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TMCNet:  Fitch Upgrades St. Francis Regional Medical Center (MN) Bonds to 'A'; Outlook Stable

[May 28, 2014]

Fitch Upgrades St. Francis Regional Medical Center (MN) Bonds to 'A'; Outlook Stable

CHICAGO --(Business Wire)--

Fitch Ratings has assigned an 'A' rating to the approximately $43.2 million, series 2014 city of Shakopee, Minnesota's health care facilities revenue bonds (St. Francis Regional Medical Center).

In addition, Fitch upgrades to 'A' from 'A-' the approximately $48.2 million, series 2004 city of Shakopee, Minnesota bonds issued on behalf of St. Francis Regional Medical Center (that will be refunded with the series 2014 issuance).

The Rating Outlook is revised to Stable from Positive.

Proceeds from the series 2014 bonds will be used to refund St. Francis Regional Medical Center's series 2004 bonds and pay for certain costs of issuance. The bonds, which will be issued as fixed rate, are expected to price the week of June 2 via negotiation.

SECURITY

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

KEY RATING DRIVERS

SUSTAINED STRONG FINANCIAL PERFORMANCE: The rating upgrade to 'A' is driven by St. Francis Regional Medical Center's (St. Francis) consistently strong operating profitability and debt service coverage levels that have consistently outpaced the 'A' category medians. Although operating profitability is expected to decline to 5.4% in fiscal 2014 and operating EBITDA margin is expected to be about 15%, Fitch believes that these ratios continue to support the higher rating level.

IMPROVING LIQUIDITY: St. Francis' liquidity against expenses was 194.2 days cash on hand as of March 31, 2014 (three- month interim) compared to the 'A' category median of 196.3 days. Cash to debt and cushion ratio have improved year-over-year for the last three years but remain somewhat light compared to the medians but sufficient for the rating level.

SOLID DEBT SERVICE COVERAGE: With this refinancing, pro forma maximum annual debt service (MADS)falls to about $3.5 million from about $4 million, resulting in pro forma debt service coverage levels of 6.6x in fiscal 2013 and 4.3x through the three-month interim ended March 31, 2014 and healthy against the 'A' category median of 3.8x

BENEFICIAL OWNERSHIP STRUCTURE: St. Francis benefits from its ownership structure, which is currently a 37.5% split ownership by Allina Health (rated 'AA-'; Stable Outlook) and HealthPartners (Not rated by Fitch; Park Nicollet Health Services merged with HealthPartners January 2013) and 25% ownership from Critical Access Group (a subsidiary of Essentia Health rated 'A-'; Stable Outlook). This structure provides St. Francis with administrative support, purchasing, strategic planning and access to physicians.

RATING SENSITIVITIES

STABILITY EXPECTED: Based on St. Francis' steady operating performance and growing balance sheet, along with its guidelines for distribution to members, Fitch does not expect any material deterioration to its financial profile.

CREDIT PROFILE

St. Francis operates an 86-bed acute care hospital (48-staffed beds) in Shakopee, MN, approximately 23 miles southwest of downtown Minneapolis. Total patient revenues for fiscal 2013 were $120.9 million. St. Francis is jointly owned by Allina Health System (Allina), HealthPartners and Critical Access Group. Fitch views the benefits of St. Francis' relationship with the joint members as a credit positive. Although one of Fitch's main credit concerns is St. Francis' small revenue base, this is partially mitigated by its ownership structure, which includes benefits such as access to a strong physician network and ability to utilize Allina's electronic medical record platform as well as participate in Allina's treasury program. Allina is responsible for managing day-to-day operations, operating and capital budgeting, strategic planning, and cash management.

CONSISTENTLY STRONG OPERATING PERFORMANCE

St. Francis' operating performance has been consstently solid over the last few years with a 7.1% operating margin in fiscal 2013, 8% operating margin in fiscal 2012, 8.4% in fiscal 2011 and 10.1% in fiscal 2010; all well exceeding the 'A' category median of 3.3%. Operating EBITDA has also outperformed the 'A' category median, averaging 16.7% over the last four years (2010 - 2013). Strong operating performance has been driven by continued standardization and focus on expense management. Although St. Francis is budgeting a 5.4% operating margin and 15% operating EBITDA margin in fiscal 2014, which are below 2013 results, Fitch believes that this is still in line with an 'A' rating. St. Francis has limited capital needs over the next three years and Fitch expects St. Francis to maintain its strong operating cash flow. The distribution to members is subordinate to debt service and is limited by certain financial targets.


FAVORABLE BUT COMPETITIVE SERVICE AREA

The service area, located just to the southwest of the Twin (News - Alert) Cities, has favorable characteristics including population growth and above-average median household income. Utilization growth has been relatively flat over the last few years; however, 60% of St. Francis' revenue is from outpatient services. St. Francis does not currently employ any physicians but about 45% of its active medical staff is employed by Allina or HealthPartners. St. Francis maintains the leading market share in its service area at 33.8% as of September 2013, compared to its next closest competitor, Fairview Health Services with 24.3% (across three hospitals). St. Francis has lost market share to Ridgeview, mostly due to a free-standing ED and ambulatory surgery center at Ridgeview and the loss of seven primary care physicians over the last year at St. Francis. Fitch does not expect significant additional deterioration in the market share position.

IMPROVING LIQUIDITY

At March 31, 2014 (three-month interim), unrestricted cash and investments equaled $56.3 million, which equates to 194.2 days cash on hand, 91.7% pro forma cash to debt (including the medical office building debt) and 16.1x cushion ratio, which have improved year-over-year and are more in line with the respective 'A' category medians of 196.3 days, 129.2% and 15.6x. Liquidity has been stable over the last few years but has not grown significantly, reflecting significant capital expenditures and distribution to owners. Capital spending is moderate going forward and St. Francis' distribution to owners is based on a commitment to maintain at least 175 days cash on hand.

MODERATE DEBT BURDEN

St. Francis' pro forma debt burden will remain manageable with $45.6 million of debt outstanding after the series 2014 issuance, which is 96% fixed rate and 4% variable-rate demand bonds (VRDBs). The letter of credit (LOC) on the outstanding series 1987 VRDBs (not rated by Fitch) expires on Jan. 1, 2015 but has an auto-renew for an additional 12 months and the underlying bonds mature in September 2016. Pro forma MADS of about $3.5 million accounts for 2.9% of fiscal 2013 revenues, which is favorable compared to the 'A' category median of 3.1%. Pro forma MADS coverage by EBITDA was a very healthy 6.6x in fiscal 2013 compared to the 'A' category median of 3.8x. The debt and MADS figure exclude a $15.8 million medical office building (MOB) financing that is recorded on St. Francis' balance sheet (cash-to debt ratio, however, includes the MOB). The MOB was financed through a joint venture in which St. Francis is a part owner in and the debt service is paid through the lease income from the MOB. Allina and St. Francis have master leases on the MOB.

DISCLOSURE

St. Francis covenants to disclose annual and quarterly information to EMMA. Annual and quarterly financial statements can also be found on EMMA. Quarterly statements include a balance sheet, income statement, utilization statistics, cash flow statement and management discussion and analysis.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 3, 2013;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832039

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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