facility (Adventist Bolingbrook) less than ten miles away

*Declines in admissions prior to 2010 due to a shift to observation cases and the opening of a competitive facility, although admissions were relatively stable in fiscal year 2010

*Relatively high variable rate debt, which accounts for 59% of all debt; swap exposure with a collateral posting in FY 2010

*Concentration risk with 3 out of 4 liquidity facilities to be concentrated with one bank, although this is partially mitigated by longer term expirations (2013) and cash-to-puttable debt of192%

RECENT DEVELOPMENTS/RESULTS

Located approximately 25 miles West of Chicago in Aaa-rated Naperville, IL, EHSC benefits from favorable demographics being located in an affluent high population growth area. As the fourth largest city in the state, Naperville has exhibited favorable population growth of 11% since 2000 and is characterized by approximately $89,000 per year median household income, favorable payer mix, low Medicaid and self-pay population despite economic pressures. EHSC continues to operate in a competitive environment with a dozen hospitals of similar size and service line offerings (some of which are owned by larger systems with resources) within a 20-mile radius, including the opening of Adventist-Bolingbrook Hospital less than ten miles away in Bolingbrook, IL in January 2008.

Inpatient admissions remained flat in FY 2010 (19,556 from 19,558 in FY 2009) after declining11% in FY 2009. The decline in 2009 was due to the competing facility in Bolingbrook, a greater shift to observation stays and weaker economic conditions. Management has since reported that volume losses to Adventist-Bolingbrook have stabilized and that shifts in admissions to observation stays has flattened (observations grew 3% in FY 2010 compared to 19% growth in the prior year). Inpatient admissions combined with observation stays grew 1% in FY 2010. EHSC's opening of a freestanding emergency department in Plainfield, IL in September 2009 has resulted in 25% growth in emergency department visits in FY 2010 and has resulted in approximately 50 hospital inpatient admissions per month since its opening. The opening of the freestanding emergency department is part of the hospital's strategy to meet demand for services in the southwestern quadrant of its market by increasing its presence and offering additional outpatient services. In September 2009, EHSC also opened a cancer center offering radiation and chemotherapy in Plainfield and continues to develop physician practices and outpatient services in the market.

EHSC's operating performance has historically remained strong (double digit revenue growth in 16 of the last 22 years) despite a modest decline in FY 2010. EHSC's operating revenue grew a modest 3% in FY 2010 primarily due to flat volume trends and increased charity care related to the economic slowdown. Management anticipates improved revenue growth in FY 2011 due to full year operating results from the freestanding emergency department and cancer center, revenue cycle initiatives, and improved commercial contract rate increases. EHSC generated $15.8 million (2.9% margin) in operating income in FY 2010, down from $17.3 million (3.3% margin) in FY 2009. Operating cash flow continues to remain strong growing to $75.9 million (13.8% margin) in FY 2010, up from $74.2 million (14.0% margin) in FY 2009 and above the A2 median of 9.7%.

Unrestricted cash and investments increased to $317 million (237 days cash on hand) at fiscal yearend (FYE) 2010 and $333 million (245 days cash on hand) at September 30, 2010, up from $276 million (213 days) at FYE 2009. Growth in cash is due to investment returns, improved accounts receivable and operating cash flow. In October 2009, EHSC purchased 50% of its 50/50 joint venture with cardiologists, Edward Cardiovascular Institute (ECI), impacting cash by $13.3 million. EHSC's liquidity remains strong with 100% of unrestricted cash available within one month as of FYE 2010. Cash-to-debt based on FYE 2010 is moderate at 112%, although up from 95% at FYE 2009. EHSC maintains a 56% investment allocation in equities, 37% in fixed income and 7% in cash. EHSC placed a soft freeze on its defined contribution pension plan in FY 2009 and unfroze it as of January 1, 2010.

Capital spending is estimated between $50 million and $60 million in FY 2011 and FY 2012, respectively, which is less than historical spending levels and is under operating cash flow levels. Projects include continued expansion of the Naperville Campus (estimated $18 million); expansion of the Bolingbrook outpatient facility (estimated $4 million) and woman's imaging renovation ($2.5 million). EHSC spent only $47 million on capital out of $60 million budgeted for FY 2010. Management anticipates no future significant capital or plans for new debt over the next several years.

