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Fitch Upgrades Community Foundation of Northwest Indiana Revenue Bonds to 'AA-'; Outlook Stable.

New York: Fitch Ratings has assigned a 'AA-' Issuer Default Rating (IDR) to Community Foundation of Northwest Indiana (CFNI) and has upgraded to 'AA-' from 'A+' bonds issued by Indiana Finance Authority on behalf of CFNI. The rating incorporates Fitch's 'Rating Criteria for U.S. Not-For-Profit Hospitals and Health Systems' dated Jan. 9, 2018.

The Rating Outlook is Stable.


The bonds are secured by a pledge of general revenues and a mortgage lien on the main hospital facilities.


The 'AA-' IDR and upgrade to 'AA-' from 'A+' reflect CFNI's solid operating performance, which Fitch expects to be maintained through the base case scenario. CFNI's strong liquidity position provides substantial financial flexibility through Fitch's rating case under Fitch's updated not-for-profit hospitals and health systems criteria. The rating is also supported by CFNI's leading market position in the competitive northwest Indiana market.


Revenue Defensibility: 'bbb'; Leading Market Position with Expanding Outpatient Footprint

CFNI's revenue defensibility is midrange. CFNI's three acute care hospitals maintain the leading market position with a 59% market share in its primary service area in the competitive northwest Indiana market. Medicaid and self-pay account for a low 18% of gross revenues, but sizable disproportionate share payments increase dependence on governmental payors. The service area has weak demographic characteristics with generally low wealth levels and unemployment rates that are higher than state and national averages.

Operating Risk: 'a'; Continued Strong Operations Expected

Fitch assesses CFNI's operating risk as strong based on historically solid operating EBITDA margins that averaged 11.7% over the past five years, including 2018 nine-month interim financials annualized. Fitch expects continued favorable operations driven by outpatient volume growth and strong cost controls. There are no significant capital or deferred maintenance needs and CFNI has no plans for additional debt.

Financial Profile: 'aa'; Strong Performance Through the Cycle

CFNI's financial profile is assessed as 'aa' with cash to adjusted debt of 173% and net adjusted debt to adjusted EBITDA of negative 2.0x in year four of Fitch's rating case. The financial profile metrics remain strong throughout the forward look with cash to adjusted debt consistently over 120% and net adjusted debt to EBITDA remaining negative, reflecting CFNI's ample financial flexibility through the cycle.

Asymmetric Additional Risk Considerations

No asymmetric factors were applied in this rating determination.


The rating incorporates Fitch's expectation that CFNI will demonstrate continued strong operating performance consistent with Fitch's base case generating operating EBITDA margins at or exceeding 10%. Continued growth of the balance sheet and improvement in the financial profile metrics over a sustained period could lead to positive rating movement. Downward rating pressure could result from capital expenditures exceeding expected levels or a decline in liquidity that would result in financial profile metrics inconsistent with the rating category.


CFNI is a three hospital system located in northwest Indiana. The system comprises 432 bed Community Hospital (CH) in Munster, IN, 211 bed St. Catherine Hospital (SCH) in East Chicago, IN and 200 bed St. Mary Medical Center (SMMC) located in Hobart, IN with each hospital operating several outpatient and diagnostic services within the community. The Community Stroke and Rehabilitation Center is currently under construction in Crown Point, IN and scheduled to open in mid-2019. The three acute care hospitals, the parent corporation, Community Care Network, a 240 provider network, and Hartsfield Village, a continuing care retirement community comprise the obligated group and make up substantially all of the revenues and assets of the combined group. In fiscal 2017, CFNI reported total operating revenues of $1.08 billion.

Revenue Defensibility

CFNI's revenue source characteristics are assessed at mid-range with Medicaid and self-pay totaling about 18% of gross revenues in 2017, Medicare totaling 51% of gross revenues and commercial payors accounting for 29% of gross revenues. Indiana is a Medicaid expansion state and recently approved a work requirement to be phased in in 2019 which may cause a slight shift in Medicaid enrollment. Incremental Medicaid and disproportionate share payments have been running about $50 to $60 million over the past three years and management anticipates payments will remain at this level through 2020 when the program will be reviewed. Fitch expects the payor mix to remain relatively stable and continue to support a mid-range assessment.

CFNI's three acute care hospitals are located within 20 miles of each other in Lake County, with Community Hospital being the larger tertiary provider. CFNI has the leading market position in its primary service area (PSA) with close to 59% market share compared to its closest competitor, Franciscan Health (AA/Stable), which operates four hospitals in CFNI's PSA and has a 20.6% market share. Competition also stems from Methodist Hospitals (BBB/Stable), and Porter Regional Health. The competitive environment is dynamic with Methodist and Franciscan recently suspending talks about partnering. Fitch expects CFNI to maintain its leading market position as management continues to focus on their northwestern Indiana service area with expansion to the east in Valparaiso and the south in Crown Point, away from the more competitive areas toward the Chicago suburbs to the north. Community Village continuing care retirement community has maintained solid occupancy of over 88% as of December 2017. Fitch assesses CFNI's market position as mid-range.

