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Rating Update:

MOODY'S AFFIRMS FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM'S (LA) A2 UNENHANCED RATING; OUTLOOK REMAINS STABLE

11 May 2011

FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM HAS A TOTAL OF $518.8 MILLION OF RATED DEBT OUTSTANDING

Louisiana Public Facilities Authority
Health Care-Hospital
LA

Opinion

NEW YORK, May 11, 2011 -- Moody's Investors Service has affirmed the A2 unenhanced ratings assigned to Franciscan Missionaries of Our Lady Health System's (FMOLHS) $518.8 million of outstanding bonds issued by the Louisiana Public Facilities Authority (see RATED DEBT section in this report). The outlook remains stable.

FMOLHS is a single state system operating four acute care hospitals in the state of Louisiana. Its three tertiary hospitals are located in the cities of Baton Rouge, Lafayette and Monroe, with a community hospital located in Ascension Parish.

SUMMARY RATING RATIONALE

The affirmations of the rating and outlook are attributable to growth for the state's largest acute care provider with continued strong performance in the Baton Rouge market, where a distinctly leading market share is held, to help offset lower performance by hospitals in Lafayette and Monroe that are experiencing admission declines with continued competitive pressures. Operating performance improved in fiscal year 2010 to return operating cash flow margin to historical levels, with growth in liquidity as well. However, a 25% increase in debt load in FY 2010 continues to temper debt measures. FMOLHS will be undergoing marked changes in the Baton Rouge market through an agreement to accept nearly all acute care volume from the charity hospital as it plans to close in 2013, as well as enhancement of its educational and residency programs with the assumption of the LSU programs from Earl K Long.

STRENGTHS

* Single state system (generating $1.3 billion in operating revenue in fiscal year 2010) with diversification of cash flow across three key markets with Baton Rouge flagship holding a distinctly leading market share and accounting for largest portion (68% in fiscal year 2010) of system operating cash flow; system maintains the leading market share position in Monroe

*Fiscal year (FY) 2009 actual performance that met or exceeded expectations in most measures except margins; FY 2010 return to operating profitability (1.4% margin) and strong improvement in operating cash flow margin to 9.4%, more reflective of historical levels following downturn in FY 2009

*Liquidity started rebounding in FY 2010, increasing $80 million (13%) with improvement in operations and positive investment returns; cash on hand increased to 213 days at fiscal yearend (FYE) 2010 from 196 days at FYE 2009

*FY 2010 debt measures are in line with A2 medians and better than Moody's pro forma 2009 ratios when Series 2009A bonds were issued, with Moody's-adjusted debt-to-cash flow of 3.73 times (vs. pro forma 6.05 times and median 3.2 times), cash-to-debt of 127% (vs. pro forma 90% and median 132%), and Moody's-adjusted maximum annual debt service (MADS) coverage of 4.22 times (vs. pro forma 3.36 times and median 5.0 times)

*Recently announced agreement that will add Louisiana State University residency programs to the Baton Rouge facility expected to increase market share and enhance clinical excellence

CHALLENGES

*High competitive pressures in all major markets through existence of specialty hospitals with a high degree of physician entrepreneurialism in this state with no certificate of need regulation; Lourdes does not maintain a leading market share

*Lafayette and Monroe markets continue to struggle financially, resulting in the system relying on continued high performance in Baton Rouge to offset the lower margins in these two markets

*Capital spending anticipated to remain high in the current and next two years with the completion of the new Lafayette hospital as well as anticipated capital spending to accommodate additional volumes and the Louisiana State University (LSU) medical school teaching programs currently at the Earl K Long facility

*Debt load and debt metrics unfavorable to A2 medians; monthly liquidity to total liquidity low compared to peers, with monthly cash on hand 145 days

*Underfunded pension plan (58%) with sizable $242 million obligation at FYE 2010; plan frozen to new employees in 2006 and classified as a church plan under ERISA funding requirements

