Allina Health System, recognized last year for its electronic health record implementation with a Davies Award, has scored an 'A' rating on its outstanding bonds.
Fitch Ratings has affirmed its 'A' rating on Allina Health System's approximately $650.3 million in outstanding revenue bonds issued through the City of Minneapolis and the Housing and Redevelopment Authority of the City of St. Paul, Minn. For various issues the rating is an underlying rating and does not consider any type of credit enhancement. The rating outlook is stable.
Fitch notes that operating margins have been depressed since 2004 due to Allina's $250 million investment in its proprietary electronic health record and the associated increase in depreciation expense (the EHR is required to be fully depreciated over a five-year period). However, Allina has continued to produce good operating EBITDA margins in-line with the category medians: 9.1 percent through the nine months ending Sept. 30, 2008 and 9.3 percent in fiscal 2007.
The rationale for the 'A' rating remains unchanged since Fitch's last rating action dated July 24, 2007 and reflects Allina's leading market position in the Twin Cities metropolitan area, solid core operating performance and light debt burden leading to solid debt service coverage.
Allina is the largest health system in Minnesota and in 2007 had a leading 31.9 percent inpatient market share in the highly competitive Minneapolis-St. Paul metropolitan area.
The next closest competitor is Fairview Health System at 19.8 percent followed by HealthEast (rated 'BBB-' by Fitch) with an 11.1 percent market share.
Moreover, Allina's market share position has remained constant since 1999. With the exception of 2006, Allina's historical operating profitability has been solid since 2003, with operating margins ranging between 2.4 percent and 4.6 percent, for the previous five years.
Through the nine-month period ending Sept. 30, 2008 and at fiscal 2007 Allina generated operating margins of 2 percent, respectively.
Allina's debt burden is light; with pro forma maximum annual debt service (MADS) just 1.6 percent of revenues through Sept. 30, 2008, compared with Fitch's 2008 'A' rating category median of 3.0 percent. Allina's light debt burden, combined with solid EBITDA generation, results in strong debt service coverage.
Fitch's primary credit concerns are Allina's below-average liquidity relative to expenses for the rating category and its ongoing future capital needs.
Due to the current decline in financial markets, Allina's balance sheet liquidity has dropped due to unrealized losses on investments. At Sept. 30, 2008, its $710.6 million in unrestricted cash and investments translated to 102.9 days of cash on hand and cash-to-debt of 109.3 percent, both weaker than Fitch's 2008 'A' rating category medians of 196.8 days and 120.5 percent, respectively.
A little over half of Allina's investment portfolio holdings are in alternative investments, which have certain lockout periods. According to management, 29 percent of their total alternative investment holdings can be redeemed within 90 days. However, Fitch notes that liquidity ratios are in line with historical levels for Allina and in compliance with all liquidity covenants. Fitch will continue to monitor the situation and update the market if any material changes occur to Allina's liquidity.
Allina's five-year capital budget forecasts annual capital spending to exceed $200 million per year. Fitch believes that Allina's investment in EHR has caused deferment of certain capital expenditures that will be funded over the near term. Management expects to utilize a combination of external and internal sources of capital to make future capital investments.
The Stable Rating Outlook reflects Fitch's belief that Allina will successfully balance capital investment with moderate liquidity growth, and generate modest operating profitability over the near term. Should the current economic turmoil subside and the expected benefits from a fully integrated EHR platform contribute to increased market share and/or improved financial performance, a rating upgrade may be warranted.