APPROXIMATELY $143 MILLION OF RATED DEBT TO BE OUTSTANDING
Kansas Development Finance Authority
Fixed Rate Hospital Revenue Bonds, Series 2011F
Expected Sale Date
Hospital Revenue Bonds
NEW YORK, Jul 22, 2011 -- Moody's Investors Service has assigned an A2 long-term rating to Stormont-Vail
HealthCare's (SVHC) $60.0 million of Series 2011F fixed rate refunding and
improvement revenue bonds to be issued through the Kansas Development Finance
Authority. Concurrent with this action, we have affirmed SVHC's A2 bond rating
on approximately $137 million of outstanding bonds (see RATED DEBT section in
this report). The rating outlook remains stable.
SUMMARY RATING RATIONALE: The affirmation of the A2 rating and stable rating
outlook reflect SVHC's distinctly leading market position, continued favorable
operating performance with improved results in interim fiscal year (FY) 2011,
and maintenance of good debt ratios.
*Tertiary referral hospital with a distinctly leading market position in a
two-hospital market and leading provider over a broad 13 county total service
*Track record of adequate operating margins with good results through eight
months FY 2011 (11.3% operating cash flow margin).
*Good pro forma adjusted debt ratios including 2.4 times debt-to-cash flow, 6.1
times maximum annual debt service coverage, and 29% debt-to-total operating
*Location in Topeka, the Kansas State capital, provides demographic stability to
*Manageable capital spending and no new money debt plans in the coming years.
*Despite SVHC's distinctly leading position, St. Francis Health Center
represents notable competition in the market.
*Underfunded defined benefit pension plan, with a 65% pension funded ratio
compared to a projected benefit obligation (PBO) of $206 million at audited
fiscal year end (FYE) 2010.
*Pro forma liquidity ratios are somewhat modest for an A2 rated credit with 135
days cash on hand and 116% cash-to-debt (based on SVHC's unrestricted cash and
investments at May 31, 2011).
DETAILED CREDIT DISCUSSION
USE OF PROCEEDS: The Series 2011F bond proceeds are expected to: (a) refund
SVHC's Series 2008E long-term rate mode put bonds ($18.9 million outstanding at
FYE 2010, whose initial mandatory put date is November 15, 2011) and Series
2001K fixed rate bonds ($40.98 million outstanding at FYE 2010); (b) release
approximately $4.1 million debt service reserve fund (DSRF) currently in place
supporting the Series 2001K bonds; (c) provide $10 million to support SVHC's
capital plans; and (d) pay the costs of issuance. The Series 2011F bonds are not
expected to include a DSRF.
LEGAL SECURITY: The bonds are expected to be secured by a pledge of receivables
of the obligated group and a mortgage on certain system facilities, including
SVHC's main campus medical center. SVHC, which currently is the only member of
the obligated group, represents approximately 97% of Stormont-Vail
HealthCare, Inc. and Affiliates (system) total assets and 99% of
system operating revenues.
INTEREST RATE DERIVATIVES: SVHC has one interest rate swap agreement in place.
In connection with the Series 2008E bonds, SVHC entered into a floating-to-fixed
interest rate swap with Bank of America N.A. Under the swap SVHC pays a fixed
rate of 4.09% and receives 68% of LIBOR. According to management, the net
termination value was a negative $359,478 to SVHC as of May 31, 2011. There is
no collateral posting requirement under the swap unless SVHC's rating falls
below Baa2. The swap expires in November 2011.
MARKET POSITION/COMPETITIVE STRATEGY: DISTINCTLY LEADING MARKET POSITION
SVHC captures a distinctly leading market share in the two hospital market of
Shawnee County (City of Topeka), KS. In addition to SVHC, the only other acute
care provider in Topeka is St. Francis Health Center (a member of Aa3 rated
Sisters of Charity of Leavenworth Health System). When SVHC acquired the
Cotton-O'Neil Clinic in 1995 the market was approximately 50/50 between SVHC and
St. Francis, respectively. Since that time, SVHC's market share has
increased steadily and materially. According to management provided
data, excluding out-migration, as of 2009 SVHC captured approximately 66% market
share compared to St. Francis' approximately 34% share. SVHC also is the leader
in a broad 13 county total service area, capturing approximately 35% share
in 2010. St. Francis is the number two provider in the total service area with
approximately 18% market share, while A2 rated Lawrence Memorial Hospital
captured approximately 10% (no other hospital captured more than 10%).
