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MOODY'S ASSIGNS A1 LONG-TERM AND UNDERLYING RATINGS TO MUNSON HEALTHCARE'S (MI) SERIES 2011A FIXED RATE AND SERIES 2011B VARIABLE RATE BONDS; A1 PARITY RATING AFFIRMED; OUTLOOK REMAINS STABLE

15 Jul 2011

APPROXIMATELY $108 MILLION OF RATED DEBT TO BE OUTSTANDING

Grand Traverse County Hospital Finance Authority, MI
Health Care-Hospital
MI

Moody's Rating

ISSUE

RATING

Series 2011A Fixed Rate Hospital Revenue Bonds

A1

  Sale Amount

$35,765,000

  Expected Sale Date

07/28/11

  Rating Description

Hospital Revenue Bonds

 

Series 2011B Variable Rate Demand Bonds

A11

  Sale Amount

$24,825,000

  Expected Sale Date

08/09/11

  Rating Description

Hospital Revenue Bonds

 

1 The Series 2011B VRDB bonds are expected to be supported by a letter of credit from JPMorgan Chase Bank, N.A.
 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Jul 15, 2011 -- Moody's Investors Service has assigned A1 long-term and underlying ratings to Munson Healthcare's (MHC) $35.8 million of Series 2011A fixed rate bonds and $24.8 million of Series 2011B variable rate demand bonds (VRDB), respectively. The Series 2011B VRDB bonds are expected to be supported by a letter of credit (LOC) from JPMorgan Chase Bank, N.A. Enhanced long-term and short term ratings reflecting joint default analysis and the LOC are expected to be published separately. The LOC is expected to expire in August 2016. Key LOC terms include a total term out period of four years, compliance with Master Trust Indenture covenants, and financial covenants (including minimum 1.10 times debt service coverage and minimum 60 days cash on hand). In addition to the Series 2011A&B bonds, MHC also plans to issue a $22 million private placement with PNC Bank. The 31 year PNC private placement will have a fixed rate term of seven years (with a put option at year seven, after which it needs to be remarketed and will convert to variable rate) and carries similar financial covenants as does the LOC reimbursement agreement. Concurrent with this action, we have affirmed MHC's A1 bond rating on approximately $132 million of outstanding bonds issued through the Grand Traverse County Hospital Finance Authority (see RATED DEBT section in this report). The rating outlook remains stable.

MHC is a tertiary referral healthcare system, providing services throughout the northern portion of the lower peninsula of Michigan and the eastern portion of the upper peninsula. MHC's largest facility by a wide margin is 23,400 admission Munson Medical Center (MMC) in Traverse City. MHC also owns one additional hospital (Paul Oliver Memorial Hospital, a critical access hospital in Frankfort, MI) and manages/affiliates with five additional smaller acute care hospitals located in the broad northern lower Michigan region.

RATINGS RATIONALE

SUMMARY RATING RATIONALE: The affirmation of the A1 rating and stable rating outlook reflect MHC's dominant market position over a broad service area, continued favorable operating performance, and maintenance of good debt and liquidity ratios.

STRENGTHS

*Tertiary referral system with a dominant market share over a five county primary service area (PSA).

*Generally good demographics in Grand Traverse County, the economic and population hub of the northern portion of the lower peninsula of Michigan. Demographic characteristics in the service area outside of Grand Traverse County are modest.

*Track record of good operating results as MHC recorded adjusted operating cash flow margin of 10.6% in fiscal year (FY) 2010 and 10.1% through nine months FY 2011.

*Good pro forma adjusted debt coverage ratios including 2.0 times debt-to-cash flow, 8.5 times maximum annual debt service coverage, 211% cash-to-debt, and 25% debt-to-total operating revenue.

*Good liquidity with 210 days cash on hand at March 31, 2011.

CHALLENGES

*Medicare represents a higher than average share of MHC's gross revenues (52.5% in FY 2010, compared to A1 median of 43.3%), which makes the system more at risk to potential Medicare cuts.

*Underfunded frozen defined benefit pension plan, with a 64% pension funded ratio compared to a projected benefit obligation (PBO) of $254 million at audited FYE 2010. According to management, at FYE 2011 the funded ratio measured 75.6% compared to a PBO of $263 million.

DETAILED CREDIT DISCUSSION

USE OF PROCEEDS: The Series 2011A&B bond proceeds and PNC private placement proceeds are expected to: (a) refund the majority of MHC's $95.5 million outstanding auction rate bonds outstanding (management estimates that approximately $17 million of auction rate bonds will not be tendered and will remain outstanding) (depending on market conditions, management is considering refunding the Series 1998A fixed rate bonds as well); (b) terminate two of MHC's three fixed payer swaps for an estimated net termination payment of approximately $4.6 million; and (c) pay the costs of issuance.

LEGAL SECURITY: The bonds are expected to be a general obligation of the members of the Obligated Group and secured by a security interest in the accounts and general intangibles of the Obligated Group. The bonds are not expected to be secured by a mortgage pledge. Obligated Group members include MMC and most system affiliates and represent nearly all of the system's total assets and operating revenues. A debt service reserve fund is not expected to be included.

