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Rating Update:

MOODY'S AFFIRMS A2 RATING ON RIVERSIDE HEALTH SYSTEM'S (IL) OUTSTANDING BONDS; OUTLOOK REMAINS STABLE

10 Jun 2011

A2 RATING APPLIES TO $157.7 MILLION OF OUTSTANDING DEBT

Illinois Finance Authority
Health Care-Hospital
IL

Opinion

NEW YORK, Jun 10, 2011 -- Moody's Investors Service has affirmed the A2 rating on Riverside Health System's (IL) $157.7 million of outstanding rated debt, which was issued through the Illinois Finance Authority (see Rated Debt section at the end of this report). The rating outlook remains stable. Riverside also has an additional $21.4 million of variable rate debt that does not carry an underlying Moody's rating.

SUMMARY RATING RATIONALE

The A2 rating is based on Riverside's track record of favorable operating performance, strong cash levels, leading market share position, somewhat leveraged debt profile, and small size relative to similarly rated hospitals. The stable outlook reflects our expectation that sound operating performance will continue, despite pressures with Medicare funding, due in large part to Riverside's strong management.

STRENGTHS

*Leading market share in the two-hospital market of Kankakee County (general obligation rated A1); in fiscal year (FY) 2010, Riverside captured 62% of the primary service area's (PSA) inpatient admissions

*Track record of favorable operating performance, with an FY 2010 operating margin of 4.5% (compared to a median of 2.3% for all rated hospitals) and an FY 2010 operating cash flow margin of 15.3% (compared to a median of 9.0%)

*Strong liquidity ratios, as evidenced by 371 days cash on hand at fiscal year end (FYE) 2010 (compared to a median of 147 days for all rated hospitals)

*Well-managed debt program mitigates some exposure to the risks associated with variable rate debt (39% of Riverside's outstanding debt as of FYE 2010) and interest rate swaps; FYE 2010 cash to debt of 132% compares favorably to a median of 102% for all rated hospitals, and FYE 2010 cash to demand debt was also strong at 338%

CHALLENGES

*Small relative to other A2 rated hospitals, with FY 2010 operating revenues of $269 million (compared to the A2 median of $466 million) and FY 2010 inpatient admissions of 11,747 (compared to the A2 median of 20,985)

*Somewhat elevated reliance on Medicare (50% of gross revenues in FY 2010, compared to a median of 43% for all rated hospitals), which heightens Riverside's vulnerability to federal reimbursement reductions

*Above average but manageable debt levels, with FY 2010 debt to operating revenues of 67% (compared to a median of 36% for all rated hospitals) and Moody's adjusted maximum annual debt service (MADS) coverage of 3.9 times (compared to a median of 4.0 times)

DETAILED CREDIT DISCUSSION

LEGAL SECURITY: Debt service on the outstanding rated bonds is secured by a joint and several pledge of unrestricted receivables of the Riverside Health System and its obligated affiliates, the Riverside Medical Center, Riverside Senior Living Center, and Oakside Corporation.

INTEREST RATE DERIVATIVES: Riverside is a party to two interest rate swap agreements. Goldman Sachs Group (senior unsecured rated A1/negative outlook) is the counterparty on both swaps. Riverside entered into a floating-to-fixed rate swap to hedge the interest rate risk on the Series 2004 Variable Rate Demand Revenue Bonds. Riverside pays a fixed rate of 3.794% and receives a variable rate of 57% of one-month LIBOR plus 54 basis points. The swap expires in 2029, coinciding with the maturity of the Series 2004 bonds. As of FYE 2010, the notional amount of the swap was $33.9 million. Management reports that the mark-to-market valuation was a negative $3.8 million as of April 29, 2011, which would be payable by Riverside upon termination.

Riverside's second derivative agreement with Goldman Sachs is a basis swap. Riverside pays a variable rate based on SIFMA and receives a variable rate of 68% of three-month LIBOR plus 67 basis points. The swap, which expires in 2035, had a notional amount of $25 million at FYE 2010. The mark-to-market valuation was negative $5,000 as of April 29, 2011, which would be payable by Riverside upon termination.

RECENT DEVELOPMENTS/RESULTS

Riverside continues to maintain a leading market position in its PSA in Kankakee County. The only other acute care hospital in Kankakee is St. Mary's Hospital, which is a member of Provena Health (rated Baa1/stable outlook). According to management, Riverside captured approximately 62% of inpatient admissions in 2010 compared to 38% for St. Mary's (excluding outpatient migration). Riverside continues to focus on broadening its market reach, particularly north of Kankakee into Will County (general obligation Aa1).

While the Kankakee regional economy is characterized by relatively high unemployment rates, Will County's socio-economic profile is stronger, reflecting its proximity to employment centers through the Chicago (general obligation rated Aa3/stable outlook) metropolitan area. A continued affiliation with Rush University Medical Center (A2/stable outlook) should support Riverside's efforts to broaden its market reach in Chicago, which is approximately 60 miles north of Kankakee.

Based on audited financial results, Riverside continued its track record of favorable operating performance in recent fiscal years. Since FY 2000, Riverside has had an operating cash flow margin of at least 10.4%. In both FY 2009 and FY 2010, Riverside recorded operating income of $12.1 million, which generated operating margins of 4.7% and 4.5% in FY 2009 and FY 2010, respectively. Operating cash flow margins were also strong: operating cash flow was $39.7 million (15.5%) in FY 2009 and $41.1 million (15.3%) in FY 2010. Reflecting good cash flow generation, debt ratios remain satisfactory at the A2 rating level. In FY 2009 and FY 2010, Riverside's Moody's adjusted debt-to-cash flow was an adequate 4.0 times and 3.5 times, respectively, while Moody's adjusted MADS coverage was a satisfactory 3.5 times and 3.9 times during the same time period.

