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Fitch Upgrades Saint Francis Healthcare System (MO) Rev Bonds to 'AA'; Outlook Stable.

New York: Fitch Ratings has upgraded $139.3 million of debt issued by the Industrial development Authority of the County of Cape Girardeau, Missouri on behalf of Saint Francis Healthcare System (SFHS) to 'AA' from 'AA-'.

Fitch has also assigned SFHS an Issuer Default Rating (IDR) of 'AA'.

The Rating Outlook is Stable.


The bonds are secured by a pledge of gross revenues of the obligated group.


The upgrade of the revenue bonds to 'AA' from 'AA-' reflects continued strengthening of SFHS's financial profile, with further improvement likely due to strong cash flow and limited capital needs. With a robust liquidity position and manageable debt burden, the system has demonstrated resilience through the cycle, even under a forward-looking scenario where a moderate economic disruption is applied. SFHS's solid financial profile is bolstered by a leading inpatient market position, strong operations, and low future capital spending needs. Liquidity and net leverage metrics currently exceed those of 'AA' rated peers with similar business profiles, mitigating SFHS's single market focus and smaller revenue base.


Revenue Defensibility: 'bbb'; Leading Market Position In Competitive Service Area

SFHS's midrange revenue defensibility is supported by a leading 46% market share in a competitive service area with one primary competitor. The leading market share is supported by physician alignment, and affiliations in key service lines and networks. SFHS's payor mix is adequate as Medicaid and self-pay total 20.7% of gross revenues, with service area characteristics that are generally stable and expected to continue supporting a stable payor mix.

Operating Risk: 'aa'; Strong Operating Profile and Completed Period of Elevated Spending

SFHS's operating risk assessment is strong which is attributed to solid operating profitability and low capital spending requirements. Fitch believes SFHS's leading market position, well aligned physician base, and effective cost controls will continue translating into strong operating profitability levels going forward. Anticipated future capital expenditures should be low due to the recent completion of major capital projects and strong capital spending.

Financial Profile: 'aa'; SFHS's Remains Strong Throughout the Cycle

SFHS's excellent liquidity and strong operating profitability provide substantial financial cushion under a stress scenario. Fitch expects SFHS to maintain strong operating profitability and a robust net leverage position with cash to adjusted debt not expected to go below 292% consistent with an 'aa' financial profile assessment through the cycle, despite a stress scenario where economic and investment performance is negatively affected.

Asymmetric Additional Risk Considerations

No asymmetric risks were factored into the rating assessment.


Revenue Volatility: A smaller revenue and volume base over a limited geography and competitive market makes the organization more sensitive to unexpected changes in its physician staff, local demographics and economic activity, or other market dynamics that could heighten volatility. However, Fitch believes SFHS's leading market position, good expense management, low capital spending needs and solid balance sheet help mitigate those risks and allow for rating stability.


SFHS operates Saint Francis Medical Center (SFMC), a 306-licensed bed acute care hospital located in Cape Girardeau, MO, approximately 120 miles south of St. Louis and 160 miles north of Memphis. Total consolidated operating revenues equaled $515.5 million in fiscal 2018 (unaudited). SFMC is the sole member of the obligated group and comprised 99% of consolidated operating revenues and 98% of consolidated total assets in fiscal 2018.

Revenue Defensibility

SFHS's Medicaid and self-pay totaled approximately 20.7% of gross patient revenues in fiscal 2018 supporting Fitch's mid-range assessment. Overall governmental payors, which includes Medicare and Medicaid are moderately concentrated and have consistently accounted for nearly 68.7% of gross revenues over the last several years. This comparatively high exposure to governmental payors exposes SFHS to increased vulnerability to state and federal budget cuts.

SFHS's primary service area (PSA) is defined as Cape Girardeau County, MO. SFHS maintains a solid 46% market share in its PSA. However, the service area remains competitive with SFHS' primary competitor, Southeast Missouri Hospital Association (SoutheastHealth), located just two miles away. SoutheastHealth holds a 42% market share in the PSA. The system's total service area includes a 25-county, five-state region of Missouri, Arkansas, Illinois, Kentucky and Tennessee, with a total population of over 700,000.

