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Fitch Rates Trinity Health (Michigan) $128.5MM 2006 Bonds 'AA'; Upgrades Outstanding Debt

Posted on: Thursday, 19 October 2006, 15:01 CDT

Fitch Ratings has assigned an 'AA' rating to Trinity Health Credit Group's (Trinity) upcoming composite $128.5 million series 2006 bonds. In addition, Fitch upgrades to 'AA' from 'AA-' Trinity's approximately $2.07 billion of outstanding debt, listed below.

The series 2006 are expected to be structured as fixed-rate debt with approximately $117.7 million issued through the Michigan State Hospital Finance Authority and approximately $10.8 million issued through the Indiana Health and Educational Facility Financing Authority. Bond proceeds will be used to fund various capital improvement projects at Trinity's Michigan and Indiana hospitals and to pay the costs of issuance. The bonds are expected to sell the week of November 9 through negotiation by Goldman Sachs & Co. and Merrill Lynch & Co.

The upgrade to 'AA' from 'AA-' is supported by Trinity's continued improvement in profitability, strong debt service coverage, the breadth and scale of operations, and a low debt burden. The primary credit factor for the rating upgrade is Trinity's improved operating profitability. As a result of continued operating improvements and the realization of management initiatives, many of Trinity's key profitability ratios meet or exceed Fitch's 2006 'AA' medians. Trinity posted a 4.2% operating margin ($256.7 million operating income) in fiscal 2006, which is the fifth consecutive year of operating improvement and exceeds Fitch's 'AA' median of 3.4% for the first time. For the fiscal year ended June 30, 2006, 13 of Trinity's 14 significant ministry organizations (MOs) were profitable.

Trinity's operational improvement is supported by favorable managed care contract renegotiations, improved revenue cycle and supply chain management, reduced pension and contract labor expense, and decreased losses related to employed primary care physicians. With 44 owned and managed hospitals in seven states, Trinity is able to achieve system-wide efficiencies, which should be enhanced by its information technology initiative that will integrate clinical, financial, and planning data for all member organizations. The initiative has been fully implemented at nine MOs and should generate additional cost savings when installation is complete, which is expected by the end of fiscal 2010. Trinity's 8% excess margin in fiscal 2006, supported by strong investment income of $153.8 million, led to pro forma debt service coverage of 6.7 times (x), up from 5.3x in fiscal 2005. Trinity's pro forma debt burden remains low with maximum annual debt service at 2.2% of revenue and debt to EBITDA of 2.6x in fiscal 2006.

Credit concerns include Trinity's relatively flat inpatient and outpatient utilizations and rising Medicaid load. System-wide inpatient volume increased by 1.3% in fiscal 2006 while overall outpatient volume declined by 1.1% over the same period. In fiscal 2006, Trinity's Medicaid load was 8.3% of net revenues, up from 8.1% in 2005, which increases exposure to unfavorable changes in government reimbursement.

The Rating Outlook is Stable. Fitch expects Trinity to sustain operating profitability consistent with Fitch's 'AA' medians based on management's operational initiatives in quality, the benefits accruing from the Genesis information platform, increased workforce productivity, and strong fiscal management practices. However, if overall utilization trends continue to be relatively flat, future revenue growth may be constrained.

Trinity Health is the fifth largest non-profit health care system in the U.S. and is comprised of 44 hospitals (29 owned and 15 managed) and other related healthcare entities. Trinity is headquartered in Novi, Michigan, with operations in Michigan, Iowa, Maryland, California, Indiana, Idaho, and Ohio, and had $6.1 billion in total operating revenue in fiscal 2006. Trinity Health covenants to provide annual audited financial statements, which includes a balance sheet, income statement, and management discussion and analysis, direct to bondholders and the NRMSIRs within 150 days of each fiscal year-end and quarterly disclosure with 90 days of each quarter end. Recently, Trinity began reporting via www.dacbond.com which is viewed positively by Fitch.

New debt:

--$117,720,000 Michigan State Hospital Authority, fixed-rate revenue bonds (Trinity Health Credit Group), series 2006A;

--$10,820,000 Indiana Health and Educational Facility Financing Authority fixed-rate revenue bonds (Trinity Health Credit Group), series 2006B

Outstanding debt:

--$43,415,000 Franklin County, Ohio, fixed-rate refunding bonds (Trinity Health Credit Group), series 2005A 'AA';

--$59,450,000 Franklin County, Ohio, variable-rate revenue bonds (Trinity Health Credit Group), series 2005B (insured by Financial Security Assurance, Inc., whose insurer financial strength (IFS) is rated 'AAA' by Fitch) 'AA';

--$15,925,000 Iowa Finance Authority variable-rate revenue bonds (Trinity Health Credit Group), series 2005C (insured by FSA) 'AA';

--$42,415,000 Michigan State Hospital Finance Authority fixed-rate refunding bonds (Trinity Health Credit Group), Series 2005D 'AA';

--$31,725,000 Indiana Health Facilities Financing Authority, hospital variable-rate revenue bonds, series 2005I (insured by FSA) 'AA';

--$14,625,000 California Statewide Communities Development Authority variable-rate revenue bonds (Trinity Health Credit Group), series 2004A (FSA insured) 'AA';

