Fitch Rates Trinity Health Credit Group’s (MI) 2016 Revs ‘AA’; Outlook Revised to Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned 'AA' ratings to the following revenue bonds expected to be issued by or on behalf of Trinity Health Credit Group (Trinity; formerly CHE Trinity):

-- $258.1 million Michigan Finance Authority, series 2016MI;

-- $44.3 million Montgomery County, Maryland, series 2016MD;

-- $23 million Idaho Health Facilities Authority, series 2016ID;

-- $227.8 million State of Connecticut Health and Educational Facilities Authority, series 2016CT.

In addition, Fitch affirms the 'AA' long-term rating on approximately $4.5 billion of Trinity's outstanding debt, the 'F1+' short-term rating on approximately $1.2 billion of variable rate debt, and the system's $600 million commercial paper program supported by self-liquidity currently rated by Fitch.

The Rating Outlook is revised to Negative from Stable.

The series 2016 bonds are expected to be structured as traditional fixed-rate debt. Bond proceeds will be used for refunding of certain maturities of currently outstanding debt, reimbursement of approximately $300 million for prior capital expenditures, to redeem approximately $250 million of outstanding commercial paper, and to pay associated costs of issuance. The fixed rate bonds are expected to be priced the week of Jan. 11 through negotiated sale. Trinity expects to issue approximately $328.3 million of bank placed variable rate refunding debt in 1Q 2016, which Fitch was not asked to rate.

SECURITY

The bonds are general unsecured obligations of the Trinity Health Credit Group. The master indenture provides for security interests in 'pledged property' of members at the obligated group and certain designated affiliates with pledged property including: all receipts, revenues, income and other moneys received, and including rights to receive accounts and health care insurance receivables.

KEY RATING DRIVERS

GEOGRAPHICALLY DIVERSE SYSTEM: Trinity Health Credit Group (formerly CHE Trinity) is the second largest nonprofit healthcare provider in the U.S. with approximately $14.3 billion in total revenue owned and operating 56 hospitals in 21 states with more than 113,000 employees. The 'AA' rating reflects the benefits that accrue from the system's size, scope of operations, and geographic diversity, which Fitch believes helps insulate the organization from adverse economic events that could severely affect any of its core markets.

WEAKENED INTERIM PROFITABILITY: The Outlook revision to Negative reflects Fitch's concern about the sharp decline in profitability through the five month interim period ended Nov. 30. Management attributes the compression in margin to increased labor and supply costs due to higher patient volumes combined with a slight erosion in payor and service line mix.

ADEQUATE LIQUIDITY: At Nov. 30, 2015 Trinity's unrestricted cash and investments totaled $7.63 billion which equates to 189 days cash on hand, a 20.5x cushion ratio (pro forma) and 130.7% cash to debt. While Trinity's liquidity metrics are weak relative to the 'AA' category medians, they are consistent with organizations of comparable size, scale and revenue diversity.

MIXED DEBT METRICS: Trinity's debt burden remains moderate with pro forma maximum annual debt service (MADS) equating to 2.6% of fiscal 2015 total revenues which is consistent with Fitch's 'AA' category median of 2.4%. However, debt to capitalization of 35.8% at Nov. 30, 2015 and fiscal 2015 debt to EBITDA of 3.0x are elevated relative to the respective 'AA' medians of 28.1% and 2.4x.

STRONG MANAGEMENT PRACTICES: Fitch continues to view Trinity's management team as a credit strength that could lead to core operating performance recovery. The team's strong management practices are evident through its historically stable and consistent operating performance, proactive approach towards population health management and its demonstrated willingness to close or divest facilities in poor performing markets.

RATING SENSITIVITIES

PROFITABILITY IMPROVEMENT: Trinity Health is implementing a profitability improvement plan that includes expense reduction initiatives in certain non-clinical areas and realization of improved efficiencies in clinical and non-clinical operations. Should operating profitability recover in the second half of fiscal 2016 and into 2017 to levels more consistent with historical performance, an Outlook revision to stable is likely. Conversely, a prolonged period of weakened profitability would likely result in negative rating action.

MAINTAIN LIQUIDITY: Given Trinity Health's adequate liquidity metrics and sizeable capital plan, a decline in liquidity ratios would also be of concern. Trinity plans to scale back capital spending slightly due to the profitability downturn.

CREDIT PROFILE

Trinity is one of the largest Catholic health care delivery systems in the U.S. with operations in 21 states including 56 owned and operated hospitals, 115 continuing care facilities and home health and hospice programs providing nearly 1.7 million home health visits annually. The organization has total revenues of approximately $14.3 billion employing more than 113,000 employees including 3,900 employed physicians.

As of June 30, 2015 (audited year-end) Trinity operated acute care hospitals, long-term care facilities, skilled nursing and behavioral health facilities with an aggregate of 10,200 staffed beds, 3,500 skilled nursing beds, and more than 900 assisted living units. Combined, the obligated group makes up approximately 85% of net revenues of the consolidated system. Fitch's analysis is based on the consolidated system.