INTEREST RATE DERIVATIVES: MHC has entered into three variable-to-fixed interest rate swaps and one basis swap. The total notional amount of the swaps outstanding as of audited fiscal year end (FYE) 2010 was $80.9 million and, according to management, $79.9 million at June 30, 2011. Merrill Lynch and JPMorgan are the counterparties. On the basis swap, MHC pays SIFMA and receives 70.3% of five-year LIBOR. On the three fixed payer swaps, MHC receives 67% of monthly LIBOR and pays fixed rates between 3.20% and 3.62%. The terms of the fixed payer swaps match the terms of the associated bonds (the Series 2005A&B and Series 2002A auction rate bonds). According to management, the total net termination value of all four swaps as of June 30, 2011 was a negative $4.5 million to MHC. Management expects to terminate two of the three fixed payer swaps as part of the current financing, leaving one fixed payer swap in place to hedge the Series 2011B VRDB bonds.

MARKET POSITION/COMPETITIVE STRATEGY: DOMINANT MARKET SHARE OVER A BROAD SERVICE AREA

MHC captures a dominant 91% inpatient market share of its five county PSA. Moreover, MHC leverages MMC's position as one of only two tertiary hospitals in the northern third of the lower peninsula of Michigan and has referral relationships with most of the smaller community hospitals in the broad region. The only other tertiary acute care facility in the broad region is 10,700 admission Northern Michigan Regional Health System (NMRHS), located nearly 70 miles north of MMC in Petoskey, MI. While NMRHS presents some degree of competition for MHC in the broader secondary service area for high-end referrals, MHC does not face significant competition from NMRHS in MHC's five county primary service area.

Demographics in Grand Traverse County (general obligation limited tax rating of Aa2) are stronger than in much of the rest of Michigan. According to US Census Bureau data, while the state's population declined 0.6% between 2000 and 2010, the county's population increased 12.0% (to nearly 87,000), and the median household income in the county is above the state average and just below the national average. We note that demographic characteristics in the service area outside of Grand Traverse County generally are modest.

OPERATING PERFORMANCE: TRACK RECORD OF GOOD OPERATING MARGINS

MHC has a track record of recording favorable operating results. Through nine months FY 2011 (as of March 31, 2011) MHC recorded adjusted operating income of $15.7 million (4.0% operating margin, adjusted to reclassify the portion of investment income included in operating revenue to non-operating) and operating cash flow of $39.9 million (10.1% operating cash flow margin). Through the comparable nine months in FY 2010 MHC recorded a 5.5% adjusted operating margin and 11.3% operating cash flow margin. In audited FY 2010 (June 30 year end) MHC recorded adjusted operating income of $23.9 million (4.7% margin) and operating cash flow of $54.0 million (10.6% margin). The A1 median operating cash flow margin is 10.4%. Between FY 2005 and FY 2010 MHC's operating cash flow margin ranged from 9.5% to 11.6%.

Operating margins are down somewhat in interim FY 2011 largely due to volume declines that have resulted in a more modest 4.6% growth in operating revenue. Through the first nine months of FY 2011, inpatient admissions are down 1.4% compared to interim FY 2010 and are 2.5% below budget while total surgeries decreased 1.7% compared to interim FY 2010 and are 3.4% below budget. Management attributes the admissions decline to a shift from inpatient to outpatient and notes that, similar to much of the rest of the country, elective procedures are down due to the soft economy. Management notes that while hospital based outpatient surgeries decreased 5.1% through nine months FY 2011, these data do not factor procedures at MHC's joint venture ambulatory surgery center (ASC), which experienced a 2.2% increase in surgeries in interim FY 2011(MHC owns 49% of the ASC).

The system's operating margins remain favorable despite the volume declines in large part due to MHC's continued cost savings efforts that have resulted in approximately $12 million of expense reductions in FY 2011 according to management. Management will continue to focus of expense savings as future revenues are expected to be pressured from all major payer sources (Medicare, Medicaid, and commercial). Similar to many other healthcare organizations, MHC has ramped up its employment of physicians in recent years, which also may pressure future operating margins.

BALANCE SHEET POSITION: CASH GROWTH AND LOW DEBT RESULT IN FAVORABLE BALANCE SHEET RATIOS

Due to cash flow generation and investment returns MHC's absolute unrestricted cash and investments increased to $274 million at March 31, 2011 from $235 million at audited FYE 2010 and $186 million at FYE 2009. As a result, cash on hand increased to a good 210 days at March 31, 2011 from 188 days at FYE 2010 and 159 days at FYE 2009 (A1 median is 182 days). According to management, at audited FYE 2010 MHC's unrestricted cash and investments were allocated among approximately 70% cash and fixed income, 28% equities, and 1.5% real estate, and approximately 98.5% of MHC's unrestricted cash and investments could be liquidated within one month.

