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Fitch Rates Catholic Health East (Pennsylvania) 2007 Bonds 'A+'; Affirms Outstanding Debt

Posted on: Monday, 26 February 2007, 17:32 CST

Fitch Ratings assigns an 'A+' rating to Catholic Health East's (CHE) series 2007 bond issues which are expected to total $401.5 million. Please see the following list. In addition, Fitch affirms the 'A+' rating on CHE's $1.3 billion of outstanding debt that is listed below. The Rating Outlook is Stable.

The series 2007 bond will be issued in multiple tranches as approvals are received from the various issuing authorities. The series 2007 will be structured as non-putable indexed variable rate bonds. In addition, CHE expects to enter into a floating-to-fixed rate swap with Merrill Lynch which will convert the series 2007 bonds to a synthetic fixed rate obligation. Bond proceeds will be used to advance refund certain maturities of CHE's outstanding bond issues and pay associated costs of issuance. The series 2007 will be publicly offered by Merrill Lynch.

The 'A+' rating is supported by CHE's geographic diversity, a manageable debt burden, continued implementation of standardized business practices throughout the system, and the divestiture of Mercy Health Pittsburgh scheduled to be completed by March 2007. Financial results for 2006, based on unaudited internal statements, are consistent with last year's results, with solid operating margins, strong coverage and liquidity that is comparable to prior years. The system earned $137 million from operations (3.3% operating margin excluding investment income included in other revenue) and $214 million on the bottom line (5.1% excess margin including restructuring charges of $12.7 million). CHE's fiscal 2006 operating margins and bottom line margin are near Fitch's 'A' median of 3.2% and 5.4%, respectively. The system had $1.5 billion in cash at 2006 which equated to 161 days of cash on hand compared to 157 days at 2005. Cash-to-debt ratio declined slightly to 115.6% at 2006 compared to 117% in 2005. The ratio of debt-to-capitalization is moderate at 34.1%. Pro forma debt service coverage of maximum annual debt service (MADS), MADS as a percent of revenue, debt to earnings before interest, taxes, and depreciation, was 4.3 times (x), 2.2% and 3.1x, respectively, all of which compare favorably with Fitch's 'A' medians.

Fitch's primary credit concerns are CHE's sizeable capital needs, competitive markets, light liquidity relative to expenses, and challenges related to the implementation of new systems. While capital spending over the last five years has been adequate as indicated by capital spending as a percentage of depreciation expense, CHE's average age of plant of 11.5 years is relatively high. CHE is projected to spend $1.6 billion on capital projects over the next five years of which a significant portion is expected to be funded through cash flow.

The Stable Outlook reflects Fitch's expectation that CHE will continue to maintain its operating performance in the near term, despite its sizable capital needs. CHE is currently implementing several initiatives aimed at standardizing practices related to financial reporting, and business process redesign, which over the medium to long term should lead to overall improvement in CHE's financial profile. Additionally, CHE is undertaking a thorough assessment of all of its regional health corporations, which could result in additional divestitures of underperforming assets. Further realization of benefits related to CHE's size, standardization of business practices at the regional health corporations, and asset divestiture of underperforming assets will be necessary for CHE to fund critical capital needs and remain competitive in their markets.

At Dec. 31, 2006, CHE had a total of 24 interest rate swap transactions with notional amounts totaling $641.8 million, which have been entered into for the purpose of reducing total interest expense. The market value of CHE's interest rate swap transactions is approximately $6.5 million in CHE's favor at Dec. 31, 2006.

Headquartered in Newton Square, PA, CHE is a large Catholic integrated health care system with 33 acute-care hospitals, 45 freestanding and hospital-based long-term care facilities, 13 assisted-living facilities, five continuing care retirement communities, eight behavioral health facilities and rehabilitation facilities, and 32 home health/hospice agencies and numerous ambulatory and community-based health services operating across 11 states. In 2006, based on unaudited internal statements, CHE reported total operating revenues of nearly $4 billion. CHE covenants to supply bondholders with annual and quarterly disclosure. Disclosure to-date includes a management discussion, utilization stats, balance sheet, and an income statement and cash flows, which Fitch views favorably. CHE's disclosure to-date has been timely.

The following bonds are rated 'A+' by Fitch.

