Fitch Rates Indiana University Health Series 2015A Revs 'AA-'; Outlook Positive

Fitch Ratings has assigned an 'AA-' rating to the following bonds expected to be issued on behalf of Indiana University Health (IU Health):

--$277,690,000 Indiana Finance Authority hospital revenue bonds series 2015A.

Additionally, Fitch has affirmed the 'AA-' rating on the following bonds issued on behalf of IU Health:

Indiana Health and Educational Facility Financing Authority

--$327,170,000 hospital revenue bonds series 2006A;

--$327,100,000 hospital revenue refunding bonds series 2006B.

Indiana Finance Authority

--$69,945,000 hospital revenue bonds series 2014A;

--$186,345,000 hospital revenue refunding bonds series 2011 A-E;

--$151,550,000 hospital revenue refunding bonds series 2011 J&K;

--$155,060,000 hospital revenue bonds series 2011N.

The series 2015A bonds are expected to be issued as fixed rate bonds. In addition to the 2015A bonds, IU Health expects to issue approximately $193 million of series 2015B/C direct placement variable rate bonds. Fitch will not rate the series 2015B/C bonds. Combined bond proceeds will be used to advance refund the series 2006A bonds, currently refund the series 2011J and 2011K bonds, to refinance a taxable term loan and to pay costs of issuance. The series 2015A bonds are expected to price the week of March 30 through negotiation.

The Rating Outlook remains Positive.

SECURITY

The bonds are secured by a pledge of the gross revenues of the IU Health obligated group.

KEY RATING DRIVERS

BROAD OPERATING PLATFORM: The Positive Outlook reflects IU Health's strengthened liquidity metrics, consistently strong operating profitability, robust coverage and the strength derived from its broad operating platform. Over the past decade, IU Health's operating platform has grown into a statewide integrated delivery system operating 19 hospitals, including the state's only academic medical center, the only Level 1 pediatrics trauma center and one of two level 1 trauma centers in the state. Additional operations include a health plan with approximately 135,000 lives.

STRONG MARKET POSITION: IU Health has maintained a leading 27.8% market share in its primary service area (PSA) while successfully expanding its statewide presence, creating diversification of revenue sources and adding further credit stability.

STRONG OPERATING PROFITABILITY: Operating profitability has remained consistently strong due to a combination of expense management initiatives, including consolidation of services subsequent to the system's statewide expansion and the enactment of Indiana's Medicaid hospital assessment fee (HAF) program, which combined to offset declining inpatient volumes in fiscal 2013 and fiscal 2014. Operating EBITDA margin equaled 12.1% in fiscal 2013 and 19.3% in fiscal 2014.

MODERATE DEBT BURDEN: IU Health's debt burden has significantly moderated with maximum annual debt service (MADS) decreasing from 5.1% of revenue in fiscal 2008 to 2.2% in fiscal 2014. Pro forma MADS coverage by EBITDA equaled 5.9x in fiscal 2013 and a robust 9.2x in fiscal 2014.

STRENGTHENED LIQUIDITY: Reflecting the strong cash flows, unrestricted cash and investments increased 41.2% since fiscal 2012 to $3.6 billion at December 31, 2014 equating to 284 days cash on hand, 28.6x cushion ratio and 214.5% cash to debt. While liquidity was historically light, the improved liquidity metrics are now consistent for the rating category.

RATING SENSITIVITIES

LARGE CAPITAL PROJECTS: A rating upgrade is currently precluded due to contemplated capital projects which include a replacement hospital at IU Health's Bloomington campus and consolidation of IU Health's two academic medical centers in Indianapolis. Project planning is currently ongoing and further details are expected in the next six months. Further clarity on the timing and cost of the projects, including the projected impact to liquidity and leverage metrics, will be needed before any positive rating movement.

CREDIT PROFILE

IU Health, headquartered in Indianapolis, IN, operates 19 hospitals throughout Indiana. Although the IU Health obligated group and obligated affiliates accounts for only approximately 75% of total consolidated assets and 54% of consolidated operating revenue, Fitch's analysis is based on IU Health's consolidated financial statements which currently includes the debt of the Rehabilitation Hospital of Indiana Obligated Group. Total operating revenue equaled $5.7 billion in fiscal 2014 (Dec. 31 year end; draft audit).

The system is in the process of evaluating a transaction whereby IU Health would transfer all or a portion of IU Health LaPorte, including IU Health Starke, to an unaffiliated third party. IU Health LaPorte represents 5.4% of the obligated group's operating revenue (including obligated affiliates). Fitch does not expect the transfer of the entities to materially impact IU Health's credit profile.

BROAD OPERATING PLATFORM

IU Health completed a rapid growth phase over the past decade, increasing from six hospitals with approximately $1 billion in operating revenue in 2000 to 18 acute care hospitals and a rehabilitation hospital with $5.7 billion in operating revenue in fiscal 2014. IU Health includes one of two level 1 trauma centers in Indiana, the state's only level 1 pediatric trauma center, one of the nation's largest transplant programs and the only academic medical center in Indiana through an affiliation with the IU School of Medicine. Additionally, IU Health operates a health plan with approximately 135,000 covered lives and an accountable care organization with approximately 39,500 lives.