MHC's Moody's-adjusted pro forma debt ratios are strong at the A1 rating level, reflecting the system's good cash flow generation and modest debt load. Based on MHC's annualized unaudited nine month FY 2011 results and factoring the Series 2011A&B bonds and PNC private placement financing, adjusted pro forma debt-to-cash flow measures a favorably low 2.0 times (A1 median is 3.2 times), adjusted maximum annual debt service (MADS) coverage measures a strong 8.5 times (A1 median is 5.1 times), debt-to-total operating revenue measures a low 25% (A1 median is 39%), and cash-to-debt measures a very good 211% (A1 median is 130%). Factoring the Series 2011B VRDB bonds, 23% of MHC's pro forma debt will be in VRDB mode. The system's pro forma cash-to-demand debt measures a very strong 585% (which includes the expected $22 million of PNC private placement debt).

Highlighted current and future capital projects include information technology (including the installation of an electronic medical record system) and the potential expansion of MMC. MHC currently does not have new money debt plans in the coming years, but management will evaluate future options depending on ongoing capital needs review.

Outlook

The stable rating outlook reflects MHC's dominant market position over a broad service area, continued favorable operating performance, and maintenance of good debt and liquidity ratios.

WHAT COULD MAKE THE RATING GO UP

Material growth of revenue base without decline in operating margins; sustained elevated cash flow generation leading to maintenance of strong debt coverage ratios; continued improved liquidity ratios

WHAT COULD MAKE THE RATING GO DOWN

Unexpected significant increase in debt that leads to material weakening of debt coverage ratios; sustained materially weaker operating margins; significant decline in liquidity ratios

KEY INDICATORS

Assumptions & Adjustments:

-Based on Munson Healthcare and Subsidiaries consolidated financial statements

-First number reflects audited FY 2010 for the year ended June 30, 2010

-Second number reflects pro forma on unaudited nine months FY 2011 annualized

-Pro forma assumes issuance of Series 2011A fixed rate bonds, Series 2011B VRDB bonds, and PNC private placement to refund all but approximately $17 million of auction rate bonds and termination of two of three fixed payer swaps (depending on market conditions, management is considering refunding the Series 1998A fixed rate bonds as well)

-Investment returns reclassified as non-operating and normalized at 6%

*Inpatient admissions: 23,767; 23,272 (based on annualizing nine months FY 2011)

*Total operating revenues: $508 million; $528 billion

*Moody's-adjusted net revenues available for debt service: $68.1 million; $69.6 million

*Total debt outstanding: $134.9 million; $129.8 million

*Maximum annual debt service (MADS): $9.2 million; $8.2 million

*MADS Coverage with reported investment income: 6.63 times; 7.45 times

*Moody's-adjusted MADS Coverage with normalized investment income: 7.38 times; 8.46 times

*Debt-to-cash flow: 2.06 times; 2.03 times

*Days cash on hand: 188 days; 208 days

*Cash-to-debt: 174%; 211%

*Operating margin: 4.7%; 3.4%

*Operating cash flow margin: 10.6%; 10.1%

RATED DEBT

Issued through Grand Traverse County Hospital Finance Authority, MI (debt outstanding as of June 30, 2011):

-Series 2005A Auction Rate Revenue Bonds ($24.8 million outstanding, the bulk of which is expected to be refunded as part of the current financing), rated Aa3 based on Assured Guaranty insurance, A1 underlying rating

-Series 2005B Auction Rate Revenue Bonds ($29.4 million outstanding, the bulk of which is expected to be refunded as part of the current financing), rated Aa3 based on Assured Guaranty insurance, A1 underlying rating

-Series 2002A Auction Rate Revenue Bonds ($16.8 million outstanding, the bulk of which is expected to be refunded as part of the current financing), insured by Ambac, A1 unenhanced rating

-Series 2001A Auction Rate Revenue Bonds ($26.5 million outstanding, the bulk of which is expected to be refunded as part of the current financing), rated Aa3 based on Assured Guaranty insurance, A1 underlying rating

-Series 1998A Fixed Rate Revenue Bonds ($31.8 million outstanding), insured by Ambac, A1 unenhanced rating

CONTACTS

Obligor: Mark Hepler, CFO, Munson Healthcare, (231) 935-7767

Underwriter: Terry Mieling, Bank of America Merrill Lynch, (312) 499-3309

Financial advisors: Michael Tym, Ponder & Co., (219) 531-2369; Jennifer Dunn, Ponder & Co., (773) 281-4470

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was Not-for-Profit Hospitals and Health Systems published in January 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology .

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the 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 considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a 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

Mark Pascaris
Analyst
Public Finance Group
Moody's Investors Service

Kay Sifferman
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 ASSIGNS A1 LONG-TERM AND UNDERLYING RATINGS TO MUNSON HEALTHCARE'S (MI) SERIES 2011A FIXED RATE AND SERIES 2011B VARIABLE RATE BONDS; A1 PARITY RATING AFFIRMED; OUTLOOK REMAINS STABLE
No Related Data.
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