--Camden County Improvement Authority (NJ) (Catholic Health East) health sys rev bonds ser 2007;

--Delaware Health Facilities Authority (DE) (Catholic Health East) rev bonds ser 2007;

--Fulco Hospital Authority (GA) (Catholic Health East) health sys rev antic ctfs ser 2007;

--Massachusetts Health & Educational Facilities Authority (MA) (Catholic Health East) health sys rev bonds ser 2007;

--Massachusetts Health & Educational Facilities Authority (MA) (Catholic Health East) rev bonds ser 2007;

--Miami Health Facilities Authority (FL) (Catholic Health East) rev bonds ser 2007;

--Miami Health Facilities Authority (FL) (Catholic Health East) rev rfdg bonds ser 2007;

--Montgomery County Higher Education & Health Authority (PA) (Catholic Health East Issue) health sys rev bonds ser 2007;

--New Jersey Health Care Facilities Financing Authority (NJ) (Catholic Health East) health sys rev bonds ser 2007;

--New Jersey Health Care Facilities Financing Authority (NJ) (Catholic Health East) rev bonds ser 2007;

--North Carolina Medical Care Commission (NC) (Catholic Health East) health sys rev bonds ser 2007;

--St. Mary Hospital Authority (PA) (Catholic Health East) health sys rev bonds ser 2007;

--Unified Government of Athens-Clarke County Development Authority (GA) (Catholic Health East) rev bonds ser 2007;

The following bonds are affirmed at 'A+' by Fitch.

--Allegheny County Hospital Development Authority (PA) (Catholic Health East) rev bonds ser 2002;

--Delaware Health Facilities Authority (DE) (Catholic Health East) rev bonds ser 2003D (1);

--Massachusetts Health & Educational Facilities Authority (MA) (Catholic Health East) rev bonds ser 2002B (1);

--Miami Health Facilities Authority (FL) (Catholic Health East) rev bonds ser 2003B (1);

--Miami Health Facilities Authority (FL) (Catholic Health East) rev bonds ser 2003C (1);

--Montgomery County Higher Education & Health Authority (PA) (Catholic Health East Issue) health sys rev bonds ser 2004C (1);

--New Jersey Health Care Facilities Financing Authority (NJ) (Catholic Health East) rev bonds ser 2003A (1);

--St. Mary Hospital Authority (PA) (Catholic Health East) health sys rev bonds ser 2004A (1);

--St. Mary Hospital Authority (PA) (Catholic Health East) health sys rev bonds ser 2004B;

--Unified Government of Athens-Clarke County Development Authority (GA) (Catholic Health East) rev bonds ser 2002C (1);

The following bonds are insured. The underlying ratings of these bonds are affirmed at 'A+' by Fitch.

--Catholic Health East (PA) (Catholic Health East Issue) taxable health sys bonds ser 1999G (insured: MBIA Insurance Corp.);

--Connecticut Health & Educational Facilities Authority (CT) (Catholic Health East Issue) health sys rev bonds ser 1999F (insured: MBIA Insurance Corp.);

--Fulco Hospital Authority (GA) (Catholic Health East) health sys rev antic ctfs ser 1998A (insured: MBIA Insurance Corp.) (1);

--Tampa (FL) (Catholic Health East) health sys rev bonds ser 1998A-3 (insured: MBIA Insurance Corp.);

--Allegheny County Hospital Development Authority (PA) (Catholic Health East) rev bonds ser 1998A (insured: Ambac Assurance Corp.);

--Camden County Improvement Authority (NJ) (Catholic Health East) health sys rev bonds ser 1998B (insured: Ambac Assurance Corp.) (1);

--Delaware County Authority (PA) (Catholic Health East) rev bonds ser 1998A (insured: Ambac Assurance Corp.);

--Massachusetts Health & Educational Facilities Authority (MA) (Catholic Health East) health sys rev bonds ser 1998B (insured: Ambac Assurance Corp.) (1);

--New Jersey Health Care Facilities Financing Authority (NJ) (Catholic Health East) health sys rev bonds ser 1998E (insured: Ambac Assurance Corp.) (1);

--North Carolina Medical Care Commission (NC) (Catholic Health East) health sys rev bonds ser 1998C (insured: Ambac Assurance Corp.) (1);

--North Carolina Medical Care Commission (NC) (Catholic Health East) health sys rev bonds ser 1998D (insured: Ambac Assurance Corp.) (Liquidity facility: Bank One, N.A. [Chicago]);

--Tampa (FL) (Catholic Health East) health sys rev bonds ser 1998A-2 (insured: Ambac Assurance Corp.);

--City of Miami, FL (Catholic Health East) rev bonds ser 2006 (Insured: CIFG Guaranty);

(1) A portion of the bonds are expected to be advance refunded from the proceeds of the series 2007 bond issues.

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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