DETAILED CREDIT DISCUSSION

LEGAL SECURITY: The bonds are secured by a pledge of Receipts (as defined in the Loan Agreement) of the obligated group to pay principal and interest. The obligated group consists of Franciscan Missionaries of Our Lady Health System, Inc. (the system), St. Francis Medical Center, Inc. (St. Francis), Our Lady of the Lake Hospital, Inc. (Lake), Our Lady of Lourdes Regional Medical Center, Inc. (Lourdes), and Our Lady of the Lake Ascension Community Hospital, Inc. (St. Elizabeth). Rate covenant of 1.1 times. Letters of credit have 75 day liquidity test and maintenance of minimum bond rating of Baa2.

INTEREST RATE DERIVATIVES: FMOLHS has two fixed payor swaps and two constant maturity swaps. With respect to the Series 2005D bonds, the obligated group entered into a variable-to-fixed rate interest rate swap agreement with Merrill Lynch Capital Services, Inc. (pay fixed rate and receive variable rate based on 70% of one-month LIBOR) for a current notional amount of $82.5 million; notional amount declines with the principal payments on the bonds. FMOLHS has a constant maturity swap also with Merrill Lynch for a like notional amount under which FMOLHS pays a variable rate based on 70% of one month LIBOR and receives a variable rate based on 70% of 10 year LIBOR less 35.8 basis points. With respect to the Series 2008A bonds, FMOLHS entered into a variable-to-fixed rate interest rate swap agreement with Goldman Sachs Capital Markets, L.P. (pay fixed rate and receive variable rate based on 70% of one-month LIBOR) for a current notional amount of $48.6 million; notional amount declines with the principal payments on the bonds. FMOLHS has a constant maturity swap with Merrill Lynch for a like notional amount under which FMOLHS pays a variable rate based on 70% of one-month LIBOR and receives a variable rate based on 70% of 10 year LIBOR less 35.9 basis points. As of February 28, 2011, the swaps had a combined net unfavorable market value of $4.7 million. FMOLHS is not required to post collateral unless the bond rating falls to Baa1 or below, and then only if certain thresholds are met.

RECENT DEVELOPMENTS/RESULTS

FMOLHS continued to grow operating revenues (net equity income in equity investments reclassified to non-operating) in FY 2010, but the 6.5% growth was below each of the prior four years and the five year average of 10.2%. Nonetheless, the system held operating expense growth (including adding back capitalized interest) to only 3.1% to improve the operating margin to $18.8 million (1.4% margin) from a loss of $10.5 million (-0.9% margin) the prior year (excluding the $25.2 million loss on asset impairment in FY 2009). As a result, operating cash flow improved 56.2% to $122.2 million (9.4% margin) from $78.2 million (6.4% margin), more in line with historical levels. Correspondingly, financial metrics improved, including debt-to-cash flow (to 3.73 times from 4.17 times) and Moody's-adjusted maximum annual debt service (MADS) coverage (to 4.22 times from 3.74 times). Furthermore, metrics were favorable to pro forma ratios a the time of the issuance of the Series 2009 bonds, including pro forma debt-to-cash flow of 6.05 times, cash-to-debt of 90% and cash on hand of 178 days. Operating performance for the first six months of FY 2011 is comparable to the same period in the prior year. Operating revenues are relatively flat with the operating profit increasing to $16.8 million from $14.9 million and the operating margin improving to 2.6% from 2.3%, yet the operating cash flow margin remains comparable at 9.5%.

