Approximately $756 million of rated debt to be outstanding
New York, June 08, 2012 -- Moody's Rating
Issue:Fixed Rate Hospital Revenue Bonds, 2012A; Rating: Aa3; Sale Amount: $74,410,000; Expected Sale Date: 6/19/12; Rating Description: Revenue: Other
Moody's Investors Service has assigned a Aa3 rating to The University of Chicago Medical Center's (UCMC) $74.4 million of Series 2012A fixed rate revenue refunding bonds to be issued through the Illinois Finance Authority. Concurrent with this action, we are affirming UCMC's Aa3 long-term and underlying ratings. The outlook remains stable. As part of the current plan of finance, UCMC also is in the process of replacing the irrevocable direct pay letters of credit (LOC) from Bank of America, N.A. supporting the Series 2009D-1 and Series 2009D-2 variable rate demand bonds (VRDB) with LOCs from PNC Bank, N.A. The expected financial covenants included in the PNC LOC reimbursement agreement include: (a) minimum debt service coverage ratio of 1.25 times; (b) minimum cash on hand of 120 days cash; and (c) maximum debt-to-capitalization of 60%. In total, UCMC has approximately $410 million of VRDB bonds and commercial paper supported by LOCs from Wells Fargo, JPMorgan Chase Bank, Northern Trust, and Bank of America.
SUMMARY RATINGS RATIONALE: The assignment and affirmation of the Aa3 rating and stable outlook reflect UCMC's continued favorable operating results, maintenance of good cash on hand, and strong relationship with Aa1 rated University of Chicago. UCMC is issuing more debt than what was planned originally and its debt coverage ratios are stressed at the Aa3 rating level.
*Status as a controlled entity of Aa1 rated University of Chicago. While UCMC is a separate 501(c)(3) from the university, UCMC and the university are very closely integrated (e.g., the university is the sole corporate member of UCMC and every member of the UCMC board is appointed by the university board).
*Large, nationally recognized academic medical center with high acuity mix of tertiary and quaternary services including a children's hospital. UCMC's Medicare case mix index measured a very high 2.17 in fiscal year (FY) 2011 (the all ratings median Medicare CMI is 1.59).
*Trend of good operating results in recent years continues in interim FY 2012 (11.5% adjusted operating cash flow margin through nine months FY 2012).
*Good cash on hand with adjusted 290 days at March 31, 2012.
*UCMC is one of five academic medical centers in the very competitive Chicago healthcare market.
*High exposure to Medicaid, which represented 23% of gross revenues in FY 2011. We note that UCMC's children's hospital elevates the system's Medicaid share of business.
*UCMC is adding more debt than what was expected originally to support the construction of a parking garage that was not a part of the original capital program. Factoring $75 million of new money debt expected to be issued by calendar year end 2012, UCMC's Moody's adjusted pro forma debt ratios are stressed at the Aa3 rating level (pro forma 105% cash-to-debt, 5.2 times debt-to-cash flow, 4.1 times maximum annual debt service coverage, and 67% debt-to-total operating revenue).
*UCMC is relatively highly unionized, as nearly half of UCMC's employees are members of a bargaining unit.
*UCMC participates in the university's defined benefit pension plan, which was underfunded at fiscal year end (FYE) 2011 (pension funded ratio of 59% relative to a projected benefit obligation of approximately $651 million); we note that UCMC's use of operating leases is minimal (debt equivalent of nearly $25 million at FYE 2011 based on multiplier method).
The stable outlook reflects UCMC's continued favorable operating results, maintenance of good cash on hand, and strong relationship with Aa1 rated University of Chicago.
WHAT COULD MAKE THE RATING GO UP
Material cash flow growth resulting in significantly improved debt coverage ratios; significant and sustained market share growth in high-margin service lines; material strengthening of balance sheet ratios; explicit debt guarantee by the University of Chicago
WHAT COULD MAKE THE RATING GO DOWN
Sustained weaker operating performance leading to thinner debt coverage ratios; weakening of balance sheet ratios; material market share loss; weakened affiliation with The University of Chicago
The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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