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Fitch Rates Iowa Health System $420MM Series 2005 Bonds 'A+'; Outlook to Positive.

NEW YORK -- Fitch has assigned an 'A+' rating to Iowa Health System's upcoming $420 million series 2005 revenue refunding bonds. In addition, Fitch affirms the rating on Iowa Health System's outstanding revenue bonds, listed below. The Rating Outlook is changed to Positive from Stable.

The series 2005A bonds are expected to be insured by Financial Guaranty Insurance Company (FGIC), whose financial insurer strength is rated 'AAA' by Fitch. The series 2005B bonds are expected to be insured by Ambac Assurance Corp., whose financial insurer strength is rated 'AAA' by Fitch. The series 2005 bonds are expected to be structured as variable-rate demand bonds supported by standby bond purchase agreements. Bond proceeds will be used to advance refund $286 million of the Iowa Finance Authority Series 2000 and Series 1998A Bonds, with the remainder funding future capital projects throughout the System. Upon closing of the Series 2005 issue, Iowa Health System's total debt outstanding will increase from $470 million to $518 million. The bonds are expected to sell through negotiation by Citigroup and Morgan Stanley the week of July 25. Fitch will provide short-term ratings on the series 2005 bonds at a later date.

The 'A+' rating is warranted due to Iowa Health System's (IHS) geographic diversity and strong market presence in the State of Iowa, solid operating profitability, improved liquidity ratios, and strong debt service coverage. IHS is the largest provider of health care services in the State of Iowa. IHS operates eleven hospitals in seven regions that encompasses 37% of Iowa's population. IHS shares a market leading position in the growing Des Moines metro area and is the market leader in Cedar Rapids and Ft Dodge. Together these markets compose 60% of total system revenues and 82% of IHS' 2004 operating profit. IHS has achieved solid operating margins of 2.3% and 2.2% in 2003 and 2004, respectively. Moreover, financial results within each of IHS' seven regions have shown improvement since 2003. Cash generation has improved liquidity ratios with days cash on hand growing to 188.4 in 2004 from 133.3 in 2002 and cash to debt increasing to 148.9% in 2004 from 94.8% in 2002. 2004 debt service coverage by EBITDA of 4.1 times (x) exceeded IHS' average debt service coverage of 3.8x over the past five years. Moreover, 2004 historical pro forma debt service coverage, taking into account the benefits of the refinancing, was 4.8x. Currently, the outstanding bonds are secured under a 'parent-affiliate' model. With the series 2005 issue, Iowa Health System will create an obligated group structure, which Fitch views favorably.

Credit concerns include significant competition in most regions, light capital spending relative to depreciation expense, and risks associated with a possible hospital construction in West Des Moines. IHS faces significant competition in the six regions producing 90% of its overall revenue base, three of which include Mercy Health Network facilities (part of Catholic Health Initiatives and Trinity Health System; revenue bonds rated 'AA-' by Fitch). IHS holds a secondary market share position in the Waterloo, Dubuque, Sioux City, and Quad Cities regions. Over the past five years, capital spending as a percentage of depreciation expense has averaged 128%, which is slightly below Fitch's 'A' rated median average of 147.3% over the same period. Finally, IHS is pursuing the development of a new hospital in the growing West Des Moines market. Although approvals have yet to be received, the new facility is projected to total 120 inpatient beds with construction that may begin sometime in 2007.

The Positive Rating Outlook reflects Fitch's belief that IHS will continue to show improved operating results systemwide and realize the cash flow benefits from the 2005 refinancing. Although the West Des Moines project may require issuance of approximately $100 million in debt, continued improvement in profitability and liquidity measures could lead to upward movement in the rating.

Iowa Health System, headquartered in Des Moines, IA comprises nine hospitals in Iowa and two hospitals in Illinois (1,967 aggregate staffed beds), 360 employed or contracted physicians, and various other health care related entities. In fiscal 2004, total operating revenue was $1.55 billion. IHS has covenanted to provide disclosure of annual audited financial statements only which Fitch views negatively. However, ongoing disclosure to Fitch has been favorable in terms of content and timeliness.

Outstanding Issues

--$138,465,000 Iowa Finance Authority hospital facilities revenue bonds, Iowa Health System, series 2000 (1)

--$68,985,000 Illinois Finance Authority hospital facilities revenue bonds, Iowa Health System, series 2000 (1)

--$200,485,000 Iowa Finance Authority hospital facilities revenue bonds, Iowa Health System, series 1998A (1) (2)

--$46,000,000 Iowa Finance Authority Adjustable Rate Hospital Facilities revenue bonds, series 1998B (3)

--$23,000,000 City of Des Moines, variable-rate demand revenue bonds, series 1985B (4)

(1) A portion of these bonds are expected to be defeased or advance refunded upon closing of the series 2005 bond issue.

(2) The bonds are insured by MBIA Insurance Corp., whose insurer financial strength is rated 'AAA' by Fitch.

(3) The bonds are insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch.

(4) Not rated.

Fitch's rating definitions are available on the agency's public site, Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.
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Publication:Business Wire
Geographic Code:1USA
Date:Jul 13, 2005
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