Fitch Upgrades Community Foundation of Northwest Indiana Revs to 'A+'; Outlook Revised to Stable
--$64 million Indiana Finance Authority refunding revenue bonds, series 2015, to 'A+' from 'A';
--$171.1 million Indiana Finance Authority revenue bonds, series 2012, to 'A+' from 'A';
--$124.2 million Indiana Health and Educational Facility Financing Authority hospital revenue bonds, series 2007, to 'A+' from 'A'.
The Rating Outlook is revised to Stable from Positive.
SECURITY
The bonds are secured by a pledge of general revenues and a mortgage lien on the main hospital facilities.
KEY RATING DRIVERS
SUSTAINED OPERATING RESULTS: The rating upgrade to 'A+' from 'A' is supported primarily by healthy operating performance ahead of budget, which drove further balance sheet growth despite increased capital spending. In fiscal 2015 (June 30 year-end) CFNI produced a 13.7% operating EBITDA margin, well in excess of Fitch's 'A' category median and ahead of its 10% budget target. Profitability was driven by strategic growth in ambulatory clinical volume and steady cost controls..
LIMITED CAPITAL NEEDS: While capital spending is expected to remain in excess of depreciation near $50-60 million over the intermediate term, it is expected to be funded with cash flow with no additional debt planned. Further, CFNI's targeted ambulatory growth plans coupled with a manageable 11.2 year average age of plant are consistent with an expectation of manageable capital outlay going forward.
ONGOING LIQUIDITY GROWTH: Balance sheet metrics continue to hold pace with meaningful revenue growth, improving to $544 million in unrestricted cash and investments as of fiscal 2015, equal to 231.7 days of cash on hand (DCOH), 20.7x cushion ratio, and 141.7% cash to debt. This reflects a 55% increase from $352 million in fiscal 2012, when CFNI had 165.9 DCOH. More modest growth is expected to continue, as some increase in capital outlay coupled with expected increases in pension contributions may slow the pace somewhat.
HIGH GOVERNMENTAL PAYOR EXPOSURE: CFNI has a relatively high Medicare and Medicaid payor base totaling 64% of gross revenues in 2015, which can leave the organization susceptible to programmatic reimbursement changes at the state and/or federal level. While Medicaid expansion in Indiana has been largely positive for CFNI in increasing volume and reducing its self-pay exposure, the longevity of state supplemental payments remains uncertain beyond 2017.
RATING SENSITIVITIES
STEADY CASH FLOW: Community Foundation of Northwest Indiana is expected to maintain solid levels of operational cash flow and sustain its balance sheet improvement trend, while maintaining its leading market position. Fitch believes the organization has some debt capacity, although no significant debt issuances are currently planned.
CREDIT PROFILE
CFNI is comprised of a 458 staffed-bed Community Hospital (CH) located in Munster, IN; 200 staffed-bed St Catherine Hospital (SCH) located in East Chicago, IN and 195 staffed-bed St Mary's Medical Center (SMMC) located in Hobart, IN. With the parent, these facilities compose the Obligated Group (OG) and represent approximately 100% of the unrestricted net assets and 99% of total revenues of the consolidate system. Fitch's analysis is based on the consolidated system, which generated $972 million in total revenues in fiscal 2015 (June 30 year-end).
HEALTHY PROFITABILITY
The upgrade to 'A+' reflects CFNI's ongoing revenue growth and strong profitability, ahead of budgeted expectations, coupled with further balance sheet growth. CFNI's operating EBITDA has averaged 12.1% over the past four fiscal years, well ahead of Fitch's 'A' category median of 10.3%. This has been driven in large part by targeted growth efforts, resulting in a 12.8% increase in total revenue over three years. Conversely, consistent attention to efficiency and cost control has meant a 10.5% increase in expenses over the same time frame.
Healthy profitability has resulted in balance sheet growth as well, with unrestricted liquidity up nearly 55% from 2012-2015, or 15.7% per year. Still, this level of liquidity growth is expected to taper going forward, as CFNI continues its strategic growth efforts and contributes to a 77% funded (at fiscal 2015) frozen defined benefit pension plan.
With 5.1x MADS coverage by operating EBITDA in fiscal 2015, Fitch expects CFNI to maintain coverage at or above the 'A' category median. Operating performance is expected to remain steady, with a 12% operating EBITDA budget for fiscal 2016 which would generate 4.7x MADS coverage.
MARKET LEADERSHIP
A leading market position of over 40% within Lake and Porter Counties in northwest Indiana has been a consistent factor in CFNI's ability to recruit and retain a solid medical staff, and makes it a key provider for commercial payors in the area. CFNI has been successful in strategic growth efforts in the desirable Valparaiso area to the east, and its ambulatory centers in both Valparaiso and Schererville have surpassed clinical volume and revenue targets since opening in 2013.
Still, the market also reflects a high level of Medicare and Medicaid volume, which comprise a high 64% of CFNI's gross revenue base. Further, CFNI benefits from approximately $35 million in state Medicaid supplemental reimbursement, under a program with a 2017 current term. This reimbursement could be pressured going forward should changes to this program occur, though the current expectation is renewal beyond 2017.
DEBT PROFILE
At Sept. 30, 2015 CFNI had $368 million in total long term debt, which is 100% fixed rate and includes approximately $50 million in taxable debt. CFNI has $75 million in direct placement debt, of which $50 million terms in 2025 and the remainder in 2037. Maximum annual debt service is $26.3 million per the indenture, and debt service is largely level through 2041. CFNI produced 5.11x debt service coverage and had 227.3 DCOH per its indenture calculation for fiscal 2015.
DISCLOSURE
CFNI covenants to provide annual audited financial statements within 150 days of year end, and quarterly disclosure within 45 days of the close of the first three fiscal quarters and within 60 days of close of the last fiscal quarter to the Municipal Securities Rulemaking Board's EMMA system. Disclosure includes both financial and operating data, and has been timely and thorough.
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