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MOODY'S ASSIGNS Aa2 RATINGS TO OHIOHEALTH'S $130 MILLION OF SERIES 2011A BONDS AND $62 MILLION OF SERIES 2011D BONDS; OUTLOOK IS STABLE

03 Jun 2011

SYSTEM WILL HAVE APPROXIMATELY $745 MILLION OF RATED DEBT OUTSTANDING

Franklin (County of) OH
Health Care-Hospital
OH

Moody's Rating

ISSUE

RATING

Revenue Bonds, Series 2011A

Aa2

  Sale Amount

$130,000,000

  Expected Sale Date

06/09/11

  Rating Description

Healthcare Revenue

 

Revenue Bonds, Series 2011D

Aa2

  Sale Amount

$62,235,000

  Expected Sale Date

06/09/11

  Rating Description

Healthcare Revenue

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Jun 3, 2011 -- Moody's Investors Service has assigned Aa2 ratings to OhioHealth's Series 2011A bonds ($130 million ) and Series 2011D bonds ($62 million). The rating outlook is stable. The Series 2011A bonds will be fixed rate bonds. The Series 2011D bonds will be "put" bonds in a long-term interest rate mode until a mandatory tender in June, 2016. OhioHealth also anticipates issuing Series 2011B bonds ($62 million) as "put" bonds in a long-term interest rate mode until a mandatory tender in July, 2012 and Series 2011C bonds ($62 million) in an "index interest rate" mode based on SIFMA plus a spread until a mandatory tender in August, 2013. Tenders for the Series 2011B and Series 2011C bonds will be supported by OhioHealth's internal liquidity.

At this time we are affirming the Aa2 and Aa2/VMIG 1 ratings on OhioHealth's outstanding debt issued through Franklin County, Ohio as listed at the end of this report. We are also affirming the Aa2 unenhanced and underlying ratings on Doctors OhioHealth's bonds, which are guaranteed by OhioHealth.

SUMMARY RATINGS RATIONALE:

The Aa2 rating is based on OhioHealth's history of consistently strong and growing operating margins, leading market position in a competitive Columbus healthcare market, high unrestricted investment position, manageable debt level and debt structure, and strong management team with a proven track record of meeting or exceeding budgets and responding to competition quickly and effectively.

STRENGTHS

*History of very strong operating margins averaging 6% and operating cashflow margins averaging 12% over the last five years, resulting in a peak proforma debt service coverage of an exceptional 12 times based on nine-month annualized results for fiscal year 2011; the system's operating margins improved each of fiscal years 2009 and 2010 and through the interim period of 2011, which is particularly impressive given economic stresses and competition, and reflects effective management of operating challenges.

*Maintenance of a leading market position with 42% share in the greater Columbus, Ohio market and close to 50% share in several profitable, tertiary services, despite heavy competition.

*Very high and growing investment position with 337 days of cash on hand as of March 31, 2011, providing a strong 250% coverage of proforma debt

*Relatively conservative investment strategy with 57% allocated to fixed income investments and cash; based on fiscal yearend 2010 data, 87% of the system's investments can be liquidated on a monthly basis

*Debt structure is well managed to minimize risk; while 67% of debt will be demand debt after the current financing, OhioHealth has strong cash-to-demand debt of almost 390% based on investments as of March 31, 2011 and bank agreements are well structured with long term-out periods and diversification among banks

*Manageable capital plans with expected spending well under operating cashflow levels

*Strong management team as evidenced by a consistent track record of sustaining strong margins, quick responses to competitive and operating challenges, proactive planning for potential challenges in the future, and solid treasury management who have negotiated favorable bank agreements and closely monitor liquidity needs

CHALLENGES

*Very competitive market as competitors are investing in facilities and are owned by a larger "parent" with extensive resources; physician market is very fluid with continued competition to recruit physician groups and driving increasing investment in physician employment and partnership strategies by most systems in the market

*Pressures on Ohio Medicaid funding as a result of protracted state budget issues; OhioHealth is budgeting net reductions in Medicaid payments for fiscal year 2012

DETAILED CREDIT DISCUSSION

USE OF PROCEEDS: The Series 2011A bonds will provide approximately $130 million of proceeds that will be used to fund the purchase of a parking garage, and to reimburse OhioHealth for recent capital expenditures. The Series 2011D bonds, along with Series 2011B and 2011C bonds (which will be rated separately), will provide funds to refund the Series 2008A variable rate bonds and to pay the costs of terminating an interest rate swap entered into in connection with the refunded Series 2006 bonds .

LEGAL SECURITY: The bonds are a general obligation of the obligated group, which includes OhioHealth Corporation (including Grant Medical Center, Riverside Methodist Hospital , Dublin Methodist Hospital and Doctors Hospital), Grady Memorial Hospital, Hardin Memorial Hospital, Marion General Hospital, Inc., and Doctors Health Corporation of Nelsonville.