EHSC's debt structure continues to present some risk, although we believe it is manageable relative to liquidity levels, with 59% variable rate debt, all supported by bank letters of credit (LOC) with JP Morgan Chase, which poses concentration risk. EHSC is in the process of substituting liquidity providers for its Series 2009A variable rate bonds, replacing JP Morgan Chase with Bank of America under a 3-year term expiring December 1, 2013 which mitigates some of the concentration risk among liquidity providers. All of EHSC's LOCs have are relatively long terms with expirations in 2013 and the term-out periods are adequate (approximately 3 years). EHSC has adequate headroom under its current and anticipated financial covenants (100 days cash on hand, 1.2 times rate covenant and 65% debt-to-capitalization) and had adequate cash-to-puttable debt of 192%. Leverage measures relative to operating performance have improved with 5.0 times peak debt service coverage in FY 2010 up from 4.7 times in FY 2009, and debt-to-cash-flow decreased to 3.3 times in FY 2010 from 3.7 times in FY 2009.

Outlook

The positive outlook reflects our belief that EHSC will be able to continue to generate strong levels of cash flow, stabilize volumes, and improve debt measures as debt is paid down and no new debt is planned.

What could change the rating--UP

At least stability in admissions; maintenance of operating margins and unrestricted cash levels; further improvement in debt measures as debt is paid down and no new debt is planned

What could change the rating--DOWN

Material increase in debt that would weaken coverage ratios and weaken financial position without a commensurate increase in cash flow; loss of market share due to elevated competition; unexpected and prolonged decline in operating performance

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for Edward Health Services Corporation, IL

-First number reflects FY 2009 audit year ended June 30, 2009

-Second number reflects FY 2010 audit year ended June 30, 2010

-Investment returns smoothed at 6% unless otherwise noted

- Interest expense adjusted for capitalized interest of $588,000 and $426,000 in FY 2010 and FY 2009

*Inpatient admissions: 19,558; 19,556

*Total operating revenues: $532 million; $550 million

*Moody's-adjusted net revenue available for debt service: $94 million; $100 million

*Total debt outstanding: $292 million; $282 million

*Maximum annual debt service (MADS): $20.2 million; $20.2 million

*MADS coverage based on reported investment income: 4.2 times; 4.3 times

*Moody's-adjusted MADS coverage: 4.7 times; 5.0 times

*Debt-to-cash flow: 3.7 times; 3.3 times

*Days cash on hand: 213 days; 237 days

*Cash-to-debt: 95%; 112%

*Operating margin: 3.3%; 2.9%

*Operating cash flow margin: 14.0%; 13.8%

RATED DEBT (debt outstanding as of June 30, 2010)

- Series 2001A fixed rate bonds: $31.0 million; A2 underlying rating; insured by Assured Guaranty

- Series 2008A fixed rate bonds: $86.1 million; A2 rating; Ambac insured

- Series 2008B1-2 variable rate bonds: $109.6 million; A2 underlying rating; JPMorgan Chase Bank Letter of Credit expiring April 29, 2013

- Series 2008C variable rate bonds: $12.2 million; A2 underlying rating; JP Morgan Chase Bank Letter of Credit expiring April 29, 2013

- Series 2009A variable rate bonds: $43.5 million; A2 underlying rating; JP Morgan Chase Bank Letter of Credit (to be substituted with Bank of America letter of credit on December 1, 2010)

CONTACTS

Issuer: Vincent Pryor, Chief Financial Officer, EHSC, (630) 527-3035

Underwriter: Michael Brown, Citigroup Global Markets Inc., (312) 876-3557

The last rating action with respect to EHSC, IL was on September 28, 2009, when a municipal finance scale rating of A2 was assigned and the outlook was stable. That rating was subsequently recalibrated to A2 on May 7, 2010.

RATING METHODOLOGY:

The principal methodology used in this rating was Not-for-Profit Hospitals and Health Systems published in January 2008.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Nyisha Hohn
Analyst
Public Finance Group
Moody's Investors Service

Lisa Martin
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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MOODY'S AFFIRMS A2 RATING ON EDWARD HEALTH SERVICES CORPORATION'S (IL) OUTSTANDING BONDS; OUTLOOK IS REVISED TO POSITIVE FROM STABLE
No Related Data.
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