Fitch Affirms Immanuel Health Systems, NE's Revs at 'A-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

In the course of ongoing surveillance, Fitch Ratings has affirmed the 'A-' rating on the following bonds issued on behalf of the Immanuel Health Systems Obligated Group (IHS):

--$38,355,000 series 2010 Hospital Authority No. 1 of Lancaster County, NE;

--$6,460,000 series 2010 Hospital Authority No. 1 of Sarpy County, NE;

--$19,615,000 series 2010 Hospital Authority Auth No. 2 of Douglas County, NE.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge of the obligated group members, a first mortgage on each of IHS' five communities, and a fully funded debt service reserve fund.

KEY RATING DRIVERS

CONSISTENTLY HIGH OCCUPANCY: IHS' occupancy has been consistently above 95% in its independent living units (ILU) and assisted living units (ALU) historically. In the six months ended Dec. 31, 2011 (interim period), occupancy was 95.6% in ILUs and 96.0% in ALUs.

WEAKER CONSOLIDATED OPERATING RESULTS: IHS' consolidated financial ratios were weaker in FY 2011 (June 30 year-end) due mostly to more than $2 million in startup costs related to a Program of All-Inclusive Care for the Elderly (PACE) program outside the obligated group (OG). OG results (excluding PACE) were more consistent with prior year performance and the rating level.

ADEQUATE LIQUIDITY: IHS had unrestricted cash and investment reserves of approximately $40.3 million as of Dec. 31, 2011, equating to 619.8 days cash on hand, 8.8 times (x) pro forma cushion ratio, and 63.1% pro forma cash to debt. DCOH is above Fitch's 'A' category median while the cushion ratio and cash to debt are below category medians and are at the lower end of the 'A' category.

MIXED CAPITAL RATIOS: Leverage metrics are high with maximum annual debt service (MADS) equaling 14.8% of total revenue in the interim period. In FY 2011, debt service coverage on a consolidated basis was low at 1.8x but a stronger 2.1x on an OG basis. Revenue-only coverage for the OG was very strong at 1.7x.

FUTURE CAPITAL PLANS: IHS is in the pre-sales phase of an expansion project at its Pacific Spring Village campus and plans to move forward once 70% of the units have been pre-sold. Velocity of sales has been slow with 7% of units currently pre-sold. IHS management indicated that it does not anticipate reaching 70% pre-sales for at least 15 months. IHS has very little debt capacity at the current rating level and, should IHS move forward on the project and issue debt, downward rating pressure is likely and the impact would depend on the final amount of the additional debt.

CREDIT PROFILE

The 'A-' rating reflects IHS' high occupancy, adequate overall financial profile at the rating level, and good market position. Credit concerns include weaker performance on a consolidated basis, a relatively high debt burden, reliance on investment income to support operations, and the potential for new debt over the medium term.

Occupancy remains a key credit strength for IHS. IHS has maintained strong occupancy over 95% since fiscal 2008 despite macroeconomic pressures. Occupancy is supported by IHS' sales force, good waitlist, limited competition in the service area and entrance fees that are moderate when compared to local area housing prices.

IHS' management reports that maintaining occupancy of 95% or better is essential to producing stable operating results. Historically, Fitch has used consolidated financial results for IHS as it essentially mirrored obligated group results. However, in fiscal 2011, IHS created three new entities outside the obligated group to start-up a PACE program in Iowa and Nebraska, as well as provide other non-residential services. PACE programs are a unique, capitated, managed care benefit for the frail elderly (dual Medicare and Medicaid eligible). Programs generally are sanctioned by the state and organizations are designated as the sole PACE provider for a region.

As the programs are ramping up, IHS has invested over $2 million (during fiscal 2011), without commensurate revenue, which diluted the operating results on a consolidated basis. Obligated group results were stronger and consistent year over year, with the operating ratio of 93.5% and net operating margin - adjusted of 19.4%, both of which compare well to Fitch's 'A' category medians. However, IHS remains heavily reliant on investment income as it comprised 50% of its cash flow in fiscal 2011.

Consolidated results for FY 2011 were weaker, with a 99.5% operating ratio and 13.2% net operating margin - adjusted. Moving forward, Fitch will report on both obligated group and consolidated results, but expects the difference between the two to narrow as the PACE programs outside the obligated group begin to generate cash flow.

Debt service coverage for the OG was adequate at 2.1x, but trailed the 'A' category median of 3.0x. However, IHS' revenue-only coverage was solid at 1.7x, above the category median of 1.4x and it is a credit strength. In addition, IHS significantly reduced risk exposure related to its debt profile with its 2010 financing, which resulted in 100% fixed-rate debt with no swaps. IHS had approximately $64.4 million in long-term debt as of Dec. 31, 2011.

Primary credit concerns include a high debt burden and potential for new debt over the medium term. The debt burden is high as demonstrated by MADS as a percentage of revenue of 14.8% at Dec. 31, 2011, as compared to the 'A' category median of 8.3%. IHS is in the pre-sale stage of a sizable expansion project at the Pacific Springs Village campus. Should pre-sales reach the 70% level and IHS moves forward on the expansion and issues debt, there would likely be negative rating pressure on the rating. Fitch does not expect the pre-sales to reach 70% for at least 15 months. Only 7% of the 70% needed pre-sales have been sold.

The Stable Outlook reflects Fitch's belief that IHS will continue to demonstrate strong occupancy levels, which should keep financial performance stable and maintain current levels of debt coverage and balance sheet metrics.

IHS operates five Type C facilities in Omaha and Lincoln, Nebraska, with a total of 409 ILUs, 148 ALUs and 26 memory care beds. IHS also has a 50% co-sponsorship stake in Alegent Health System (Alegent), which comprises nine acute care hospitals, more than 100 service sites, and over 1,300 physicians on its medical staff. Alegent provides skilled nursing services on a few IHS campuses. Total revenues in fiscal 2011 were $26.5 million.

IHS discloses quarterly statements within 60 days of each quarter end that includes a balance sheet, income statement, and cash flow statement and audited financial statements within 120 days of fiscal year-end.

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 20, 2011;

--Rating Guidelines for Nonprofit Continuing Care Retirement Communities, July 26, 2011.

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.