INTEREST RATE DERIVATIVES: In conjunction with the Series 2003B-1 and Series 2003B-2 variable rate bonds, OhioHealth entered into interest rate swap agreements for a total notional amount of $135 million with termination dates in 2031. Citibank is the counterparty. The swaps result in OhioHealth paying a fixed rate of 4.17% and receiving a variable rate payment of 75% of LIBOR. While the Series 2003B-1 and Series 2003B-2 were refunded, the interest rate swap agreements remain in place and partially hedge the Series 2008A variable rate bonds. No collateral is required under the swap agreements associated with the Series 2003B-1 and Series 2003B-2 bonds. In conjunction with the Series 2009 bonds, the system entered into a $50 million floating-to-fixed rate swap where it pays 2.414% and receives 62% of LIBOR plus a spread. JPMorgan Chase is the counterparty. The swap related to the Series 2009 bonds has a collateral threshold of $25 million at the "Aa" rating category.

MARKET/COMPETITIVE POSITION: SYSTEM MAINTAINS LEADING MARKET POSITION IN COMPETITIVE MARKET

Competition in the greater Columbus area remains OhioHealth's greatest challenge, although the system has sound strategies to maintain and grow market share and has been able to absorb these challenges and maintain strong margins. OhioHealth's inpatient market share remains leading at 42%. All of the systems are competing heavily for and increasingly employing physicians or offering other types of partnerships. Movement of groups of physicians among systems creates uncertainty regarding volume trends. Additionally, competitors are investing heavily in facilities, primarily converting space to private patient rooms, which will necessitate most hospitals in the area to make similar investments in order to remain competitive.

OhioHealth's volume trends have remained solid. While total system admissions were down 1% in fiscal year 2010, total admissions factoring observations grew by 0.5%. Through nine months of fiscal year 2011, admissions are up 2%; including observations, volumes are up 1%. Certain hospitals experienced very strong admissions growth through nine months of fiscal year 2011 including Grant Hospital (up 10%), Grady Memorial Hospital (up 10%), and Dublin Hospital (up 9%). Doctors Hospital was up 1% as a result of physician recruiting and investments in the emergency department, which should result in further growth. Admissions at Riverside were down 0.5%, which is generally favorable considering Riverside lost volumes to the new Dublin Hospital. Marion and Hardin hospitals experienced 7% and 4% admissions declines, respectively, in part due to the local economy.

One of OhioHealth's primary strategies is physician recruitment, which entails various employment and alignment models for both specialists and primary care physicians. While these strategies will involve financial investment, we believe the system is positioning itself well strategically to protect and grow market share. Additionally, the system is planning to construct a patient tower at Riverside Hospital in order to provide more private beds and is investing in existing and new outpatient campuses.

OPERATING PERFORMANCE: CONSISTENT TREND OF STRONG OPERATING MARGINS AND ABILITY TO RESPOND EFFECTIVELY TO CHALLENGES

OhioHealth's operating performance has been consistently strong and margins have improved each year for the last four years. In fiscal year 2010, OhioHealth reported $162 million in operating income (a healthy 7.4% margin), compared with $128 million in operating income (6.2% margin) in 2009. Operating cashflow was $283 million (12.9%) in 2010, compared with $252 million (12.3%) in 2009. The further improvement in fiscal year 2010, after a strong 2009, was due to a healthy 6% revenue growth due to outpatient growth and revenue cycle initiatives. On the cost side, OhioHealth benefited from successfully implementing a proactive cost reduction program that has resulted in a low 1.5% increase in cost per adjusted admission in fiscal year 2010, in part driven by wage freezes and the earlier implementation of a consumer driven health plan. With the exception of Doctors Nelsonville, all the system's hospitals were profitable in 2010; the Grant, Doctors and Dublin hospitals reported particularly strong growth in operating income.

Through the nine months of fiscal year 2011 (ended March 2011), operating income was $156 million (8.9%), compared with $134 million (8.2%) in the same period of fiscal year 2010, and operating cashflow increased to $249 million (14.3%) from $224 million (13.7%) in the prior year period. Most of the factors discussed above are continuing to drive performance in fiscal year 2011, including further cost reductions. Revenue grew a solid 7%. All hospitals were profitable during the interim period, and there was substantial income growth achieved at Grant, Dublin and Doctors hospitals.

Future operating performance will likely be affected by further investment in physician strategies and, more immediately, anticipated cuts in Medicaid funding. The system anticipates approximately $11 million in net reductions in Medicaid payments. As discussed above, OhioHealth anticipates significant growth in the number of employed physicians over the next several years. Nevertheless, management anticipates maintaining strong margins as the benefits of strategic investments, volume gains and continued cost management offset future challenges.