A key credit factor supporting the 'AA' rating is the benefit that accrues from Trinity's size, scale and diversity of operations. Fitch believes the geographic diversity of its operations provides greater overall stability by insulating the organization from adverse economic, demographic and operational changes in any one of its markets. Moreover, Trinity's large non-acute operations provide further diversification of revenues and better positions the system for healthcare reform initiatives.

Management has demonstrated a willingness to divest dilutive operations and/or those facilities that do not fit the organization's longer-term strategic plan. The system expects to complete the transfer of St. Michael's Medical Center in New Jersey to Prime Healthcare pending state approval. On July 1, 2015, Trinity Health became the sole member of 431 staffed bed St Joseph's Health Center located in Syracuse NY and on Oct. 1, 2015, Trinity became the sole member of 439-staffed bed St. Francis Hospital and Medical Center located in Hartford CT.

WEAKENED PROFITABILITY

Historically, Trinity has generated stable, albeit moderate, operating and operating EBITDA margins relative to Fitch's 'AA' medians. In fiscal 2014 and 2015, the system generated operating margins of 3% and 3.3%, respectively, and operating EBITDA margins of 9.4% and 9.6%, respectively. Fitch has viewed the consistency and stability of Trinity's operating performance as a key credit factor in its assignment of the 'AA' rating.

However, through the five-month interim period ended Nov. 30, 2015, operating profitability has dropped sharply with operating and operating EBITDA margins of 0.3% and 6.8%, respectively. A part of the decline in profitability reflects the dilutive impact of the St. Francis and St. Joseph's acquisitions as well as the system's investments in population health management initiatives ($41 million in fiscal 2016 vs. $24 million in the prior year period). However, of greater concern is the impact of higher labor and staffing costs resulting from higher volumes and growing competition for nursing staff combined with an unfavorable shift in payor and service mix. Fitch believes the recent cost pressures on margin present a greater challenge to management to resolve going forward.

Management has implemented a variety of cost containment measures that are expected to improve system profitability in the second half of fiscal 2016. Management expects to cut back or freeze certain non-clinical expenses and staffing and deploy rapid action teams to certain regional ministries to identify, analyze and implement labor cost savings and efficiencies.

Should management be able to successfully generate margin improvement more consistent with historical performance, a revision of the Outlook to Stable is likely.

ADEQUATE LIQUIDITY

At Nov. 30, 2015 Trinity's unrestricted cash and investments totaled approximately $7.63 billion, which translated into 189.1 days cash on hand, 20.5x pro forma cushion ratio, and 130.7% cash to debt. Upon closing of the 2016 financing, Trinity expects to reimburse itself $300 million for prior capital expenditures. Long term debt increases from $5.84 at Nov. 30 to $6.49 billion reflecting reimbursement and conversion of outstanding commercial paper to long term debt. As a result key liquidity metrics at Nov. 30 on a pro forma basis would be 196.5 DCOH, 21.3x cushion ratio and 122.2% cash to debt. While Trinity's liquidity metrics have traditionally lagged the 'AA' category medians, the system's size, diversity and stability have mitigated those concerns. In addition, the growth in absolute liquidity is viewed positively as unrestricted liquidity has grown by over $500 million since FYE 2014.

MIXED DEBT & LEVERAGE METRICS

Total pro forma debt after the series 2016 issuance is approximately $6.5 billion with 69% fixed rate and 31% variable rate debt. Pro forma MADS of $372.6 million reflects a smoothing of bullet maturities and is an increase from the current MADS of $322 million. Historical coverage of pro forma MADS in 2014 and 2015 is adequate at 4.8x and 5.1x compared to the 'AA' median of 5.7x and does not include the operations of St Francis or St Michael's. While pro forma MADS equates to a modest 2.6% of fiscal 2015 total revenues, pro forma debt to capitalization of 35.8% at Nov. 30, 2015 and fiscal 2015 debt to EBITDA of 3.0 are elevated relative to the 'AA' medians of 28.1% and 2.4x.

'F1+' SELF LIQUIDITY RATING

The 'F1+' rating reflects the adequacy of Trinity's internal liquidity resources as well as its size, sophistication and market access to meet optional and mandatory tenders presented by its variable rate demand debt and CP programs. Liquidity resources include highly liquid, highly rated investments and dedicated bank liquidity facilities which are discounted based on Fitch's criteria. At Nov. 30, 2015, Trinity maintained highly liquid resources to cover the maximum mandatory put exposure on any given date in excess of Fitch's criteria of 1.25x.

ENHANCED CAPITAL SPENDING PROGRAM

Over the next three years, Trinity anticipates funding a total of $3.9 billion for its capital investment program, which will be funded from a combination of operational cash flow, investment earnings and additional debt. Specific uses of these funds include routine maintenance of the organization's various facilities, certain major facility replacement and expansion projects, and further investment in Trinity's information systems.

Given Trinity's recent compression in profitability and somewhat elevated leverage metrics, Fitch expects Trinity to adjust its capital spending budget to maintain its historic financial profile (i.e. liquidity, profitability and leverage) as it invests in its facilities and strategies.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807

Additional Disclosures

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Fitch Ratings, Inc.

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Source: Fitch Ratings