Despite declines in total admissions (including observation stays) of 2.4% in FY 2009 and 1.6% in FY 2010, Riverside was able to post solid operating results due largely to rate increases from commercial and managed care payers, as well as management's various cost containment efforts. Unaudited results for the first quarter of FY 2011 are similar to those of the first quarter of FY 2010, suggesting a continuation of solid operating performance.

Riverside is highly dependent on Medicare, which comprised 50% of gross revenues in FY 2010, compared to the national median of 43% for all rated hospitals. Hospitals experienced declines in federal Medicare reimbursement in federal FY 2011 and we expect they likely will experience continued reductions as healthcare reform is implemented over the next decade and the US continues to face significant federal deficits. We expect that Riverside management will offset Medicare pressures and maintain operating performance at levels that support the A2 rating.

Riverside's cash position has improved since our last review, with FYE 2009 and FYE 2010 days cash on hand an ample 359 days and 371 days, respectively, and cash to debt of 119% and 132% during the same time period. According to management, at FYE 2010, unrestricted cash and investments were allocated primarily in money market and fixed income funds (59%) and equities (42%).

Management expects days cash on hand to remain above 300 days, which we believe is an important component of the A2 rating, as it provides some protection against the risks associated with variable rate demand debt. Approximately 39% of Riverside's outstanding debt is variable rate. The outstanding principal on the two Moody's rated series of variable rate debt totaled approximately $48 million at FYE 2010. The demand feature on these two series of bonds is supported by letters of credit (LOC) from JPMorgan Chase Bank, NA (senior unsecured rated Aa1/negative outlook) that expire in February 2016. Riverside also has three series of unrated variable rate bonds with total principal outstanding of $21 million as of FYE 2010. The demand feature on these bonds is supported by LOCs from Bank of America, NA (long term rated Aa3/on review for possible downgrade) that expire in August 2014.

Construction continues on the new $60 million, three-story patient tower located adjacent to the existing hospital. The facility is scheduled to be fully operational by mid-2012. No additional debt is planned in the near term, as capital improvements are expected to be funded from cash flow.

Outlook

The stable rating outlook reflects our expectation that despite Medicare reimbursement pressures, Riverside will continue to enjoy a strong market position, favorable operating margins, and satisfactory liquidity levels that support the A2 rating.

WHAT COULD MAKE THE RATING GO UP

Material increase in admissions and revenue base to levels consistent with higher rating categories; further improvement of operating performance and cash position; ability to address ongoing capital needs without adversely affecting balance sheet measures

WHAT COULD MAKE THE RATING GO DOWN

Reduced inpatient admission and surgical volumes that materially weakens operating margins; significant market share loss; inability to offset reductions in Medicare reimbursement without impairing operating performance and/or liquidity; increase in debt without commensurate increase in cash flow

KEY INDICATORS

Assumptions & Adjustments:

-Based on Riverside Health System and Obligated Affiliates special purpose combined financial statements and combining schedules

-First number reflects audit year ended December 31, 2009

-Second number reflects audit year ended December 31, 2010

-Investment returns normalized at 6%

*Inpatient admissions: 12,301; 11,747

*Total operating revenues: $256.7 million; $268.5 million

*Moody's adjusted net revenue available for debt service: $50.8 million; $56.4 million

*Total direct debt outstanding: $183.1 million; $179.1 million

*Maximum annual debt service (MADS): $14.4 million; $14.4 million

*MADS coverage with reported investment income: 1.9 times; 3.1 times

*Moody's adjusted MADS coverage with normalized investment income: 3.5 times; 3.9 times

*Debt to cash flow: 4.0 times; 3.5 times

*Days cash on hand: 359 days; 371 days

*Cash to debt: 119%; 132%

*Operating margin: 4.7%; 4.5%

*Operating cash flow margin: 15.5%; 15.3%

RATED DEBT (issued through the Illinois Finance Authority) (amounts outstanding as of December 31, 2010)

-Series 2009 Fixed Rate Revenue Bonds ($66.5 million outstanding), A2 underlying rating

-Series 2006C Fixed Rate Revenue Bonds ($42.8 million outstanding), A2 underlying rating

-Series 2006A Variable Rate Demand Revenue Bonds ($15.1 million outstanding), insured by Radian Asset Assurance Inc., rated Aa1/VMIG1 based on LOC provided by JPMorgan Chase Bank, N.A. (LOC expires February 15, 2016), A2 underlying rating

-Series 2004 Variable Rate Demand Revenue Bonds ($33.3 million outstanding), insured by Radian Asset Assurance Inc., rated Aa1/VMIG1 based on LOC provided by JPMorgan Chase Bank, N.A. (LOC expires February 15, 2016), A2 underlying rating

CONTACTS

Obligor: Bill Douglas, Chief Financial Officer, (815) 935-7548; Patricia Marlinghaus, Director of Finance, (815) 935-7256

PRINCIPAL METHODOLOGY USED

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, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

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

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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

Rachel Cortez
Analyst
Public Finance Group
Moody's Investors Service

Mark Pascaris
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


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MOODY'S AFFIRMS A2 RATING ON RIVERSIDE HEALTH SYSTEM'S (IL) OUTSTANDING BONDS; OUTLOOK REMAINS STABLE
No Related Data.
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