SFHS is part of a clinically integrated network (CIN) called MPACT, which includes over 50 hospitals and 550 clinics and aims to improve access and care coordination. As of fiscal 2018, SFHS employs 149 physicians. Additionally, SFHS has an affiliation with the Cleveland Clinic which enhances cardiology expertise. This allows SFMC to retain some of the profitable tertiary services that otherwise could out-migrate to St. Louis-area academic medical centers.

SFHS's PSA characteristics are generally stable and should support its current payor mix over time. Cape Girardeau County, MO population has increased in line with state averages over the last five years. The unemployment rate in the county is below state and national averages. The median household income level is in line with state averages for Missouri.

Operating Risk

Operating profitability has been consistently strong with operating EBITDA margin and EBITDA margins averaging approximately 13% and 17%, respectively, over the last five fiscal years. The robust operations reflect strong expense management initiatives, physician alignment, and sound strategic investments. Fiscal 2017 was a transition year as margins softened to 10.1% and 13.5% as SFHS implemented a new electronic medical record system (EPIC) that was successfully completed in July 2016. However, in fiscal 2018 (unaudited) operating EBITDA and EBITDA margins improved to 15% and 20.3%. The operational improvement can be attributed to EPIC being fully online, continued expense control initiatives, decreased payment denial rates and a higher case mix index. Fitch expects that operating EBITDA will range between 10%-10.5% over the next several years.

SFHS currently has a low average age of plant at 7.8 years which reflects historically strong capital spending on its facilities. SFHS's capital expenditures averaged 160.7% of depreciation the last five fiscal years. Completed projects included a new five-story patient tower that opened in July 2015, renovations at the prior facility which completed in 2016, as well as implementation of a new IT system. The new patient tower cost approximately $127 million and provided SFMC with 100% private beds and increased total beds to 308 from 289. The project included a new orthopedics and neurosciences center, a new women's and children's pavilion, expansion of existing clinical areas and one floor of shelled space. Looking forward, no large capital projects are expected in the near future which should allow for further liquidity growth.

Financial Profile

SFHS's leverage profile has historically been strong, averaging cash to adjusted debt of 242% and net adjusted debt to adjusted EBITDA of a favorably negative 3.2x over fiscal years 2014-2018. As of fiscal 2018, cash to adjusted debt equated to 330% and net adjusted debt to adjusted EBITDA was negative 3.2. Cash to adjusted debt improved from 239% to 330% in 2018 as SFHS paid off $34.57 of series 2013B variable rate bonds. Fitch uses debt equivalents from the 2018 fiscal-year end, $10.5 million for capitalized operating leases (calculated at a 5.0x multiple) and no pension liability as SFHS does not have a defined benefit pension plan.

The base case assumes Fitch's expectations of operating EBITDA margins for SFHS in the range of 10%-10.5%. Capital expenditures represent Fitch's base case assumption of 120% of depreciation. However, despite softened margins, cash to adjusted debt should continue to strengthen due to modest capital expenditure needs and a declining debt burden.

The rating case assumes the standard stress to revenues (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). SFHS's investment portfolio experiences moderate stress due to an aggressive asset allocation of 64% equities and 5% hedge funds as of June 30, 2018. Capital expenditures are reduced by 20% from the base case in fiscal 2020 and 2021 reflecting flexibility to reduce or defer certain capital expenditures during a stress scenario. SFHS's balance sheet strength is strong throughout the rating case as cash to adjusted debt does not fall below 292% and net adjusted debt to adjusted EBITDA remains favorably negative throughout not falling below a negative 5.4%.

Asymmetric Additional Risk Considerations

No asymmetric risks were factored into the rating assessment.

SFHS had debt outstanding of $139.3 million as of June 30, 2018, consisting of 100% fixed rate bonds. Debt outstanding includes series 2013A revenue bonds ($108.1 million) and series 2016A revenue bonds ($31.2 million). SFHS is not counterparty to any swaps.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U4MO
Date:Jan 9, 2019
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