Fitch Upgrades Midwest Physician Group (Illinois) to 'BB+'; Outlook Stable
Fitch Ratings upgrades the Illinois Health Facilities Authority’s approximately $15 million revenue refunding bonds, series 1998 (Midwest Physician Group Ltd.) to ‘BB+’ from ‘BB’. The Rating Outlook is Stable.
The rating upgrade reflects the requirement that Midwest Physician Group (MPG) make debt service payments prior to payment of physician distribution which results in strong coverage of maximum annual debt service (MADS), MPG’s position as the leading osteopathic medical group in the Chicago land area and the relative stability in MPG physician staffing. Under the 1994 bond documents, MPG is required to make monthly principal and interest payments to the bond trustee. Payments or distributions to physicians are restricted to the extent such payment would cause income available for debt to fall below 1.1 times (x). When including the total amount of physician distributions into revenues available for debt service from years 2002-2006, coverage of MADS ranged between 7.2x and 8.9x .
Assuming payment of physician distributions causes coverage of MADS to drop to 0.1x to 1.5x over the same time frame. In fact, a rate covenant violation originally reported by the auditors in fiscal 2003 was due to an incorrect calculation. MPG was started in 1975 as a division of the Chicago College of Osteopathic Medicine. Many of MPG physicians have faculty positions at Midwestern University’s School of Osteopathic Medicine. Fitch believes MPG’s position as the largest osteopathic physician clinic provides certain advantages in attracting and retaining osteopathic physicians. Since fiscal 2003, the total number of physicians has been very stable at around 80-85 doctors with roughly 30 primary care physicians, 45-50 specialists and five-to-eight mid-level providers.
A higher rating is precluded due to MPG declining liquidity position combined with a belief that MPG financials are subject to greater risk from physician departures and managed care contracting pressures. At Dec. 31, 2006 MPG had $7.8 million of unrestricted cash and investments (65 days cash on hand) which was down from $11.3 million in fiscal 2002 (99 days cash on hand). Management expects to spend $1.9 million during fiscal 2007 to expand the Orland Park surgi-center which will further reduce MPG’s liquidity. Fitch believes that the risk profile of MPG is greater relative to our investment grade portfolio. Year to year physician recruitment and retention and changes in manage care contracts can have a much greater affect on MPG credit profile than is typical in Fitch’s investment grade portfolio.
Fitch’s Stable Outlook reflects the expectations that MPG will maintain stable staffing levels and that liquidity should stabilize around 60-70 days of cash on hand. MPG recently hired a recruitment coordinator to formalize identification and recruitment of physician and medical staff.
MPG is an 81-physician, independent, multi-specialty, physician practice group with various locations in the south and southwest Chicago markets. Although not required under MPG bond document, management provides quarterly disclosure to investors including a balance sheet, income statement and selected utilization data which is viewed positively by Fitch.