Baylor Health Care System Merits Moody's Upgrade

DALLAS — Moody’s Investors Service raised its rating on the Baylor Health Care System to Aa2 from Aa3, citing continued financial improvements for several years that have led to increased market share in the highly competitive Dallas-Fort Worth area. The upgrade applies to $719.4 million of debt outstanding, and analysts also revised the outlook on the credit to stable at the higher rating from positive at the lower rating.The increased market position is due to the success the system had implementing its significant capital plan. The North Central Texas Health Facilities Development Corp. issued debt in 2004 and 2006 on behalf of the Baylor system, which used proceeds to build new facilites and update existing hospitals.The faith-based, non-profit health care system provides services through 15 owned, leased or affiliated hospitals, and surgical services at five short-stay hospitals across North Texas. “The upgrade is reflective of a lot of things, but specifically of management’s ability to deliver a variety of strategies that have benefitted both operations and performance over the last number of years,” said John Miller, vice president and treasurer of the system.“We have a number of joint-venture strategies that are paying off, as well as a physician-practice plan with numerous physicians’ offices across the DFW metroplex that’s extending our brand into the communities and sending referrals back to our hospitals,” he said.Only 6% of hospitals rated by Moody’s are Aa2 or higher, according to Miller.Earlier this month, Standard & Poor’s affirmed its AA-minus rating and stable outlook on the credit.The Baylor system’s significant capital expenditures are funded through a combination of philanthropic contributions, operations and debt, according to Miller. He said the system expects to be back in the market with some taxable debt next year and again with tax-exempt debt in 2009. The total new-money debt component of the financing plan is projected to be about $500 million.The system anticipates building a new hospital in the McKinney area while expanding and renovating existing facilities with bond proceeds.Miller said the system is also on the process of beginning to search for potential sites for more hospitals to deal with “explosive growth of the area.” He said the system opened a new hospital in Plano in December 2004 and “for all intent and purposes that hospital is full.” Some of the fastest growing areas of the country are in North Texas.Earlier this year, the Census Bureau reported that the DFW metroplex added 182,000 new residents for the fiscal year ended July 31, 2006. That equates to roughly 500 new residents a day and represents 44% growth from the previous year. The Census Bureau said most of the growth in the metroplex is attributable to increased domestic migration.Moody’s said the Baylor health care system’s operating margins have improved annually since 2002, reaching 7.6% for fiscal 2007, and cashflow margins also have continued to climb each year, increasing to 14% this year.Analysts also expect the significant capital plans of the system to result in cash levels that remain at current average levels and temper short-term improvement to balance sheet indicators. Some projects to be addressed under the capital plan may be deferred “to maintain satisfactory balance sheet ratios,” as “cash levels are a weakness of the system,” according to analysts.Fulbright & Jaworski serves as bond counsel to the health system.