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Centegra officials say they expected Fitch 'negative' debt rating

CRYSTAL LAKE – Fitch Ratings affirmed its “A-” rating of Centegra Health System’s $195 million in bond debt this week, but said the hospital system’s ratings outlook remained negative based on its plans to take on more debt to build a $233 million hospital in Huntley.

The Fitch Rating report issued this week cited Centegra’s already high debt level and its plans to take on additional debt to finance construction of the Huntley hospital as “key drivers” of the rating.

The agency’s top credit rating of AAA has the lowest expected risk of default. “A” ratings “denote expectations of low default risk,” according to the agency. The rating affects the hospital system’s borrowing costs. Lower ratings typically result in higher interest rates.

David Tomlinson, Centegra’s chief financial officer and chief information officer, said the report confirmed what the hospital system had expected.

“We will be incurring more debt to improve our market share,” he said. “The rating is exactly what we were expecting.”

Centegra’s leading market position in McHenry County and it’s “consistent but modest financial profile” were viewed favorably, the ratings agency said.

“Centegra’s market share position in a growing service area with a favorable demographic profile is a key credit strength,” the report said. “Centegra maintained a leading market share position with about 45.4 percent inpatient market share in its primary service area of McHenry County compared to its nearest competitor, Advocate Good Shepherd, with 13.3 percent market share and Sherman Hospital (now a part of Advocate Health Network) at 11.7 percent.”

Advocate Health Network, the state’s largest health system, is rated “AA” with a stable outlook by Fitch.

The report said Fitch “expects Centegra’s strong management practices and integrated physician operating platform to continue to generate solid cash flow.” But it raised concerns about Centegra’s plan to build a 128-bed hospital in Huntley.

“Given Centegra’s already high debt burden and its future large capital plans, any additional debt would likely result in negative rating pressure,” the report said.

Centegra’s strong position as the leading health care provider in the county “outweighs some of the pressures that all health care organizations are facing as a result of health care reform,” said Susan Milford, Centegra’s senior vice president for strategy and development.

The Illinois Health Facilities and Services Review Board gave Centegra permission to build the Huntley hospital in July 2012, but Centegra has yet to begin construction. An ongoing lawsuit over the project delayed a groundbreaking set for Wednesday. Centegra will head back to Will County Circuit Court on Nov. 12 to hear Judge Bobbi Petrungaro’s final decision on the lawsuit filed by competitors Mercy Health System and Advocate Health Care. With a final court date set, Centegra pushed back the groundbreaking to late December or early January as a precaution.

Though the Huntley hospital project was considered in the report, Fitch said, it wouldn’t consider the impact of the project until more information was available about how Centegra plans to finance it.

“Two competitors have filed a lawsuit contesting the construction of the new facility, and the case is currently in circuit court. Management anticipates an outcome before the end of the year but will not move forward with construction until the lawsuit is resolved,” the report said. “Fitch believes the new facility could help Centegra expand its footprint in the fast-growing southern portion of McHenry County. The details regarding the project are not available at this time, and Fitch will assess the impact of the project on the rating when the lawsuit is resolved and the financing plans are solidified.”

Other highlights from the report include:

• Centegra had operating revenues of $398.9 million in fiscal 2013 and $195 million in debt outstanding.

• Centegra’s market share declined slightly when Sherman Hospital in Elgin opened in 2009, but has held at about 45 percent since.

• Centegra officials expect the cost of the Huntley hospital to be less than $233 million, but the report didn’t say how much less.

• Centegra’s “operating performance has been weak for the rating level and has been affected by its strategic investments, relatively flat volumes and an unfavorable shift in payor mix.”

The report also said “Fitch expected improved performance in fiscal 2013 from the prior year, but profitability was affected by several one-time expenses including physician acquisition and by the roll-out of its electronic medical record system in May.”

It further noted Centegra’s “operating margin was a thin 0.2 percent in fiscal 2013, 0.5 percent in fiscal 2012 and negative 0.1 percent in fiscal 2011.” The report said “management continues to work to reduce expenses, focusing on cost per unit and revenue cycle management, and Fitch expects improved operating performance going forward. If operating performance does not improve in the near term, negative rating pressure is likely.”

Tomlinson said the report was evidence of Centegra’s ongoing efforts to get the most for every dollar it spends.

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