Market Overview

Fitch Assigns 'AA' to Advocate Health Care's (IL) 2011 Revs; Outlook Stable

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings assigns the following ratings to the expected issuance of Illinois Finance Authority bonds issued on behalf of Advocate Health Care Network (Advocate):

--$44.6 million fixed rate revenue bonds, series 2011A, 'AA';

--$70 million Windows variable rate demand revenue bonds, series 2011B, 'AA/F1+';

--$22 million put bonds, series 2008C-3B, 'F1+'.

In addition, Fitch affirms the 'AA' rating on approximately $990 million revenue bonds issued by the Illinois Health Facilities Authority and the Illinois Finance Authority on behalf of Advocate, and its 'F1+' short-term ratings on the following Illinois Finance Authority bonds based upon self liquidity provided by Advocate:

--$56.1 million put bonds, series 2003A&C;

--$145.5 million put bonds, series 2008A-1,2&3.

The series 2011A-B bonds will price the week of Sept. 12, 2011 via negotiation, and will be used for various capital projects, reimbursement for prior capital expenditures, and to redeem the series 1998A-B bonds and pay costs of issuance. Advocate will also issue approximately $100 million in series 2011C-D bonds, under a direct purchase agreement. Fitch was not asked to rate the series 2011C-D bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are unsecured obligations of the obligated group. They are not secured by a pledge of, mortgage on, or security interest in any obligated group assets.

KEY RATING DRIVERS

Leading Market Position: Advocate is the largest healthcare provider in the State of Illinois and maintains a leading market share that is more than double its nearest competitor in the highly competitive six-county Chicago metropolitan area.

Integrated Delivery Platform: Advocate's integrated delivery approach facilitates increased physician alignment, efficient coordination of care and effective contracting.

Substantial Balance Sheet Strength: Advocate maintains consistent and substantial balance sheet strength, with liquidity indicators that well exceed Fitch's 'AA' category median ratios.

Manageable Pro Forma Debt Level: Advocate's pro forma debt profile remains manageable, with coverage and capital ratios which compare favorably to Fitch's 'AA' category median metrics.

Significant Capital Plans: Following several years of light outlays, Advocate is planning for significant expenditures through 2013. However, Advocate continues to generate very strong coverage and cash flow levels which should continue to offset its capital needs.

CREDIT PROFILE

A key rating consideration continues to be Advocate's strong market position. Advocate remains the market-share leader in the six-county Chicago metropolitan area with a 15.6% market share through Dec. 30, 2010 compared with its closest competitor, Resurrection Healthcare (rated 'BBB+' by Fitch), with a 6.6% market share. Fitch believes Advocate's long-standing leading market position and array of services provided across its integrated delivery system should provide some protection from competing hospitals. Furthermore, Advocate has a highly aligned medical staff with over 775 employed physician full time employees (FTEs) and its 3,400 member physician-hospital organization (PHO). Fitch views Advocate's physician alignment favorably as it allows for efficient coordination of care and effective contracting. Still, despite its leading position, Advocate faces formidable competition from an array of academic medical centers and several well-regarded suburban community hospitals. Of additional concern is the legislative environment in Illinois, including increased scrutiny of the property tax exemption held by nonprofit hospitals.

At June 30, 2011, Advocate's unrestricted cash and investments totaled $3.02 billion, increasing from $2.92 billion at Dec. 31, 2010. Liquidity metrics at June 30 are very strong with 280.9 days cash on hand (DCOH), a pro forma cushion ratio of 45.8 times (x) and cash and investments equating to 249% of pro forma long-term debt; all of which handily exceed the respective 'AA' category medians of 214.7 DCOH, 19.6x and 149.9%. Advocate is counter-party to three floating to fixed rate swaps with a total notional value of $326.3 million. The market to market on the swaps at June 30, 2011 was approximately negative $44.3 million with required collateral posting of roughly $20.7 million.

The 'F1+' rating reflects the strength of Advocate's cash and investment position to pay the cost of a mandatory tender on the series 2011B, 2003A, 2003C, 2008A-1, 2008A-2, 2008A-3 and 2008C-3B put bonds. At June 30, 2011, Advocate's eligible cash and investment position available for same-day settlement (see Fitch's report 'Criteria for Assigning Short Term Ratings Based on Internal Liquidity' dated June 20, 2011) would cover the cost of the maximum mandatory put on any given date well in excess of Fitch's criteria of 1.25x. Advocate provided Fitch with an internal procedures letter outlining the procedures to meet any un-remarketed puts. In addition, Advocate provides monthly liquidity reports to Fitch to monitor the sufficiency of Advocate's cash and investment position relative to its mandatory put exposure.

Advocate's pro forma debt burden remains among the lightest in Fitch's health care portfolio. The total par amount of the series 2011 issuance is expected to equal approximately $214 million. Approximately $12 million will be used to refund the series 1998A bonds. The remaining proceeds will be used to finance approximately $130 million in capital projects and $70 million in reimbursement for prior capital expenditures. Post-issuance, Advocate will have long-term debt of $1.2 billion, of which $322 million are weekly VRDBs, $70 million are Windows VRDBs, and $200 million are put bonds. Pro forma MADS is estimated at $65.8 million as provided by the underwriter. Through June 30, 2011, pro forma MADS as percentage of revenues was a low 1.4% and pro forma debt equated to 1.8x EBITDA; both of which are lighter than the 'AA' category medians of 2.6% and 3.4x, respectively. Further, pro forma debt to capitalization was a low 25.2% against Fitch's 'AA' category median of 34%.

Following several years of very light capital spending, Advocate has a sizeable five-year capital plan which includes an approximate $475 million in planned expenditure in 2011. Fitch believes Advocate's cash flow levels and current borrowing should offset these costs, and additional borrowing is not anticipated over the near term. Advocate's solid profitability through June 30, 2011, coupled with a light pro forma debt burden resulted in robust pro forma MADS coverage of 10.3x by EBITDA and 7.4x by operating EBITDA. Robust operations have consistently resulted in very healthy operating cash flow, averaging over $400 million in operating EBITDA since 2007. Further, improved investment income of $167 million in 2010 bolstered Advocate's EBITDA and excess margins to 17.8% and 9.2% respectively, both well in excess of Fitch's 'AA' category medians of 10.5% and 3.8%, respectively. This trend continued through the June 30, 2011 interim period, with a 14.2% EBITDA margin and 9.7% excess margin.

Advocate is an integrated health care system composed of 10 acute care hospitals, two integrated children's hospitals, a home health agency, and over 200 sites located throughout the Chicago metropolitan area and in Bloomington, IL. Total revenues in fiscal 2010 were $4.44 billion. Advocate's disclosure is outstanding and includes annual audited financial statements as well as quarterly unaudited balance sheet, income statement, cash flow statement, an extensive MD&A, and utilization statistics. The information is posted to the Municipal Securities Rulemaking Board's EMMA system. In addition, management holds quarterly calls with rating agencies and annual calls with investors. Fitch considers Advocate's disclosure standards to be best practice.

In addition to the sources of information identified in Fitch's Revenue Supported Rating Criteria, this action was informed by information from Citigroup as Underwriter.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 20, 2011;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011;

--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' dated June 20, 2011.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637129

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 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 Ratings
Primary Analyst
Emily E. Wadhwani, +1-312-368-3347
Associate Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Adam Kates, +1-312-368-3180
Director
or
Committee Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com

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