Demographics in the Topeka area are stable, as Topeka is the state capital of
Kansas. Both the City of Topeka and Shawnee County have general obligation bond
ratings of Aa2. According to the Bureau of Labor Statistics and Kansas
Department of Labor the unemployment rate in the Topeka metropolitan statistical
area is well below the national average and in-line with the state average.
According to the US Census Bureau, the median income level in Shawnee County is
just below the state average and the county's population increased 4.7% between
2000 and 2010 (compared to 6.1% for Kansas and 9.7% for the USA).
OPERATING PERFORMANCE: TRACK RECORD OF ADEQUATE OPERATING RESULTS WITH GOOD
PERFORMANCE IN INTERIM FY 2011
SVHC has a track record of recording adequate operating margins for an A2 rated
credit, with good results in interim FY 2011. Through unaudited eight months FY
2011 (as of May 31, 2011) SVHC recorded adjusted operating income of $19.5
million (5.7% operating margin, adjusted to reclassify the portion of
investment income included in operating revenue to non-operating) and
operating cash flow of $38.4 million (11.3% operating cash flow margin). Through
the comparable eight months in FY 2010 SVHC recorded a 1.9% adjusted operating
margin and 7.8% operating cash flow margin. In audited FY 2010 (September 30
year end) SVHC recorded adjusted operating income of $12.3 million (2.5% margin)
and operating cash flow of $40.7 million (8.4% margin). The A2 median operating
cash flow margin is 9.7%. Between FY 2006 and FY 2010 SVHC's operating cash flow
margin was quite stable and ranged from 8.4% to 9.0%.
The improved operating margins in interim FY 2011 are due to a number of
factors, including: (a) unlike much of the rest of the country, SVHC continues
to enjoy volume growth, including a 7.0% increase in inpatient admissions
through eight months FY 2011 (following increases of 6.0% in FY 2009, 5.3% in FY
2008, and 8.0% in FY 2008) and a 13.1% gain in outpatient visits in interim FY
2011; (b) expanded number of cardiologist and geographic coverage; (c) the
opening of a pediatric intensive care unit; and (d) a decline in average length
of stay from 4.35 days through eight months FY 2010 to 4.15 days for the same
period FY 2011.
Looking forward, SVHC management expects to maintain operating margins in-line
with interim FY 2011 results; between FY 2011 and FY 2015 the system's operating
margin is projected to range between 4.2% and 5.1%. While we expect SVHC will
remain profitable we believe these projected margins may be optimistic given the
pressures on the not-for-profit hospital sector, including tight future Medicare
reimbursement as the federal government faces steep deficits.
BALANCE SHEET POSITION: SOMEWHAT MODEST LIQUIDITY RATIOS
Due to cash flow generation, investment returns, and somewhat limited capital
spending, SVHC's absolute unrestricted cash and investments increased in recent
years to $170 million at May 31, 2011 from $157 million at audited FYE 2010 and
$143 million at FYE 2009. As a result, cash on hand improved slightly to a still
somewhat modest 134 days at May 31, 2011 from 126 days at FYE 2010 and 126 days
at FYE 2009 (A2 median is 169 days). Management expects to grow absolute
liquidity and days cash on hand in the coming years.
According to management, at audited FYE 2010 SVHC's unrestricted cash and
investments were allocated among approximately 60% cash and fixed income, 17%
equities, and 24% hedge funds, and approximately 76% of the system's
unrestricted cash and investments could be liquidated within one month.