Liquidity showed marked improvement, increasing $79.5 million (13%) over fiscal yearend 2009 for 213 days cash on hand by FYE 2010. Liquidity growth resulted from the improvement in cash flow generation, favorable market returns, and a substantial portion of the additions to property, plant and equipment supported by the Series 2010 bond proceeds. Moody's notes that 32.5% of unrestricted liquidity is invested in hedge funds, private equity, real estate and other alternative investments. With limitations on liquidation of investments, monthly liquidity is 145 days cash on hand versus total unrestricted cash of 213 days, unfavorable to peer organizations. Liquidity grew another $82.4 million (12%) in the first half of FY 2011 with stable cash flow generation and continued favorable market returns, with annualized cash on hand improving to 238 days. As of December 31, 2010, FMOLHS had about $48 million yet to contribute to the construction of the new Lafayette hospital, which we believe will stymie growth in cash on hand but not have a negative impact. In the first part of calendar year 2011, FMOLHS received $100 million from the Department of Health and Hospitals to support its endeavor to assume the majority of the clinical services and Louisiana State University (LSU) residency programs currently at Earl K Long (see Our Lady of the Lake discussion below). Moody's assumes these monies will be used for capital and strategic initiatives related to this new endeavor, and is therefore not assuming this as a permanent growth in liquidity.

In FY 2010 FMOLHS issued $125 million of Series 2009A fixed rate bonds to support the construction of the new Lafayette hospital as well as capital projects in Baton Rouge. As a result, long term debt increased $110 million in FY 2010 over FYE 2009 and debt-to-revenue increased to 43% from 36%. With the new debt issue the mix of fixed rate debt increased to 67%. The variable rate debt is 100% supported by letters of credit with expiration dates not until 2015 and 2016, with cash-to-variable rate debt strong at 384%. Monthly liquidity to variable rate debt is lower but still comfortable at 261%. Management has no debt plans in the next 12-18 months, but is considering issuing up to $100 million of debt thereafter to support the LSU capital initiatives discussed below.

Following is a discussion of the three significant markets. Our Lady of the Lake represented 60% of operating revenues and 68% of operating cash flow in FY 2010. Our Lady of Lourdes represented 18% of operating revenues and 14% of operating cash flow. St. Francis Medical Center represented 21% of operating revenues and 15% of operating cash flow.

Our Lady of the Lake:

Our Lady of the Lake (OLOL) continues to hold an increasing and clearly leading market share in its three parish primary service area (PSA), increasing to 40.4% in 2010 from 37.4% in 2006 (all market share data provided by FMOLHS, and excludes newborn, obstetrics, and rehab). The next largest providers are Baton Rouge General with a distant 18.2% market share and North Oaks Medical Center in neighboring Tangipahoa Parish with 14.1%. All other providers hold less than 10% market share each. Several specialty surgical facilities continue to operate in this market, including a six operating room (OR) ambulatory surgery center owned by FMOLHS and the 23-bed, 8-OR Surgical Specialty Centre owned 49% by FMOLHS. Baton Rouge is the capital of Louisiana, and demographics of the PSA anticipate continued population growth, with unemployment currently below both state and national levels.

OLOL continues to perform well financially, and to carry the system by offsetting poorer performance at its next two largest hospitals in Lafayette and Monroe. OLOL generated operating and operating cash flow margins of 5.6% and 10.6%, respectively, in FY 2010. Admissions, which had flattened in FY 2009, grew 5.1% in FY 2010 but have declined a half percentage point in the first eight months of FY 2011. Despite the flattening of admissions, surgeries continue to grow, with the number of ORs recently expanding to 34 rooms from 26 rooms. In addition, an increased focus on patient management has reduced the average length of stay to 4.8 from 5.2 two years ago.