The service area is characterized by generally low wealth levels and unemployment rates that are higher than the state and national averages and by flat population growth. The primary service area comprises Lake County and Porter County, located on the southern coast of Lake Michigan and about 40 miles southeast of Chicago. Although Lake County includes Gary, IN, which has weak demographics and has experienced population and job losses over recent decades with the decline of the steel industry, CFNI does not generally draw from Gary as that population is served more by Methodist Hospitals. Porter County has somewhat stronger demographics with population growth of 1.6% over the past five years compared to 2.0% for the state, and median household income comparing favorably to the state in 2016. There are pockets of high growth in Lake and Porter Counties, specifically Crown Point and Valparaiso.

Operating Risk

CFNI has maintained its trend of solid revenue growth with total revenues of $1.08 billion in fiscal 2017 and strong operating performance with an operating EBITDA margin of 10.6% in 2017, and 11.3% for 2018 nine month year-to-date annualized. Revenue growth has been supported by continued ambulatory volume growth as CFNI has made significant investment in its outpatient strategy. In fiscal 2017, inpatient revenues accounted for roughly 40% of gross revenues and outpatient accounted for 60%. Outpatient volume continues to grow with clinic visits increasing by 5% and outpatient surgeries increasing by 2.5% from 2016 to 2017, a trend that is expected to continue but moderate. Based on the outpatient growth, stable inpatient market share and strong cost controls, Fitch expects strong operating performance to continue through the forward look with operating EBITDA consistently around 10%, and EBITDA margins around 12%. However, profitability is supported by governmental supplemental payments creating some vulnerability to the operating profile.

Fitch considers CFNI's capital expenditure requirements to be elevated. Capital expenditures have averaged 122% of depreciation over the past four years and the average age of plant in fiscal 2017 was 12.3 years, reflecting adequate investment. CFNI is investing in expanding outpatient services and is currently constructing the Community Stroke and Rehabilitation Center in Crown Point, IN, with a cost of about $60 million and expected completion in the spring of 2019. CFNI implemented EPIC electronic medical records in 2011 and therefore has that significant investment in technology behind them. Management expects ongoing routine and strategic capital expenditures to be about $70 million annually, which can be scaled back if not supported by adequate cash flow, and there are no current plans for additional debt.

Financial Profile

Fitch utilizes the annualized nine month (March 31, 2018) interim consolidated financials to estimate 2018 historical performance and as the starting point for the forward look in Fitch's base case and rating case. CFNI's leverage profile is strong with cash to adjusted debt of 159% and net adjusted debt to adjusted EBITDA of negative 1.6x in 2018 (annualized). Debt equivalents of about $44 million include operating lease obligations at a 5x multiple. CFNI has a defined benefit pension plan that is over 80% funded in FY 2017 and therefore there is no pension liability included in adjusted debt in 2017 or 2018.

In 2014, CFNI froze its defined benefit pension plan and is currently in the process of terminating the plan by fully funding the benefit obligation and required premium, therefore eliminating any future pension liability. CFNI borrowed $60 million through a taxable bank loan in the second quarter of FY 2018 for this purpose. The borrowing is cash flow neutral with debt service on the borrowing equal to the expected pension payments prior to termination. Fitch views this balance sheet strategy as risk reducing.

Fitch's base case assumes revenue growth of 4% in year 2019-2020 and 4.6% thereafter and expense growth of 5.0% in 2019-2020 and 4.6% thereafter, reflecting historical growth rates, but slightly modified to reflect the opening of the stroke center in 2019. In 2019 CFNI incurs a $74.2 million non-operating pension settlement expense as reflected in 'other adjustments' in Fitch's base and rating case. Annual capital expenditures of $70 million include routine and strategic investments and represents about 120% of the average depreciation expense over the forward period. No additional debt is assumed in the base case.

Fitch's rating case scenario applies the standard stress to CFNI's financial portfolio and operating revenues, reflecting a market downturn affecting investment values and revenues commensurate with those that a hospital would encounter in its business cycle. CFNI demonstrates strong financial flexibility through the cycle with cash to adjusted debt of 175% and net adjusted debt to adjusted EBITDA of negative 2.1x in year four. The rating case assumes the standard stress to revenue growth (two points lower than the base case year one revenue growth, one point lower in year two, one point higher in year three and equal to the base case in years four and five). Capital expenditures in the base case are reduced to $55 million (about 100% of depreciation) from $70 million in 2020-2021 reflecting flex in expenditures during the stress years.

Asymmetric Additional Risk Considerations

No asymmetric additional risk considerations were applied in this rating determination. CFNI's debt structure is conservative with 100% of debt fixed rate. Total debt excluding capital leases is $408 million of which $100 million is direct purchase taxable loans. The $60 million in taxable private placement done in October 2017 to fund the pension plan termination has a 10-year amortization with five-year commitment and prepayment provisions.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U3IN
Date:Sep 6, 2018
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