OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to $42.9 million of series 2016 revenue bonds to be issued by the Wisconsin Health and Educational Facilities Authority on behalf of The Monroe Clinic (TMC).

In addition, Fitch has affirmed TMC's 'A-' rating on its series 2009 Redevelopment Authority of the City of Monroe revenue bonds.

The series 2016 bonds will be fixed rate and will refinance TMC's series 2009 bonds and pay the costs of issuance. The series 2016 bonds are expected to price the week July 18, 2016 and mature in 2038.

The Rating Outlook is Stable.

SECURITY

The series 2009 bonds are secured by a gross revenue pledge and a debt service reserve fund (DSRF). The series 2016 bonds also are to be secured by a gross revenue pledge, but not a DSRF.

KEY RATING DRIVERS

TRACK-RECORD OF STRONG MARGINS: TMC has a track-record of generating double-digit operating EBITDA margins (13.7% in fiscal year [FY] 2015). Like many smaller hospitals, however, TMC is vulnerable to dependence on a small number of physicians and physician turnover, which contributed to softer margins in interim FY 2016.

GOOD LIQUIDITY: Due to favorable cash flow, TMC's unrestricted cash and investments have grown consistently leading to good cash on hand of nearly 260 days at fiscal year-end (FYE) 2015.

LEADING MARKET SHARE: TMC maintains a distinctly leading share of a quality primary service area (PSA). The only other hospital in the PSA is FHN Memorial Hospital, approximately 23 miles south in Freeport, IL.

RATING SENSITIVITIES

OPERATING STABILITY EXPECTED: Given The Monroe Clinic's strong market position in a good service area, integrated delivery platform, and track-record of favorable operating margins, Fitch expects the organization to rebound from the modest contraction of margins in interim FY 2016 and maintain favorable liquidity ratios. Maintenance of an operating EBITDA margin well in excess of 'A' medians and continued strengthening of balance sheet ratios could lead to positive rating movement.

CREDIT PROFILE

TMC is a 58-staffed bed community hospital located in Monroe, WI. The system includes a fully-integrated physician clinic with nearly 130 active physicians, 10 satellite clinics in two states, and two employer-based clinics. TMC is located just over 40 miles south of Madison, WI and approximately 110 miles southwest of Milwaukee. TMC recorded over $175 million of total operating revenue in FY 2015.

TRACK-RECORD OF STRONG MARGINS

TMC has a track-record of generating profitable operating margins and double-digit operating EBITDA margins. The operating EBITDA margin was especially good in FY 2014 (13.1%) and FY 2015 (13.7%). The operating trend is particularly impressive given TMC's clinic model with a comparatively large employed physician base.

Factors contributing to the strong operating results in recent years include the use of data analytics to manage expenses and TMC has benefited from a reduction in uninsured as the Affordable Care Act (ACA) has been implemented. For example, TMC's self-pay as a percentage of gross revenues decreased from 5.0% in FY 2012 to 2.7% in FY 2015 (based on management data).

Fitch notes favorable operating margins have been achieved despite a 12.1% decline in inpatient admissions between FY 2012 and FY 2015 (down 6.4% including observation stays). Since outpatient represents over 80% of operating revenues, however, TMC is less dependent on inpatient trends than are most other acute care hospitals.

TMC's pro forma debt service coverage ratios are adequate. Including the lower maximum annual debt service (MADS) from the series 2016 financing (and refunding of the series 2009 bonds) and based on FY 2015 results, pro forma MADS coverage is 4.7x ('A' median is 4.2x) and MADS as a percent of total revenue is 3.1% ('A' median is 2.8%). Pro forma cash-to-debt is 151% ('A' median is 144%) and debt-to-EBITDA is 2.9x ('A' median is 3.0x).

Like many smaller hospitals, TMC is vulnerable to dependence on a small number of physicians and physician turnover. For instance, in early 2016 TMC's interventional cardiologist left the market, which contributed to softer margins for the system through unaudited five-months FY 2016 (9.2% operating EBITDA, compared to 11.5% for the same period FY 2015).

Looking forward, management expects TMC's operating EBITDA margin to rebound to the 11% range in FY 2017 and beyond. Improvement efforts include recruitment of two new interventional cardiologists, continued use of data analytics and lean processes to manage expenses, work with GPO to reduce supply expenses, partnering with smaller rural hospitals to spread the costs of the Epic electronic medical record (EMR) system (TMC has fully implemented Epic in both the clinic and hospital since 2011), and advance refunding of the series 2009 bonds to save interest costs.

GOOD LIQUIDITY

Due to favorable operating cash flow and investment returns, TMC's unrestricted cash and investments has grown consistently in recent years. Total unrestricted cash and investments increased from $80 million at FYE 2012 to just over $110 million at FYE 2015; as a result, cash on hand improved from 200 days at FYE 2012 to 259 days at FYE 2015. The 'A' median cash on hand is 205 days. Fitch expects TMC to maintain favorable days cash in the coming years.

LEADING MARKET SHARE IN QUALITY SERVICE AREA

TMC maintains a distinctly leading share of a quality PSA centered on Green County, WI and Stephenson County, IL. The only other hospital in the PSA is FHN Memorial Hospital, approximately 23 miles south in Freeport, IL. Monroe, WI is just over 40 miles south of Madison, WI, which is home to three tertiary referral hospitals: University of Wisconsin Hospital (UW); SSM's St. Mary's Hospital; and UnityPoint Health's (rated 'AA-') Meriter Hospital. Consequently, TMC faces out-migration pressure, although many of the volumes that leave the market are for tertiary/quaternary services not offered by TMC.

TMC is the market leader for both inpatient and outpatient services. Of the Wisconsin portion of the PSA, TMC captured 46.7% of inpatient admissions and 49.1% of outpatient volumes through nine-months 2015 (based on management data). UW Hospital captures the number two market position for both inpatient admissions (19.3% through nine-months 2015) and outpatient (26.5%). All other hospitals capture less than 10% of PSA admissions and less than 6% of PSA outpatient services.

TMC operates in a quality service area, particularly on the Wisconsin side of the PSA. The unemployment rate in Green County, WI is below the national average and in-line with the state average and the median household income level in Green County is just above state and national averages (U. S. Census Bureau and U. S. Bureau of Labor Statistics data). The unemployment rate in Stephenson County, IL is above the national average, but declining, and Stephenson County's income level is below average. Population trends are generally stagnant in the area.

MANAGEABLE CAPITAL SPENDING

TMC's capital spending plans are manageable in the coming years. Between FY 2016 and FY 2020, the system has approximately $67 million of capital planned, translating to average annual capital spending ratio of 1.1x. The key project over the period is the demolition of the old hospital tower, to be replaced by a new medical office building (MOB), new parking, and green space. The project is estimated to cost roughly $40 million (funded with internal funds) and be complete by 2020. Most other capital spending is focused on outpatient investments.

DEBT PROFILE

TMC has approximately $73 million of pro forma debt outstanding, all of which is fixed rate. The system has one series of public debt (the series 2009 bonds) and two series of private placements (the series 2012A with JPMorgan Chase and series 2012B with Associated Bank). Financial covenants include: minimum debt service coverage of 1.1x in the MTI (1.2x in private placements); and minimum cash on hand of 75 days in the private placements.

TMC does not have new money debt plans in the coming years.

Favorably, TMC has manageable operating leases and does not have exposure to a defined benefit pension plan.