Fitch Rates Urbana Foundation AA-Minus With Evolving Outlook

CHICAGO - Fitch Ratings last week rated the Urbana, Ill.-based Carle Foundation's upcoming $250 million bond sale AA-minus and assigned an "evolving" outlook due to the uncertain outcome and the fiscal impact of its merger discussions with an affiliated physicians' group.

The rating review comes ahead of the foundation's plans to sell in February $250 million of revenue bonds through the Illinois Finance Authority to retire a $225 million bank loan that was tapped to defease last April its outstanding debt issued in 1998 and 2006. Another $25 million is for capital projects and to cover issuance costs.

Goldman, Sachs & Co. and Barclays Capital are the underwriters, according to IFA documents. The deal includes a mix of fixed-rate bonds and variable-rate demand bonds secured by letters of credit.

Carle received approval to sell up to $450 million of debt from the IFA board last month. That authorization includes the February transaction and additional new money of up to $200 million primarily to finance construction of a new eight story, 135-bed patient tower attached to its existing hospital tower.

The timing of the project and that piece of debt is uncertain and dependent on Carle's financial condition and interest rates. The 305-bed Carle Foundation Hospital serves as the primary teaching facility for the University of Illinois at Champaign-Urbana.

The credit's challenges include the need for additional debt to finance the new tower and poor financial results of late that included a $2 million loss for the first quarter of the fiscal year. The losses were due in part to a higher percentage of Medicare/Medicaid patients and fewer surgical cases. CF has moved to trim expenses and cut positions to offset the losses.

Carle's rating is supported by its strong operating profitability with $495 million of total operating revenues in fiscal 2008 and solid balance sheet, growing market share of 44 %, and long-standing "collaborative" relationship with the Carle Clinic PC, Fitch analysts wrote.

CF's unrestricted cash and investments totaled $400 million at the close of September, providing 328 days cash on hand and its market share has jumped by 10% over the last five years.

The Carle Clinic is a 350-physician, multi-specialty clinic with 32 locations that last year accounted for 95% of the Carle Foundation's hospital admissions. The two have a 60-year relationship sharing the costs of certain services such as radiology, lab, information technology, purchasing, and housekeeping.

Due to recent changes enacted by the Centers for Medicare and Medicaid Services on its rules governing physician-hospital relationships, CF and Carle are considering a full asset merger. Fitch expects that such a merger would benefit CF in the long run, but the costs of merging in the shortterm remain uncertain.

"Fitch will be following the merger discussions and take appropriate rating action at that time," analysts said of the decision to assign an "evolving" outlook to the credit.

The foundation carries an issuer rating of AA-minus from Standard & Poor's.

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