SVHC's Moody's adjusted pro forma debt ratios are quite good at the A2 rating
level, reflecting the system's good cash flow generation and relatively modest
debt load. Based on SVHC's annualized unaudited eight months FY 2011 results and
factoring the Series 2011F, adjusted pro forma debt-to-cash flow measures a
favorably low 2.4 times (A2 median is 3.2 times), adjusted maximum annual
debt service (MADS) coverage measures a good 6.1 times (A2 median is 5.0 times),
and debt-to-total operating revenue measures a manageable 29% (A2 median is
34%). Pro forma cash-to-debt measures a more modest (although still adequate)
116% (A2 median is 132%).
SVHC completed its new patient tower in 2009 and has manageable capital spending
plans in the coming years. Highlighted current and future capital projects
include: (a) renovation of the old emergency department (which currently is
vacant) to include pain management, endoscopy, and pulmonary services
(approximately $5.5 million); (b) renovation of the 7th floor of the South Tower
(approximately $6 million); and (c) longer-term, management is
considering expanding physician office space. Management notes that SVHC was an
early adopter of an electronic medical record system. SVHC currently does not
have new money debt plans through FYE 2015.
The stable rating outlook reflects SVHC's distinctly leading market
position, continued favorable operating performance with improved results in
interim FY 2011, and maintenance of good debt ratios.
WHAT COULD MAKE THE RATING GO UP
Continued growth in patient volumes leading to maintenance of distinctly leading
market position; consistent growth in absolute cash flow generation and elevated
operating margins leading to stronger debt ratios; materially improved liquidity
WHAT COULD MAKE THE RATING GO DOWN
Material market share loss; sustained decline in operating margins and weakening
of debt and liquidity ratios; unanticipated material increase in debt without
commensurate increase in cash and cash flow
Assumptions & Adjustments:
-Based on Stormont-Vail HealthCare, Inc. and Affiliates combined financial
-First number reflects audited FY 2010 for the year ended September 30, 2010
-Second number reflects pro forma on unaudited eight months FY 2011 annualized
-Pro forma assumes issuance of Series 2011F fixed rate bonds to refund SVHC's
Series 2008E long-term rate mode put bonds and Series 2001K fixed rate bonds,
release approximately $4.1 million of DSRF funds currently in place, and provide
$10 million to support SVHC's capital plans
-Investment returns reclassified as non-operating and normalized at 6%
*Inpatient admissions: 19,070; 20,165 (based on annualizing eight months FY
*Total operating revenues: $486 million; $512 million
*Moody's-adjusted net revenues available for debt service: $50.5 million; $69.9
*Total debt outstanding: $141.9 million; $147.2 million
*Maximum annual debt service (MADS): $9.6 million; $11.5 million
*MADS Coverage with reported investment income: 4.78 times; 5.22 times
*Moody's-adjusted MADS Coverage with normalized investment income: 5.25 times;
*Debt-to-cash flow: 3.34 times; 2.36 times
*Days cash on hand: 126 days; 135 days
*Cash-to-debt: 110%; 116%
*Operating margin: 2.5%; 5.8%
*Operating cash flow margin: 8.4%; 11.3%
Issued through Kansas Development Finance Authority (debt outstanding as of
September 30, 2010):
-Series 2008F Fixed Rate Revenue Bonds ($28.0 million outstanding), rated A2
-Series 2008E Long-Term Rate Mode Revenue Bonds ($18.9 million outstanding,
initial mandatory put date of November 15, 2011, expected to be refunded by
Series 2011F bonds), rated A2
-Series 2007L Fixed Rate Revenue Bonds ($50.1 million outstanding), insured by
MBIA, A2 unenhanced rating
-Series 2001K Fixed Rate Revenue Bonds ($40.98 million outstanding, expected to
be refunded by Series 2011F bonds), insured by MBIA, A2 unenhanced rating
Obligor: Kevin Han, CFO, (785) 354-6148
Underwriters: Steve Proeschel, Piper Jaffray, (612) 303-6649; Bill Henderson,
Piper Jaffray, (913) 345-3370
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.
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MOODY'S ASSIGNS A2 LONG-TERM RATING TO STORMONT-VAIL HEALTHCARE'S (KS) SERIES 2011F FIXED RATE REVENUE BONDS; A2 PARITY RATING AFFIRMED; OUTLOOK REMAINS STABLE
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