Fitch Ratings has assigned an 'A' rating to the approximately $106.8 million Orange County Health Facilities Authority hospital revenue bonds (Orlando Regional Healthcare System) series 2006A and approximately $78.9 million series 2006B. The series 2006A bonds are expected to be insured by Financial Security Assurance, whose insurer financial strength is rated 'AAA' by Fitch. In addition, Fitch has upgraded the rating on Orlando Regional Healthcare System's (ORHS) outstanding debt, listed below, to 'A' from 'A-'. The Rating Outlook is Stable.
Proceeds of the series 2006 bonds will be used to advance refund the outstanding series 2002 bonds, reimburse ORHS for prior capital expenditures ($44 million), fund future capital expenditures ($34 million), establish debt service reserves, and pay costs of issuance. The series 2006A bonds are expected to price on Jan. 20 through negotiation led by Goldman Sachs, and the series 2006B bonds are expected to price on Jan. 19 through negotiation by UBS and Goldman Sachs.
Fitch has upgraded ORHS's bond rating despite expected additional debt issuances due to its continued improved financial profile. This rating action incorporates an additional new money debt issuance of approximately $138 million this summer. Although some of ORHS's ratios are not in line with Fitch's 'A' category medians, Fitch believes its location in one of the fastest growing regions in the U.S. should support further revenue and profitability growth. In addition, Fitch expects sustained improvement of ORHS's current financial performance, which should support its large capital plan. The population in ORHS's service area has increased 14.1% from 2000-2005 and is projected to increase 13.1% from 2005-2010. ORHS has been able to capitalize on the favorable population trends by investing in its plant with total capital spending of over $350 million the last three years. Fitch views the capital spending favorably, which included the expansion of two facilities, the M.D. Anderson Cancer Center and the Winnie Palmer Hospital for Women and Babies. ORHS's six-year capital plan for fiscal year (FY) 2006-2011 totals $1.3 billion and includes a significant expansion for its Sand Lake Hospital and the expansion and rebuild of portions of its flagship facility, Orlando Regional Medical Center. Fitch views these investments favorably and although leverage and liquidity ratios may be pressured in the mid term, Fitch believes these strategic investments should position ORHS to maintain its good market position in a fast growing and competitive service area.
ORHS posted very strong results in FY 2005 with a 4.8% operating margin, 3.2 times (x) pro forma debt service coverage, and 136.9 days cash on hand. Operating profitability has consistently increased over the last several years with budgets being met or exceeded in each of the last three years. The improvement in profitability has been due to rising volume, increased capacity, renegotiated managed care contracts, reduced agency usage, and improved productivity. Strong utilization growth has fueled annual revenue growth of 8% over the last five years. Acute admissions increased 4.7% in fiscal 2005 and 4.9% the prior year. Due to the increasing demand for services, market share is divided by two main providers mainly based on the capacity available. ORHS has 39% of the beds in the service area and has maintained market share around 36%-37% for inpatient admissions. The main competitor, Florida Hospital System (part of Adventist Health System, rated 'A+' by Fitch) has 44% of the beds in the market and has maintained the leading position with 48%-49% market share. However, ORHS has continued to differentiate its clinical capabilities by offering unique services such as a women's and children's hospital with the largest neonatal intensive care unit in the state, a dedicated pediatric facility, the only Level I Trauma Center in central Florida, and the M.D. Anderson Cancer Center-Orlando. ORHS maintains leading market share for newborn and pediatric services.
Primary credit concerns are ORHS's future capital needs and a relatively high debt burden. Management has completed its strategic plan that includes capital needs of approximately $1.3 billion in FY 2006-2011. Capital spending will be funded by additional debt issuances projected in 2008 and 2011 and cash flow. ORHS's debt burden is already somewhat high and the absorption of the additional debt will be dependent on ORHS's ability to sustain its current financial performance. Although leverage ratios have improved since Fitch's initial rating, ORHS's debt ratios continue to compare unfavorably to Fitch's 'A' median ratios. Pro forma debt service coverage was solid at 3.2x in fiscal 2005, but has averaged only an annual 2.3x over the last five years. Debt to capitalization was 50.3% in fiscal 2005 compared with Fitch's 'A' median of 39%. Debt ratios include the series 2006A and B issues and the expected $138 million financing this summer. Fitch will continue to monitor ORHS's performance and the impact of additional indebtedness in future years to its financial profile at the time of issuance.
ORHS has several swaps outstanding, which Fitch believes pose minimal credit risk. These swaps will be outlined in Fitch's upcoming new issue report.
Located in Orlando, Florida, ORHS is a hospital system that owns six hospitals with 1,572 operated beds and includes the 581-bed Orlando Regional Medical Center. ORHS had total revenue of $1.2 billion in fiscal 2005. ORHS covenants to provide annual and quarterly disclosure to the nationally recognized municipal securities information repositories. ORHS's disclosure has been excellent, and all quarterly and annual financial information are posted on 'www.dac-ey.com'. The information provided is comprehensive, including consolidated and consolidating balance sheet, income statement, and cash flow statement with comparisons to same period the prior year. In addition, utilization and other statistics are provided with a management discussion.
