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Fitch Rates Beaumont Hospital's, Michigan $707MM Series 2008 Bonds 'A+'; Outlook Stable

Posted on: Tuesday, 19 August 2008, 15:01 CDT

Fitch Ratings has assigned an 'A+' rating to the expected issuance of approximately $707.3 million of hospital revenue bonds for William Beaumont Hospital Obligated Group (Beaumont) through the City of Royal Oak Michigan Hospital Finance Authority. In addition, Fitch downgrades the outstanding ratings to 'A+' from 'AA-' on approximately $655 million of bonds issued on behalf of Beaumont. The Rating Outlook is Stable.

The series 2008 issue is expected to be structured with approximately $507 million of traditional fixed rate bonds and $200 million of variable rate demand bonds (VRDBs) secured by various bank letters-of-credit (LOCs). Fitch expects to assign long-term and short-term ratings on the VRDBs based on the LOCs at a date closer to pricing. Proceeds from the series 2008 issue will be used, among other things, to refund a total of $341 million of series 2001N&O, series 2003P&Q and series 2006R&S auction rate securities (ARS) and $78 million of series 2006 T&U VRDBs; fund approximately $240 million of capital projects at the Royal Oak and Troy hospital campuses and partially fund the Grosse Pointe hospital acquisition and fund costs of issuance. Pro forma debt outstanding upon closing of the series 2008 issuance is approximately $912 million.

The downgrade to 'A+' from 'AA-' is precipitated by Beaumont's increased pro-forma debt burden, the anticipated negative impact from two new hospital facilities opening in western Oakland County and the expected drag on earnings related to the acquisition of 289-bed Grosse Pointe Hospital from Bon Secours Health System (revenue bonds rated 'A' by Fitch). Upon closing of the series 2008 issue, Beaumont's pro-forma maximum annual debt service (MADS) increases to approximately $69.5 million from $48.4 million. As a result historical coverage of pro-forma MADS in fiscal 2007 is a light 3.3 times (x) compared to actual coverage of 4.8x and Fitch's 2007 'AA' median of 5.6x. Further, pro-forma MADS as percentage of fiscal 2007 revenues increases of 3.8% and pro-forma debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) of 4.0x are weaker than the 'AA' medians of 2.7% and 2.7x, respectively.

Admission volumes at Beaumont's flagship Royal Oak hospital are expected to be negatively impacted with the opening of two new hospitals in western Oakland County over the next 12-24 months. St John Health System (part of Ascension Health, revenue bonds rated 'AA+' by Fitch) expects to open a new 200-bed hospital (approximately 20 mi west in Novi, MI) in August while Henry Ford Health System (not rated by Fitch) is anticipated to open a 300-bed hospital (approximately 12 mi west in West Bloomfield, MI) in the first half of 2009. Beaumont has launched three initiatives to counter the new competition: i) the acquisition of Grosse Pointe Hospital and related assets on the east side of Beaumont's service area; ii) expansion of its ambulatory network in Oakland and Macomb Counties and iii) transitioning the Royal Oak campus to an academic medical center (through the creation of the Oakland University Beaumont School of Medicine) which will serve higher acuity, more complex cases which should generate a higher case-mix and better reimbursement.

Finally, prior to Beaumont's acquisition, the Grosse Pointe Hospital had generated consistent operating losses. Since Beaumont's acquisition in October 2007, operating losses have narrowed considerably at Grosse Pointe due to a 17% increase in admissions through the six months ended June 30, 2008 as compared to the year earlier period. Through the six months ended June 30, 2008, Beaumont Grosse Pointe generated a $3.6 million loss from operations (-4.6% operating margin) compared to a budgeted $7.6 million loss from operations and a $10.7 million loss in the year earlier period. However, results at Beaumont Hospital Grosse Pointe are expected to depress system results in the near term as management continues its turnaround plan. Beaumont's credit strengths continue to be its excellent clinical reputation, solid operating profitability, consistent volume growth and leading market position. Beaumont Hospital Royal Oak has consistently been named a Top Hospital by US News and World Reports. In 2007, the Royal Oak facility was ranked among the top 50 hospitals in eight clinical service lines and was named the top ranked hospital in Michigan in cardiac and orthopedics. In addition, the Beaumont Royal Oak was the first hospital in Michigan to receive nurse magnet status. Beaumont's operating performance has been solid, with operating EDITDA margins of 9.7%, 10.0% and 11.7% in fiscal 2007, 2006 and 2005, respectively. Beaumont has experienced consistent utilization growth with year-over-year increases in admissions for 11 straight years and increases in ER visits and total surgeries in 10 out of 11 years. Finally, Beaumont has increased its leading market share to 27.4% in 2007 and has shown the highest market share increase among all hospitals in its service area since 2002.

The Stable Outlook reflects Fitch's expectation that profitability will be somewhat depressed in fiscal 2008 and 2009 relative to historical performance as management executes on strategic plans. The Outlook incorporates the expected issuance of $175 million of additional debt in 2009 to fund capital projects at the Royal Oak and Troy campuses.

Headquartered in Royal Oak, Michigan (about 17 miles north of Detroit), Beaumont is a large, three-campus health care system with 1,696 staffed beds. Total operating revenue was $1.85 billion in fiscal 2007. Beaumont expects to covenant to provide annual audited financial statements and quarterly disclosure to the Nationally Recognized Municipal Securities Information Repositories. Quarterly disclosure is excellent and consists of a balance sheet, income statement, statement of cash flows, utilization statistics, and management discussion and analysis.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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