OLOL recently signed a Collaborative Endeavor Agreement (CEA) with Louisiana State University (LSU). Under this agreement, the local charity hospital, Earl K Long, plans to close its inpatient services by 2014. As a result of this closure, OLOL will assume all of the inpatient services from Earl K Long except for obstetrics (to transfer to Woman's Hospital) and the prison contract. To accommodate the expected increase in census, OLOL has begun a $200 million expansion project to include a nine-story bed tower, expanded emergency room and ancillary department renovations, expected to be completed in FY 2014. Part of the expansion includes a new Medical Education building for the LSU teaching program. With this expansion, OLOL plans to dedicate the new tower as a state of the art Heart and Vascular Tower and grow the emergency department to a Level I Trauma Center. The Department of Health and Hospitals has agreed to provide $129 million of supplemental funding, of which $100 million has been received in calendar 2011. In addition to the supplemental funding, for taking on the responsibility as the "safety net" hospital in the region, OLOL will receive increased reimbursement for its Medicaid patients as well as cost reimbursement for the uninsured. OLOL's current Medicaid and self-pay loads as a percentage of gross revenues are currently average for our portfolio at 14.8% and 5.8%, respectively, in FY 2010 (current medians of 11.5% and 7.6%, respectively), but we expect this load to increase with the movement of patients from Earl K Long. In addition to the increased patient volumes, LSU will move its residency programs from Earl K Long to OLOL. OLOL's residency program will grow from 43 residents to about 150 residents, enhancing OLOL as a major teaching hospital. Absorption of this new patient volume and growth in the medical education programs is sizable and will need to be carefully managed.

Our Lady of Lourdes:

Our Lady of Lourdes (Lourdes) grew revenues and improved operating performance in FY 2010 despite a 7.2% decline in admissions, with operating cash flow improving $5.9 million (46%). Lourdes continued to report a loss before earnings in equity investments, with operating cash flow margin of 7.6% a drag on overall system performance. Despite the decline in admissions, emergency room visits and operating room procedures increased in FY 2010. Admissions continued to decline in the first half of FY 2011, however, operating procedures continued to grow. Lourdes operates in the highly competitive Lafayette market, holding a number two market position of 11.9% in a nine parish service area behind Lafayette General Medical Center's 15.7% market share. For-profit HCA remains a steady competitor with a 7.3% market share (excludes the women's and children's hospital). Specialty surgical hospitals abound in this market as well, with FMOLHS holding a 60% interest in the 32-bed Heart Hospital of Lafayette and a 45% interest in 10-bed Park Place Surgical Hospital.

In 2009 Lourdes began construction on a $211 million replacement hospital located south of the City of Lafayette, a growing area with more favorable demographic characteristics. FMOLHS issued the Series 2009A bonds to support $95 million of the project cost, with the remaining funds coming from cash and cash flow. Approximately $48 million had yet to be spent on the project between January 1 and June 30, 2011. A medical office building constructed by an independent third party is open and already at capacity in anticipation of the opening of the hospital. The hospital is scheduled to open July 2011. Management is projecting increasing admissions with the opening of the new hospital.

St. Francis Medical Center:

St. Francis Medical Center (St. Francis), located in Monroe, is the distinct leading provider in the nine parish primary service area at 59.8%. The only major competitor is Glenwood Regional Medical Center, holding a distant 26.9% market share. Both providers have increased market share at the expense of other smaller providers in the surrounding area as well as the stemming of outmigration. Three specialty surgical facilities are located here, with St. Francis owning 50% of 10-bed P&S Surgical Hospital. St. Francis operates in a more challenging demographic region with weak population growth and high unemployment (9% in May and above the state average). Revenues are pressured by a payer load that includes Medicaid and self-pay at 20.7% of gross revenues in FY 2010. Admissions declined a sizable 11.9% in FY 2010 after declining 5.3% in FY 2009, with a corresponding decline in operating room procedures (21% across the past two years) despite growth in emergency room visits. These volume trends continued into the first eight months of FY 2011. St. Francis improved operating performance by $11 million in FY 2010 but continued to report operating losses, with operating cash flow margin of 7.2% (equity interest reclassified to non-operating) below the system total. To drive improvement, acute care services have been consolidated at the downtown facility, the hospitalist program has been enhanced, and revenue cycle enhancement and cost control initiatives have been implemented.

Outlook

The stable outlook is attributable to solid market positions in two of the three major markets, continued strong performance in Baton Rouge, improved performance in Lafayette and Monroe, and growth in liquidity.

