SYSTEM WILL HAVE APPROXIMATELY $745 MILLION OF RATED DEBT OUTSTANDING
Franklin (County of) OH
Revenue Bonds, Series 2011B
Expected Sale Date
Revenue Bonds, Series 2011C
Expected Sale Date
NEW YORK, Jun 8, 2011 -- Moody's Investors Service has assigned Aa2/VMIG 1 ratings to OhioHealth's Series
2011B bonds ($62 million) and Series 2011C bonds ($62 million). The rating
outlook is stable. The Series 2011B bonds ($62 million) will be issued as
"put" bonds in a long-term interest rate mode until a mandatory tender
in July, 2012. The Series 2011C bonds ($62 million) will be issued in an
"index interest rate" mode based on SIFMA plus a spread until a
mandatory tender in August, 2013. Unremarketed tenders for the Series 2011B and
Series 2011C bonds will be supported by OhioHealth's internal liquidity.
SUMMARY RATINGS RATIONALE:
The Aa2/VMIG 1 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. Additionally, the VMIG 1 rating is based on the adequacy of
OhioHealth's internal liquidity and treasury management to meet unremarketed
tenders of the Series 2011B and Series 2011C bonds.
*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
*Manageable capital plans with expected spending well under operating cashflow
*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
*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
DETAILED CREDIT DISCUSSION
USE OF PROCEEDS: The Series 2011A bonds, recently rated, 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 2011B, Series 2011C, and Series 2011D bonds 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
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
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
BALANCE SHEET PROFILE: STRONG LIQUIDITY PROVIDES GOOD COVERAGE OF MANAGEABLE
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.
Aa2/VMIG 1 RATING ALSO BASED ON OHIOHEALTH'S ADEQUATE INTERNAL LIQUIDITY AND
TREASURY MANAGEMENT TO SUPPORT UNREMARKETED TENDERS
OhioHealth's issuance of the Series 2011B and Series 2011C bonds represent the
first self-liquidity program for the system. The Series 2011B bonds ($62
million) will be issued as "put" bonds in a long-term interest rate
mode until a mandatory tender in July, 2012. The Series 2011C bonds ($62
million) will be issued in an "index interest rate" mode based on
SIFMA plus a spread until a mandatory tender in August, 2013. Unremarketed
tenders for the Series 2011B and Series 2011C bonds will be supported by
OhioHealth's internal liquidity.
Given the mandatory tender dates are known well in advance, the structure of the
bonds allows the system to plan in advance of the tender date. However,
remarketing can occur shortly before the tender date and the outcome of the
remarketing process may not be known until as late as the day of the mandatory
tender. Therefore, Moody's self-liquidity methodology for these type of bonds
evaluates whether OhioHealth has adequate daily liquidity at all times to pay
any tender occurring within any 5-day period over the next 12 months.
As of April 30, 2011 OhioHealth had ample liquidity of $481 million in
discounted assets that can be liquidated on a daily basis to provide funds for
the Series 2011B bonds ($62 million), which have a mandatory tender within the
next 12 months. The system's daily assets are comprised primarily of U.S.
treasuries and Aaa-rated agencies with greater than 3-year maturities ($277
million discounted), diversified money market funds rated Aaa-mf ($100 million)
and U.S. treasuries and Aaa-rated agencies with less than 3-year maturities ($53
million discounted). OhioHealth is notified the day prior to the tender of the
unremarketed bonds. Based on a stress test that includes all put bonds within 3
years (Series 2011B and Series 2011C bonds, totaling $124 million), OhioHealth
has ample daily liquidity. As discussed above, the system's overall asset
allocation is relatively conservative; an additional $268 million (discounted)
of fixed income securities can be liquidated on a weekly basis. Additionally,
OhioHealth's cashflows are stable and strong, the system has limited exposure to
swap collateral, and capital plans are manageable.
The stable outlook is based on our belief that the system will maintain strong
margins and liquidity, responding to competitive challenges and maintaining
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
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
*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;
*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
Issuer: Michael Louge, Executive Vice President & CFO, OhioHealth, 614-
Financial advisor: Jim Blake, Managing Director, Kaufman Hall & Associates,
Underwriter: James Molloy, Co-Head Healthcare Group, Barclays Capital,
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was Not-for-Profit Hospitals and
Health Systems published in January 2008.
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.
Public Finance Group
Moody's Investors Service
Sarah A. Vennekotter
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS Aa2/VMIG 1 RATINGS TO OHIOHEALTH'S $62 MILLION OF SERIES 2011B BONDS AND $62 MILLION OF SERIES 2011C BONDS; OUTLOOK IS STABLE
Moody's Investors Service
250 Greenwich Street
New York, NY 10007