DALLAS – Ohio-based Kettering Health Network won an upgrade from Standard & Poor’s ahead of its upcoming $90 million sale.
The rating agency raised the system’s rating one notch to A-plus from A. The upgrade also affects $394 million of outstanding KNH bonds.
The rating reflects “KHN's improved operational performance and strengthened balance sheet over the past three years, with healthy operating margins, robust maximum annual debt service coverage, and growth in unrestricted reserves,” Standard & Poor's analyst Avani Parikh said. "In addition, KHN has invested heavily in its network in recent years to extend its reach and strengthen its outpatient presence, thereby improving its overall business position, with a now leading market share in its primary service area.”
Montgomery County will sell the bonds on the system’s behalf on April 21. Gross revenue and facility mortgages of the obligated group secure the bonds. The Obligated Group consists of the Kettering Medical Center which includes Sycamore Medical Center, Kettering Behavioral Medicine Center, and Kettering College, Dayton Osteopathic Hospital, Southview Medical Center, and Beavercreek Medical Center.
Proceeds of the fixed- rate securities will provide funds to support KHN’s capital spending plans, including reimbursement for $70 million of expenses already paid. The system also intends to repay a $25 million line of credit with cash.
“In our view, the series 2016 issuance, the majority of which will reimburse KHN for capital expenditures undertaken by the network over the past year, is manageable at the higher rating level,” said S&P analysts said in their report published Thursday.
S&P’s one notch upgrade comes nearly one year after Moody’s Investors Service upgraded KNH’s credit rating to A2 stable from A3 based on its steady improvement in liquidity and operating margins. Moody’s confirmed KNH’s A2 rating ahead of the new issue.
KHN is an eight-hospital health system based in the Dayton area. A majority of the network's volume is concentrated in Montgomery County since its flagship facility is located in Kettering, and its second-largest revenue generator, GMC, is in Dayton.
The system has executed several strategies to optimize and standardize its practices across its facilities in an effort to support operating margins. KNH’s credit rating took a hit in 2012 after operating performance declined with a reduction in population in its service area.
The economy has since rebounded in those areas, and Ohio’s expansion of Medicaid “has impacted KHN's payor mix and volumes favorably,” said S&P. In 2015, system admissions at the hospitals increased 4%, and emergency visits increased 11%, after increasing 10% and 8%, respectively, the year before.
Operating performance has improved since fiscal years 2011 and 2012, when KHN posted close to breakeven operations. KHN ended fiscal 2015 with a surplus of $60.3 million, for a 4% operating margin, according to S&P.
