|[July 20, 2012]
Fitch Affirms Denver Health's (CO) Revs at 'BBB+'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'BBB+' rating on the following bonds
issued by the Denver Health & Hospital Authority (Denver Health):
--$28,560,000 healthcare recovery zone facility revenue bonds, series
--$5,120,000 healthcare revenue bonds, series 2009A;
--$120,505,000 healthcare revenue bonds, series 2007A;
--$68,250,000 healthcare revenue bonds, series 2007B.
The Rating Outlook is Stable.
Bonds are secured by a pledge of the gross revenues of the obligated
group. A debt service reserve fund provides additional security.
KEY RATING DRIVERS
ESSENTIAL SERVICE PROVIDER: Denver Health is an essential service
provider in the Denver metropolitan area assuming the roles of the
city's safety net hospital and public health system while providing care
for approximately one-third of Denver's residents.
RELIANCE ON (News - Alert) GOVERNMENT FUNDING: Denver Health's high exposure to
Medicaid and significant funding from other government sources makes the
system vulnerable to state and federal budget cuts.
HISTORICALLY LIGHT PROFITABILITY: Operating margin is light for the
rating category averaging 0.2% since fiscal 2008 and equaling 0.8% in
fiscal 2011 (Dec. 31 year end).
LOW DEBT BURDEN: A light debt burden, with maximum annual debt service
(MADS) equal to a low 2.0% of revenue, has allowed for solid MADS
coverage equal to 3.8x operating EBITDA in fiscal 2011 relative to
Fitch's 'BBB' category median of 2.3x.
SOLID LIQUIDITY RELATIVE TO DEBT: Unrestricted liquidity increased 17%
since fiscal 2010 to $155.9 million at March 31, 2012 and is solid
relative to debt with 9.8x cushion ratio, however liquidity remains weak
relative to expenses with 82.2 days cash on hand.
Denver Health is an integrated health care delivery system with an
extremely broad operating platform in the Denver metropolitan area. In
addition to Denver Health Medical Center, a 525 licensed bed acute care
hospital, Denver Health operates the city's public health system, the
Rocky Mountain Center for Medical Response to Terrorism, the Rocky
Mountain Regional Trauma Center, and a network of federally qualified
health centers. Denver Health's essential nature to the Denver
metropolitan area is highlighted by the fact that it provides healthcare
services to one-third of Denver's residents and 40% of Denver's children.
Given its high level of exposure to government funding, Denver Health is
susceptible to state and federal budget cuts. As the city's safety net
provider, Denver Health is the largest recipient of disproportionate
share hospital (DSH) funding in Colorado and is among the largest
Section 330 Public Health Service grant recipients in the United States.
Additionally, Medicaid accounts for a high 33.1% of gross revenues and
is reflective of Denver Health's role as a safety net provider for the
medically indigent and uninsured. Total supplemental funding (net of
provider fee expense) was $113.9 million in fiscal 2010, $91.7 million
in fiscal 2011 and projected to be $87.6 million in fiscal 2012.
However, Denver Health's status as the city's safety net provider
provides a level of perating stability and some insulation from
potential state Medicaid cuts.
Operating profitability has been historically light, with operating
margin averaging 0.2% since fiscal 2008 and equaling 0.8% in fiscal 2011
(operating income of $6.6 million). Operating margin improved from
negative 0.4% in fiscal 2010 to 0.8% in fiscal 2011 due to increased
volumes and ongoing cost control efforts. Despite the low profitability
levels, Denver Health's light debt burden allows for solid MADS coverage
which equaled 3.8x operating EBITDA in fiscal 2011 and is strong
relative to Fitch's 'BBB' category median of 2.3x.
Operating profitability during the three month period ending March 31,
2012 (the interim period) was negatively impacted by decreased inpatient
volumes and increased observation stays. Management continues to
implement LEAN initiatives to increase operating efficiencies and has
engaged a consultant to identify potential areas to increase
productivity related to workforce management.
Unrestricted cash and investments increased 17% since fiscal 2010 to
$155.9 million at March 31, 2012, providing solid cushion for payment of
debt service. The increase was primarily due to cash flows and the
release of $10.5 million from trustee held funds for the reimbursement
of prior capital expenditures. Liquidity metrics are solid relative to
debt with 9.8x cushion ratio and 71.7% cash to debt relative to Fitch's
'BBB' category medians of 8.8x and 79.8%. However, liquidity remains
weak relative to operating expenses with 82.2 days cash on hand at March
At March 31, 2012, Denver Health had approximately $254 million of
long-term debt outstanding, including $212 million of long term bonds
and $42 million of long-term notes and capital leases. Approximately 70%
of outstanding bonds are fixed rate with the remainder in an underlying
variable rate mode and swapped to fixed rate. The variable rate bonds
are floating rate notes. The fixed payor swap does not have any
collateral posting requirement as long as Denver Health's credit rating
remains above investment grade.
Denver Health's main campus has historically been capacity constrained.
However, the system's new Pavilion M opened in November 2011 and is
expected to provide for increased capacity at the main campus. Future
capital needs total $44 million for fiscal 2012, $40 million for fiscal
2013 and $42 million for fiscal 2014 compared to EBITDA of $68 million
in fiscal 2011.
After serving in the position for over 20 years, Denver Health's CEO
announced that she will retire in September 2012. A national search for
a new CEO is underway and management expects to fill the position by the
end of summer 2012. The remaining senior management team has had a long
tenure with Denver Health.
The Stable Outlook reflects Fitch's expectation that Denver Health will
continue its positive operating profitability going forward. Management
is contemplating issuing approximately $36 million of additional debt to
fund a new federally qualified health clinic. Fitch will assess the
potential impact of any future debt as plans are finalized.
Denver Health covenants to provide annual disclosure within 150 days
after the end of the fiscal year and quarterly disclosure within 45 days
of the end of each fiscal quarter. Disclosure is provided through the
Municipal Securities Rulemaking Board's EMMA system. Denver Health's
disclosure practices are excellent, consisting of a detailed management
discussion and analysis, balance sheet and income statement, utilization
statistics and other supplemental material.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (Aug. 12,
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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