--$16,305,000 Franklin County, Ohio, fixed-rate refunding bonds (Trinity Health Credit Group), series 2004B 'AA';

--$44,820,000 Franklin County, Ohio, variable-rate revenue bonds (Trinity Health Credit Group), series 2004C-1 and series 2004C-2 (liquidity facility: U.S. Bank) 'AA';

--$18,400,000 Montgomery County, Maryland, variable-rate economic development revenue bonds (Trinity Health Credit Group), series 2004D (FSA insured) 'AA';

--$86,725,000 Michigan State Hospital Finance Authority variable-rate revenue bonds (Trinity Health Credit Group), series 2004E and 2004F (FSA insured) 'AA';

--$32,775,000 Michigan State Hospital Finance Authority variable-rate refunding and revenue bonds (Trinity Health Credit Group), series 2003A 'AA';

--$13,125,000 Michigan State Hospital Finance Authority variable-rate refunding revenue bonds (Trinity Health Credit Group), series 2003B (Ambac insured) 'AA';

--$105,125,000 Franklin County, Ohio, variable-rate revenue bonds (Trinity Health Credit Group), series 2003C-1 and series 2003C-2 (Ambac insured)'AA';

--$17,300,000 Iowa Finance Authority variable-rate refunding revenue bonds (Trinity Health Credit Group), series 2003D 'AA';

--$17,550,000 Iowa Finance Authority variable-rate revenue bonds (Trinity Health Credit Group), series 2003E (Ambac insured) 'AA';

--$30,225,000 Maryland Industrial Development Financing Authority variable-rate refunding revenue bonds (Trinity Health Credit Group), series 2003F 'AA';

--$50,925,000 California Statewide Communities Development Authority variable-rate refunding revenue bonds (Trinity Health Credit Group), series 2003G 'AA';

--$5,275,000 California Statewide Communities Development Authority variable-rate refunding and revenue bonds (Trinity Health Credit Group), series 2003H (Ambac insured) 'AA';

--$84,825,000 Idaho Health Facilities Authority variable-rate refunding and revenue bonds (Trinity Health Credit Group) series 2002A (Ambac insured) 'AA';

--$45,675,000 Idaho Health Facilities Authority variable-rate refunding and revenue bonds (Trinity Health Credit Group) series 2002B (Ambac insured) 'AA';

--$152,005,000 Michigan State Hospital Finance Authority refunding and revenue bonds (Trinity Health Credit Group) series 2002C 'AA';

--$65,000,000 Montgomery County, Maryland economic development revenue bonds (Trinity Health Credit Group) series 2001 'AA';

--$129,890,000 Michigan State Hospital Finance Authority, revenue and refunding bonds (Trinity Health Credit Group), series 2000A 'AA';

--$39,470,000 Iowa Finance Authority revenue and refunding bonds (Trinity Health Credit Group), series 2000B 'AA'

--$102,915,000 City of Fresno, California, hospital variable-rate revenue bonds, series 2000C (Trinity Health Credit Group) (liquidity facility: Landesbank Hessen-Thuringen Girozentrale, rated 'F1+') 'AA';

--$47,315,000 Iowa Finance Authority variable-rate refunding and revenue bonds (Trinity Health Credit Group), series 2000D (liquidity facility: The Northern Trust Company and JP Morgan Chase Bank, rated 'F1+') 'AA';

--$155,175,000 Michigan State Hospital Finance Authority, variable-rate revenue bonds, series 2000E (Trinity Health Credit Group), (liquidity facility: JP Morgan Chase Bank) (FSA insured) 'AA';

--$132,005,000 Franklin County, Ohio, variable-rate revenue bonds, series 2000F (Trinity Health Credit Group) (liquidity facility: JP Morgan Chase Bank and Bayerische Landesbank Girozentrale, rated 'F1+') 'AA'

--$62,740,000 Michigan State Hospital Finance Authority, hospital revenue and refunding bonds (Mercy Mount Clemens Corporation Obligated Group), series 1999A (MBIA insured) 'AA';

--$16,915,000 City of Fresno, California, hospital refunding revenue bonds, series 1998 (Holy Cross Health System Corporation) (MBIA insured) 'AA';

--$46,615,000 Idaho Health Facilities Authority hospital revenue bonds, series 1998 (Holy Cross Health System Corporation) (MBIA insured) 'AA';

--$73,310,000 Indiana Health Facilities Financing Authority, hospital revenue bonds, series 1998 (Holy Cross Health System Corporation) (MBIA insured) 'AA';

--$44,135,000 Franklin County, Ohio, hospital revenue bonds, series 1998 (Holy Cross Health System Corporation) (MBIA insured)'AA';

--$15,575,000 Maryland Industrial Development Financing Authority, hospital revenue refunding bonds, series 1996 (Holy Cross Health System Corporation)'AA';

--$50,130,000 Franklin County, Ohio, hospital revenue bonds, series 1996 (Holy Cross Health System Corporation) 'AA';

--$49,200,000 Franklin County, Ohio, variable-rate hospital revenue Bonds, series 1995 (Holy Cross Health System Corporation) (liquidity facility: JP Morgan Chase Bank, rated 'F1+')'AA'

Please note: Fitch is upgrading the underlying rating on all insured bonds.

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. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Source: Business Wire

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