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Fitch Assigns 'A' to Orlando Regional Healthcare System's (Florida) 2007A & B Bonds

Posted on: Thursday, 18 January 2007, 12:01 CST

Fitch Ratings has assigned an underlying 'A' rating to the approximately $90 million Orange County Health Facilities Authority Hospital Revenue Bonds (Orlando Regional Healthcare System) series 2007A and to the approximately $60 million series 2007B. The Series 2007A bonds are expected to be insured by Financial Security Assurance, whose insurer financial strength (IFS) is rated 'AAA' by Fitch, while the series 2007B bonds are expected to be insured by FGIC, also rated 'AAA'.

The series 2007 A & B bonds are expected to be issued as insured variable rate demand bonds with liquidity support coming from a standby bond purchase agreement from Dexia Credit Local. Fitch expects to assign long and short term ratings closer to the closing of the series 2007 bonds. In addition, Fitch has affirmed its 'A' rating on Orlando Regional Healthcare System's (ORHS) outstanding debt listed below. The Rating Outlook is Stable.

Proceeds of the series 2007A & B bonds will be used to fund the expansion of ORHS' Sand Lake Hospital in Orlando. The 2007 project will include adding 144 new beds and a new parking structure that will accommodate approximately 850 vehicles. The 2007 A&B bonds are expected to sell the week of January 22, 2007 through negotiation led by SunTrust Capital Markets, Inc., Morgan Stanley and UBS Investment Bank.

The rating and affirmation is based on ORHS' continued solid financial performance, stable liquidity and sound market position in a growing service area. Although some of ORHS's ratios are not in line with Fitch's 'A' category medians, Fitch believes its location in one of the fastest growing regions in the U.S. should support further revenue growth. In addition, Fitch believes ORHS's current financial performance should be sustained, which should support its large capital plan. The population in ORHS's service area has increased 15% in the period 2000-2006 and is projected to increase 11.1% in the period 2006-2010. ORHS has been able to capitalize on the favorable population trends by investing in its plant with total capital spending of over $430M over the last three fiscal years. Fitch views the capital spending favorably, which included the expansion of the MD Anderson Cancer Center and the construction of The Winnie Palmer Hospital for Women and Babies. ORHS's six year capital plan for fiscal years 2007-2012 totals $900 million and includes an expansion of the Arnold Palmer Hospital for Children and the expansion and replacement of portions of its flagship facility, Orlando Regional Medical Center. Fitch views these strategic investments favorably and, although leverage and liquidity ratios may be pressured in the mid-term, believes these strategic investments should position ORHS to maintain its good market position in a fast growing and competitive service area.

ORHS posted strong results in fiscal year 2006 with a 2.4% operating margin, 3.1 times (x) proforma debt service coverage and 139.4 days cash on hand. Operating profitability decreased in fiscal 2006 from fiscal 2005, due to an unexpected volume decline at the flagship facility caused primarily by capacity constraints, the start-up of the Winnie Palmer Hospital and a rise in uncompensated care. Management has begun several long-term initiatives to address capacity issues including moving all medicine services to the ORMC Lucerne facility, opening Winnie Palmer Hospital which has created more capacity at Arnold Palmer Hospital for Children and moving forward with plans to expand Sand Lake Hospital. Due to the increasing demand for services, market share in the service area is divided by two main providers mainly based on the capacity available. ORHS has 39% of the beds in the service area and continues to maintain market share of approximately 36%-37% for all inpatient admissions. The main competitor to ORHS, Florida Hospital System (part of Adventist Health System, rated 'A+' by Fitch) has 44% of the beds in the market and has maintained the leading position with approximately 48%-49% market share. However, ORHS has continued to differentiate its clinical capabilities by offering unique services such as a women's and children's hospital with the largest neonatal intensive care unit in Florida, a dedicated pediatric facility, the only Level I trauma center in central Florida, and the M.D. Anderson Cancer Center-Orlando. ORHS maintains leading market share for newborn and subspecialty pediatric services in the service area.

Primary credit concerns are ORHS's future capital needs, relatively high debt burden and below average liquidity for the 'A' rating. Management has completed its strategic plan that includes capital needs of approximately $900 million in fiscal years 2007-2012. Capital spending could be funded by additional debt issuances projected in 2009 or 2010 and from cash flow. ORHS's debt burden is already somewhat high and the incurrence of any additional debt will be dependent on ORHS's ability to sustain favorable financial performance. Although leverage ratios have improved since Fitch's initial rating, ORHS's debt ratios continue to compare unfavorably to Fitch's 'A' median ratios. Proforma debt service coverage was solid at 3.1x in fiscal 2006, but is below Fitch's median for A-rated hospitals of 3.9x. Debt to capitalization was 48.8% in fiscal 2005 compared to Fitch's 'A' median of 41.7%. Fitch will continue to monitor ORHS's performance and will assess the impact of additional indebtedness in future years to its financial profile at time of issuance.

ORHS has several swaps outstanding, which Fitch believes pose minimal credit risk. These swaps will be outlined in Fitch's upcoming new issue report.

Located in Orlando, Florida, ORHS is a hospital system that owns six hospitals with 1,572 operated beds and includes the 581-bed Orlando Regional Medical Center. ORHS had total revenue of $1.3 billion in fiscal 2006. ORHS covenants to provide annual and quarterly disclosure to the nationally recognized municipal securities information repositories (NRMSIRs). ORHS's disclosure has been excellent and all quarterly and annual financial information are also posted on Digital Assurance Certification's website at www.dacbond.com. The information provided is comprehensive, including consolidated and consolidating balance sheet, income statement, and cash flow statement with comparisons to same period the prior year. In addition, utilization and other statistics are provided with a management discussion.

Outstanding Issues

-- $79,699,000 Orange County Health Facilities Authority hospital revenue bonds (Orlando Regional Healthcare System) series 1996C (1);

-- $50,000,000 Orange County Health Facilities Authority hospital revenue bonds (Orlando Regional Healthcare System) select auction variable-rate securities series 1999A (2);

-- $35,775,000 Orange County Health Facilities Authority hospital revenue bonds (Orlando Regional Healthcare System) select auction variable-rate securities series 1999B (2)

-- $73,375,000 Orange County Health Facilities Authority hospital revenue bonds (Orlando Regional Healthcare System) select auction variable-rate securities series 1999C (1);

-- $39,820,000 Orange County Health Facilities Authority hospital revenue bonds (Orlando Regional Healthcare System) series 1999D (1);

-- $67,575,000 Orange County Health Facilities Authority hospital revenue bonds (Orlando Regional Healthcare System) series 1999E;

-- $106,800,000 Orange County Health Facilities Authority Hospital Revenue Bonds (Orlando Regional Healthcare System) Series 2006A; (3)

-- $74,650,000 Orange County Health Facilities Authority Hospital Revenue Bonds (Orlando Regional Healthcare System) Series 2006B.

(1) This is an underlying rating. Bonds are insured by MBIA, whose insurer financial strength is rated 'AAA' by Fitch.

(2) This is an underlying rating. Bonds are insured by Radian Asset Assurance, whose insurer financial strength is rated 'AA' by Fitch.

(3) This is an underlying rating. Bonds are insured by FSA, whose insurer financial strength is rated 'AAA' by Fitch.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public web 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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