WHAT COULD MOVE THE RATING UP

Consistent generation of operating profits in the Lafayette and Monroe markets while maintaining financial strength in Baton Rouge; growth in overall system cash flow; strengthening of Lafayette market position; improvement in debt measures

WHAT COULD MOVE THE RATING DOWN

Decline in operating performance for the system; inability to improve operating performance a the Lafayette and Monroe markets; operational or financial challenges with the integration of volumes and programs at OLOL from EKL and LSU; weakening of debt measures

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for Franciscan Missionaries of Our Lady Health System, Inc. and Affiliated Organizations

-First number reflects audit year ended June 30, 2009

-Second number reflects audit year ended June 30, 2010

-Income from equity investees reclassified to non-operating from operating

-Excludes from non-operating gains/losses the change in value of interest rate swaps, loss on early extinguishment of debt and contribution to Franciscan Fund

-Capitalized interest of $6.2 million and $2.4 million in FY 2010 and 2009, respectively, included in interest expense

-Investment returns normalized at 6% unless otherwise noted

*Inpatient admissions: 69,469; 67,775

*Total operating revenues: $1.22 billion; $1.30 billion

*Moody's-adjusted net revenue available for debt service: $123.1 million; $175.5 million

*Total debt outstanding: $444 million; $554 million

*Maximum annual debt service (MADS): $32.9 million; $41.6 million

*MADS Coverage with reported investment income (includes realized and unrealized investment returns): -2.01 times; 5.02 times

*Moody's-adjusted MADS Coverage with normalized investment income: 3.74 times; 4.22 times

*Debt-to-cash flow: 4.17 times; 3.73 times

*Days cash on hand: 196 days; 213 days

*Cash-to-debt: 140%; 127%

*Operating margin: -0.9%; 1.4%

*Operating cash flow margin: 6.4%; 9.4%

RATED DEBT (debt outstanding as of March 31, 2011)

-Series 1998A fixed rate bonds ($57.6 million outstanding), insured by FSA, A2 unenhanced rating

-Series 1998B fixed rate bonds ($27.1 million outstanding), rated A2

-Series 2005A fixed rate ($80.0 million outstanding), rated A2

-Series 2005B variable rate bonds ($50.0 million outstanding) rated Aa1/VMIG1 (joint support rating) based on letter of credit provided by JPMorgan Chase NA expiring February 16, 2015 and A2 unenhanced rating

-Series 2005C fixed rate bonds ($50.0 million outstanding) rated A2

-Series 2005D variable rate bonds ($82.5 million outstanding) rated Aa1/VMIG 1 based on a letter of credit provided by US Bank, NA expiring February 16, 2016; A2 unenhanced rating

-Series 2008A variable rate bonds ($46.7 million outstanding), rated Aa1/VMIG 1 (joint support rating) based on letter of credit provided by JPMorgan Chase expiring February 16, 2015 and A2 unenhanced rating

-Series 2009A fixed rate bonds ($125.0 million outstanding), rated A2

CONTACTS

Obligor: Robert Ramsey, Chief Financial Officer, Franciscan Missionaries of Our Lady Health System (225) 923-2701

Financial Advisor: Michael Hammond, Managing Director, Morgan Keegan (212) 314-0400; Elaine Yao, Senior Vice President, Morgan Keegan (212) 314-0310

LAST RATING ACTION

The last rating action with respect to FMOLHS was on June 25, 2009, when a municipal finance scale rating of A2 was affirmed and the outlook was stable. That rating was subsequently recalibrated to A2 on May 7, 2010.

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, and confidential and proprietary Moody's Investors Service 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.

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

Kay Sifferman
Analyst
Public Finance Group
Moody's Investors Service

Jennifer Ewing
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 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM'S (LA) A2 UNENHANCED RATING; OUTLOOK REMAINS STABLE
No Related Data.
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