Fitch Affirms Altru Health System’s (ND) Revs at ‘A-‘; Stable Outlook

Fitch Ratings has affirmed the rating on the following bonds issued through the City of Grand Forks, North Dakota on behalf of Altru Health System (Altru) at 'A-'.

--$116.5 million, series 2012

--$27.8 million, series 2007

--$33.7 million series 2005

The Rating Outlook is Stable

SECURITY

The bonds are secured by gross receivables of the obligated group.

KEY RATING DRIVERS

DOMINANT MARKET SHARE: Altru has a dominant market position in its primary service area (PSA) with an 81 percent share. The next closest competitor, Northwood Deaconess Health Center (NDHC), has an approximate 3 percent position. Fitch views Altru's dominant market position as a primary credit strength. Additionally, Altru is a physician led organization with over 80 percent of the medical staff employed, which Fitch views positively as it supports strong physician integration.

OPERATIONAL DECLINE: In fiscal 2013 (Dec. 31, 2013; unaudited), Altru recorded a loss of $1.6 million, which was significantly off from budget ($13.7 million profit) and down from fiscal 2012's $13.4 million gain. Management primarily attributes the operating decline to weakened inpatient volumes coupled with a large shift in services to an outpatient setting from inpatient.

MIXED FINANCIAL PROFILE: Liquidity and debt service coverage continue to be relatively weak for the rating category. Additionally, Fitch believes the organization is at its debt capacity for the rating level given the recent operational pressures. Management has tabled its plan for additional debt ($40 million) until it achieves better financial results in line with historical trends.

FAVORABLE SERVICE AREA CHARACTERISTICS: Located in Grand Forks, ND, Altru operates in a favorable service area highlighted by low unemployment levels and strong economic growth.

CONSERVATIVE DEBT PROFILE: Altru has a conservative debt profile which is approximately 95 percent fixed-rate and 5 percent variable- rate. Additionally, the system has no outstanding swaps.

RATING SENSITIVITIES

OPERATIONAL IMPROVEMENT NEEDED: Management has implemented a financial turnaround plan, which is expected to yield approximately $12.5 million in savings in fiscal 2014. Management is budgeting to earn approximately $8.7 million in income from operations (1.8 percent operating margin) for fiscal 2014. Since Altru's overall financial profile is somewhat weak for the rating level, the failure to achieve financial results at or near its budgeted goal would likely result in negative rating pressure.

CREDIT PROFILE

Located in Grand Forks, ND, Altru has a 230-staffed bed (277- licensed bed) acute care hospital, a 45-licensed bed hospital located on South Washington, a 34-bed rehabilitation hospital (50 licensed beds), and offers a wide range of outpatient services. In fiscal 2013, Altru had total revenues of approximately $456 million.

OPERATING PROFITABILITY DECLINE

In fiscal 2013 Altru recorded its first operating loss ($1.6 million) in the last five fiscal years, which translated into a negative 0.4 percent operating margin and 7.5 percent operating EBITDA margin. These metrics compared unfavorably against Fitch's 'A' category medians of 3.3 percent and 10.7 percent, respectively. Management attributes the operating loss to specific inpatient volume losses (cardiology and orthopedics) and a larger portion of patients receiving treatment in an outpatient setting, which was formerly inpatient.

Since realizing the operating loss, management has begun to implement various expense reductions, expected to produce $12.5 million in savings for fiscal 2014. Additionally, management is limiting its capital spending by scaling back spending plans to approximately $20.5 million (from $30 million) and postponing a potential $40 million debt issuance.

Management is committed to meeting its budget and has expressed that further expenses will be cut if revenue growth does not meet expectations. Fitch would view Altru's failure to reach its budgeted 2014 goal negatively. With an already limited financial profile for the 'A-' rating level, Fitch believes Altru has very little financial flexibility to absorb any further adverse events in fiscal 2014.

LOW DEBT SERVICE COVERAGE AND LIQUIDITY

Over the past five fiscal years Altru has averaged maximum annual debt service (MADS) coverage of 2.6x, which is below Fitch's median of 3.8x. Additionally, Fitch believes the system is at its debt capacity for the rating level, which is highlighted by MADS ($16.6 million) as percentage of revenue of 3.6 percent in fiscal 2013, which was somewhat high against the median of 3.1 percent.

At Dec. 31, 2013, Altru had $148.7 million in unrestricted cash and investments, which equated to 126.1 days cash on hand, 8.3x cushion ratio, and 74.3 percent cash to debt. Fitch views Altru's balance sheet as light as all metrics compared unfavorably against Fitch's 'A' category medians of 196.3 days, 15.6x, and 129.2 percent, respectively.

Any material weakening in balance sheet cushion or an increase in leverage would be viewed unfavorably.

FAVORABLE SERVICE AREA CHARACTERISTICS

Located in Grand Forks, Altru's service area is noted for its robust economy, home to the University of North Dakota, stable population base, and above average economic and wealth indicators. Continuing to exemplify the good service area characteristics is Altru's payor mix, which consisted of approximately 50.8 percent governmental payors (Medicare and Medicaid) and 40.5 percent commercial and managed care insurance in 2013.

CONSERVATIVE DEBT PROFILE

Altru's debt profile is approximately 95 percent fixed rate and 5 percent variable rate, which Fitch views as conservative and appropriate for the rating level. The system has no outstanding swaps. Altru has one series of outstanding variable rate demand bonds ($8.7 million) backed by a letter of credit from Bank of America (rated 'A/F1'; Negative Outlook by Fitch) that expires in 2017.

DISCLOSURE

Altru covenants to disclose annual audited financial statements and quarterly information to the MSRB's EMMA system.

More information:

fitchratings.com

fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=498412

fitchratings.com/gws/en/disclosure/solicitation?pr_id=826619

fitchratings.com/understandingcreditratings

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