The formation of a statewide academic integrated delivery system with a substantial operating platform is viewed favorably by Fitch and should increase credit stability through diversification of service areas and revenue sources. The integrated delivery system, with a health plan, should position IU Health well for health care reform related initiatives and population health management.

STRONG MARKET POSITION

Concurrent with its statewide growth, IU Health maintained its leading 27.8% market share in its PSA which is defined as the nine county Indianapolis metropolitan area. Primary competitors include St. Vincent's (part of Ascension Health, rated 'AA+' by Fitch) with 20.4% market share and Community Health Network with 23.1%. No other hospital system holds greater than 10% market share in the PSA.

STRONG OPERATING PROFITABILITY

Operating profitability remained strong in both fiscal 2013 and further increased in fiscal 2014. Operating EBITDA margin averaged 13.9% between fiscal years 2009 and 2014, increasing to a robust 19.3% in fiscal 2014, easily exceeding Fitch's 'AA' category median of 11%. The strong operating performance reflects continued consolidation, integration and expense management initiatives.

Fiscal 2014 profitability was bolstered by the resumption of Indiana's HAF program in fiscal 2014. The HAF program was first enacted in 2012 through July 1, 2013 and was renewed in 2014 retroactive back to July 2013. IU Health received $514.7 million of HAF revenue in fiscal 2014, including $166.7 million related to fiscal 2013. Excluding the net benefit related to fiscal 2013, operating profitability remained solid in fiscal 2014 with operating and operating EBITDA margins of 12.6% and 18.2%, exceeding Fitch's 'AA' category medians of 3.9% and 11%. This compares to fiscal 2013 performance (including the HAF revenue received in fiscal 2014 attributable to fiscal 2013) with a 7.6% operating and 13.3% operating EBITDA margins. Management is budgeting for operating and operating EBITDA margins of 9.9% and 15.8% in fiscal 2015 which Fitch views as reasonable.

MODERATE DEBT BURDEN

The series 2015A bond issuance will not materially change IU Health's debt profile as the bonds will refund existing bonds, however pro forma MADS for the consolidated system is expected to decrease to $127 million from $131 million. However, pro forma MADS occurs in fiscal 2015 after which pro forma MADS further declines to $125 million thereafter. Additionally, MADS had previously declined from $161 million to $131 million in fiscal 2014 primarily due to the payment of a bullet maturity.

A significant portion of IU Health's expansion was funded through debt issuance resulting in the increased leverage in fiscal 2008. IU Health's leverage and debt burden continues to moderate with debt to capitalization decreasing from 51.6% in fiscal 2008 to 26.7% at December 31, 2014. Additionally, MADS as a percent of revenue decreased from 5.1% in fiscal 2008 to a moderate pro forma 2.2% in fiscal 2014.

Strong cash flow and the moderate debt burden combine to provide for solid pro forma MADS coverage by EBITDA of 5.9x in fiscal 2013 and 9.2x in fiscal 2014. Excluding the HAF revenue and expenses received in fiscal 2014 attributable to fiscal 2013, fiscal 2014 MADS coverage by EBITDA remains strong at 8.4x.

IMPROVED LIQUIDITY

Unrestricted liquidity has continued to strengthen, increasing 41.2% since fiscal 2012 to $3.6 billion at December 31, 2014. The continued improvement is due to strong cash flow, solid investment returns, moderate capital spending and receipt of the retroactive HAF funds in fiscal 2014. Liquidity metrics of 284 days cash on hand, 28.6x cushion ratio and 214.5% cash to debt now exceed Fitch's 'AA' category medians of 277.1 days, 26.5x and 178.5%, respectively.

LARGE CAPITAL PROJECTS

Capital plans currently contemplate two large projects, including a replacement hospital at IU Health's Bloomington campus and consolidation of IU Health's two academic medical centers in Indianapolis. IU Health currently operates two academic medical centers in downtown Indianapolis (Methodist Hospital and University Hospital). IU Health may consolidate the two downtown campuses into a single campus. Project planning is currently ongoing, but further clarity is expected in the next six months. While Fitch views the replacement hospital project and consolidation plan favorably, as the consolidation is expected to result in the elimination of redundant services and increased operating efficiencies, upward rating movement is currently precluded until more details are available so that Fitch can assess any related impact to liquidity and leverage metrics.

DEBT PROFILE

IU Health had $1.7 billion of total debt outstanding at Dec. 31, 2014. The debt portfolio is comprised of 61.5% underlying fixed rate, 26.5% synthetic fixed rate and 12% variable rate bonds. The system is counterparty to 12 fixed payor swaps with a total notional amount of $449 million and eight basis swaps with a total notional amount of $1.5 billion. IU Health has not had to post collateral related to its swaps since 2011.

DISCLOSURE

IU Health covenants to provide annual disclosure within 120 days of fiscal year end and quarterly disclosure within 45 days of each fiscal quarter end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 16, 2014

--'Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982030

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