Aug 24 2009
Fitch Ratings has downgraded to 'BBB+' the underlying rating on approximately $464 million outstanding bonds issued by the Louisiana Public Facilities Authority on behalf of Ochsner Clinic Foundation (OCF) ($380 million series 2007A) and Ochsner Community Hospitals (OCH) ($83.9 million series 2007B). OCF guaranties the debt of OCH and both are part of Ochsner Health System (OHS), which is the sole corporate member of OCF and OCH. It is OHS's consolidated financial profile which forms the analytical base for the rating.
The Rating Outlook is Stable.
The downgrade is due primarily to OHS's increased risk profile driven by slower realization of positive operating metrics consistent with the recovery of the New Orleans market and substantially weaker liquidity. Recent expansion along with the equity losses and impairments caused by the recession have reduced OHS's financial flexibility and have materially weakened its liquidity metrics, which no longer reflect appropriate levels expected of 'A' rated entities. Since Fitch's last rating action, OHS's unrestricted cash and investments (net of $33 million in short-term debt proceeds) has been cut in half (to $164.8 million at June 30, 2009 from $313.1 million at fiscal year end (FYE) 2006) while its operating expenses, due to its significant growth have increased by 57% (up to $1.47 billion at FYE2008 from $936 million at FYE2006). These figures combined to decrease days cash on hand to 42.2 days at June 30, 2009 from 135.9 days at FYE2006, well below the 'BBB' median of 113.7 days. Despite its lower level of liquidity and recent operating performance, OHS remains lightly leveraged (maximum annual debt service [MADS] as a percentage of total revenues at 1.8% at FYE08) and adequately covers its MADS with operating EBITDA at 2.6 times (x) at FYE08. Further, all of its debt outstanding is long-term fixed rate, which mitigates some of the acute concerns regarding its liquidity erosion.
The Stable Outlook reflects Fitch's expectation that operating results demonstrated through the interim period ending June 30, 2009 will continue the current positive trajectory. On the heels of focused efforts by OHS management to leverage its increased scale to match expenses with utilization, operating performance has improved each quarter since the beginning of 2008. Furthermore, OHS reports an operating profit of $4.5 million through the first six months of fiscal 2009. Fitch believes OHS's interim results should be sustainable, allowing it to build liquidity over time resulting in lower overall credit risk and greater financial flexibility going forward.
OHS's growth (adding four acute care facilities post-Katrina) has now positioned it as the combined market share leader in the metro New Orleans area (rising to 32.2% of inpatient discharges at FYE08 from 15.5% at FYE05), which lends credit strength going forward, and especially as the operating environment in New Orleans and the nation stabilizes. Having a well-aligned multispecialty physician clinic associated with its flagship facility (employed physicians totalling 718 at FYE08) has served OHS well through the recent difficult operating environment and should prove to be a strong credit factor moving forward, especially in light of health reform that appears to favor well-aligned organizations.
Despite having an underfunded defined benefit pension plan, Fitch does not view OHS's funding status as a significant credit risk. OCF does have a defined benefit plan that was partially frozen in 2006, which has an unfunded recorded liability of $112 million at FYE2008. OHS does project contributing approximately $157 million between 2009-2017 to the plan, of which $15.2 million is scheduled for 2009 and 2010. OHS is in the final stages of a plan redesign which management believes will be cash neutral; however, it will likely serve to limit volatility related to market swings and reduce pension expense by $20 million over the next 10 years.