News Release from Fitch
June 28 - Fitch has affirmed its 'A-' rating on $269.3 million Department of Budget and Finance of the State of Hawaii revenue bonds issued on behalf of Hawai'i Pacific Health (HPH), which are listed at the end of the press release.
The Rating Outlook is Stable.
SECURITY Debt payments are secured by a pledge of the gross revenues of the obligated group. A fully funded debt service reserve fund provides additional security for the bond issue.
KEY RATING DRIVERS SOLID FINANCIAL PROFILE: The solid and consistent financial performance reflects HPH's good profitability, sound liquidity, and strong debt service coverage.
TRANSFORMING DELIVERY OF CARE: HPH is embarking on a sustainable healthcare initiative intended to strengthen the organization's position by leveraging its electronic medical record (EMR) and aligning financial incentives around quality and performance. Fitch believes HPH's strategy augurs well for sustained financial performance in a pressured reimbursement environment.
SIZEABLE CAPITAL PLAN: Future capital needs for fiscal 2013 - 2017 total $418 million and will be funded from operations, $100 million of additional debt in fiscal 2014, and philanthropy. The capital plan addresses capacity needs at HPH's flagship hospital, routine maintenance, and other strategic initiatives. Fitch notes that the current rating does not factor in the impact of the additional debt.
LEADING MARKET POSITION: HPH is the largest healthcare provider in the state of Hawaii and statewide inpatient market share was 26.5% in 2011. However, the market is competitive with Queen's Health Systems (QH) maintaining a 19% share.
CREDIT PROFILE Solid Financial Profile Financial performance through the nine-month interim period, ending March 31, 2012, rebounded after more moderate performance in fiscal 2011. Through the interim period, HPH posted a strong 5.1% operating margin, compared to 1.7% and 3.1% in fiscals 2011 and 2010 respectively. The interim profitability, which is ahead of budget, reflects stronger revenue growth due to good commercial contract increases, increased utilization, and higher patient acuity. Further, management continues to exercise good cost control measures. Fiscal 2011 results were impacted by lower patient acuity and an adverse shift in payor mix, specifically Medicare and Medicaid. Management expects 2012 results to exceed budget and is projecting an operating margin of 4.0% or higher.
Historically weak balance sheet measures rose steadily since Fitch's last rating action in July 2010 and are now more in line for the rating level. As of March 31, 2012, HPH had $351.1 million in unrestricted cash and investments, translating into an adequate 148.9 days cash on hand and a favorable 133% cash to debt position, compared to Fitch's respective 'A' category medians of 194.1 days and 113.8%. Balance sheet growth over this period was aided mainly by light capital spending, which was only 108% of depreciation expense in fiscal 2011 and 89.9% in fiscal 2010. Given HPH's large capital plans, cash flow generation exhibited in the interim period will need to be sustained.
Transforming Delivery of Care Through the creation of a clinically-integrated physician hospital organization and partnership with the state's largest commercial payor, Hawaii Medical Service Association (HMSA - Blue Cross/Blue Shield of Hawaii), HPH will leverage its EMR (Epic) to enhance quality, manage utilization, and lower costs. The agreement with HMSA will include a risk based component. Management expects this initiative to yield significant operational savings, lower the cost of providing healthcare at its facilities, and sustain financial performance over the long term. Fitch believes HPH's strategy of partnering with physicians and commercial payors along an accountable care organization model augurs well for sustained financial performance in a reduced reimbursement environment.
Change in Competitive Landscape HPH's operations benefit from its leading inpatient and outpatient market share of 34% and 10%, respectively, in the combined markets of Oahu and Kauai. On a statewide basis, HPH's market share increased to 26.5% in 2011 compared to 25.5% in 2007, compared to QH, which had 19.1% from 17.4%. There are several other providers including Kaiser, which maintained a 9.6% share.
The financially troubled Hawaii Medical Center closed its two hospitals in December 2011. QH recently signed a letter of intent agreement with St. Francis Healthcare System of Hawaii (owner of HMC facilities) to explore the possibility of reopening the Hawaii Medical Center West facility, which is located in the growing area of West Oahu.
HPH reported that while the closure of HMC has led to increased utilization at two of its facilities, Pali Momi and Straub, this volume growth brought about an adverse shift in payor mix. Fitch is concerned that QH's foray in the West Oahu region could negatively impact HPH's market position. In response to the QH announcement, HPH plans to increase inpatient capacity and expand outpatient services at its Pali Momi facility, coupled with a plan to develop an outpatient center in Kapolei, which is approximately five miles west of HMC West. Additionally, HPH intends to continue to foster and develop its physician relationships in the West Oahu area to protect its market share.
Sizable Capital Needs HPH's capital needs over the 2013 - 2017 period are sizable and total approximately $418 million, half of which is dedicated to routine operations and maintenance. The remainder is dedicated toward capacity expansion and implementation of HPH's strategic initiatives. Approximately $155 million will fund the construction cost of a new neonatal and pediatric intensive care building at its flagship facility, Kapi'olani Medical Center, with construction slated to begin in late calendar year 2013 or early 2014.
Fitch believes that HPH will need to maintain strong cash flow generation to help fund its sizable capital plan. Along with operating cash flow, HPH will issue $100 million in debt in fiscal 2014 and will rely on $30 million in philanthropy to help fund the cost of the new building. To date, HPH has received $16 million in pledges. Although this rating action does not incorporate the additional debt, Fitch believes HPH has some additional debt capacity if solid cash flow generation is sustained.
Debt Profile As of March 31, 2012, HPH had $264 million in long term debt outstanding. The debt portfolio is conservative with only 19% in variable-rate demand bonds backed by a letter of credit (LOC) from JP Morgan Chase. The five-year LOC is expected to expire in 2016. HPH has $50 million notional amount of floating- to fixed-rate swaps outstanding. The negative mark-to-market valuation was $15.2 million as of May 31, 2012, requiring $12.2 million in collateral posting.
Debt ratios are moderate with maximum annual debt service (MADS) comprising 2.3% of total 2011 operating revenue. MADS coverage by EBITDA is very good at 4.6 times (x) in fiscals 2010 and 2011, and 5.3x through the nine months ended March 31, 2012.
Leadership Transition Fitch notes that a management succession plan is underway whereby HPH's current CEO will retire in 2015 and be replaced by the current chief operating officer, whose title is now President & CEO of Operations. Fitch believes that the transparency with which HPH is undertaking this leadership transition is a stabilizing force to HPH's future performance.
Organization Hawai'i Pacific Health constitutes the largest healthcare provider system in the State of Hawaii and is a major employer in the State. The Health System includes four hospitals, three physician groups, and 49 outpatient clinics and service sites. It has approximately 5,500 employees, including more than 350 employed physicians, and is affiliated with nearly 1,300 private practice physicians. The four hospitals in the Health System have 553 licensed acute care beds and 76 bassinets with approximately 34,750 admissions annually. In fiscal year 2011, HPH reported $901.6 million in total revenue.
Disclosure HPH covenants to provide annual and quarterly disclosure through the Municipal Rule Making Board's EMMA system.
Fitch rates the Hawai'i Pacific Health revenue bonds 'A-':
- --$61.2 million revenue bonds, series 2010B;
- --$101.9 million revenue bonds, series 2010A;
- --$30 million revenue bonds, series 2004A;
- --$50 million revenue bonds, series 2004B underlying rating only (bonds are supported by a letter of credit);
- --$14.4 million revenue bonds, series 1998;
- --$11.7 million revenue bonds, series 1993.