BALANCE SHEET PROFILE: STRONG LIQUIDITY PROVIDES GOOD COVERAGE OF MANAGEABLE DEBT LEVEL

OhioHealth's balance sheet is very strong and we believe a manageable capital program and good cashflow suggest that the balance sheet will remain strong. Unrestricted cash and investments was $1.9 billion as of March 31, 2011 (337 days of cash on hand), compared with $1.5 billion as of June 30, 2010 (287 days). Growth in cash and investments reflects strong operations, positive investment returns, moderate capital spending, and reductions in receivables to very low levels (36 days in receivables). Proforma cash-to-debt is strong at 250%. We believe OhioHealth's investment strategy is conservative for its rating category, well diversified, and structured to moderate variability in investment returns. Based on fiscal yearend June 30, 2010 investments were allocated 57% to fixed income and cash. OhioHealth's investments are liquid with 87% being able to be liquidated within a month.

Debt measures are very good with favorably low debt-to-cashflow of 1.7 times based on annualized nine-month performance in 2011 and including $130 million of new debt. Proforma peak debt service coverage is exceptional at almost 12 times. After reducing capital spending to preserve liquidity the last several years, spending is expected to increase to around $200 million annually, which we believe is manageable relative to operating cashflow levels of $250-$350 million the last couple of years.

OhioHealth's debt structure is comprised of 67% demand obligations, which is high; however, management has managed actively and negotiated favorable terms in its bank agreements and will further diversify this risk through the issuance of the Series 2011 B, C, and D bonds in one year, two year and five year modes, respectively.. The system's strong cash position provides ample cushion of any debt that is accelerated with total cash and investments providing 390% coverage of all demand debt. Additionally, the system has mitigated some of this risk by negotiating bank agreements with 3-5 year expiration dates, long term-out periods that can extend beyond the expiration dates, and reasonable financial covenants (90 days cash on hand, 1.25 times debt service coverage ratio) that give the system ample headroom.

Outlook

The stable outlook is based on our belief that the system will maintain strong margins and liquidity, responding to competitive challenges and maintaining market share

WHAT COULD MAKE THE RATING GO UP

At the current high rating level, a further rating upgrade would be challenging given the competitiveness of the Columbus-area market and the system's concentration in one state and region

WHAT COULD MAKE THE RATING GO DOWN

Prolonged decline in operating performance or cash or unexpected and sizable increase in debt

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for OhioHealth Corporation

-First number reflects audit year ended June 30, 2010

-Second number reflects annualized nine-month unaudited results, ended March 31, 2011, proforma with $130 million of new debt

-Investment returns smoothed at 6% unless otherwise noted

*Inpatient admissions: 92,633; 92,241

*Total operating revenues: $2.2 billion; $2.3 billion

*Moody's-adjusted net revenue available for debt service: $371 million; $442 million

*Total debt outstanding: $620 million; $744 million

*Maximum annual debt service (MADS): $32.5 million; $37.2 million

*MADS coverage with reported investment income: 9.8 times; 10.5 times

*Moody's-adjusted MADS coverage with normalized investment income: 11.4 times; 11.9 times

*Debt-to-cash flow: 1.7 times; 1.7 times

*Days cash on hand: 287 days; 337 days

*Cash-to-debt: 243%; 250%

*Operating margin: 7.4%; 8.9%

*Operating cash flow margin: 12.9%; 14.3%

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

-Series 1996A, 1996B, 1996C variable rate ($77 million; issued as U.S. Health Corporation of Columbus; supported by letters of credit from USBank)

-Series 1998A fixed rate ($3 million; issued by Doctors Hospital, guaranteed by OhioHealth): Aa2 rating

-Series 1998B variable rate ($36 million; issued by Doctors Hospital, guaranteed by OhioHealth; letter of credit provided by PNC)

-Series 2003C-1 fixed rate ($88 million): Aa2 rating; insured by MBIA

-Series 2003C-2 fixed rate ($33 million): Aa2 rating

-Series 2003D variable rate ($13 million; supported by a letter of credit from USBank): Aa2 underlying rating

-Series 2008A variable rate ($187 million): Aa2/VMIG 1 (standby bond purchase agreement from JPMorgan Chase Bank) (to be refunded)

-Series 2009A variable rate ($83 million) and Series 2009B variable rate ($83 million): Aa2/VMIG 1 (standby bond purchase agreement from Barclays Bank, as of February 2011)

CONTACTS

Issuer: Michael Louge, Executive Vice President & CFO, OhioHealth, 614- 544-4414

Financial advisor: Jim Blake, Managing Director, Kaufman Hall & Associates, 847-441-8780

Underwriter: James Molloy, Co-Head Healthcare Group, Barclays Capital, 212-526-3298

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 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

Lisa Martin
Analyst
Public Finance Group
Moody's Investors Service

Sarah A. Vennekotter
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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USA

MOODY'S ASSIGNS Aa2 RATINGS TO OHIOHEALTH'S $130 MILLION OF SERIES 2011A BONDS AND $62 MILLION OF SERIES 2011D BONDS; OUTLOOK IS STABLE
No Related Data.
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