Higher education

University of Iowa Hospitals and Clinics maintain strong bond ratings

S & P upgrades its UIHC outlook from negative to stable

(File Photo) The exterior of the University of Iowa Children's Hospital is shown from the ground as it is under construction in Iowa City on Thursday, October 15, 2015. (Andy Abeyta/The Gazette)
(File Photo) The exterior of the University of Iowa Children's Hospital is shown from the ground as it is under construction in Iowa City on Thursday, October 15, 2015. (Andy Abeyta/The Gazette)

IOWA CITY — Citing the University of Iowa Hospitals and Clinics’ broad market reach for high-end services, robust local market share, profitability track-record, and strong debt coverage Moody’s Investors Service has affirmed the medical center’s Aa2 bond rating and its stable outlook.

Meanwhile Standard & Poor’s Rating Services has also affirmed the hospital’s AA rating on bonds and upgraded its outlook from negative to stable. That rating had slipped in September 2014 amid a large capital plan that industry experts and analysts said could result in a “balance sheet no longer commensurate with an ‘AA’ rating in the next two years.”

UIHC in 2012 began construction on a new 14-story 507,000-square-foot UI Children’s Hospital costing $360 million funded by bonds, patient revenue, and private gifts. That project is scheduled for completion later this year.

The S & P upgrade comes as UIHC has maintained a double-digit operating cash flow margin since the 2010 budget year. A Moody’s report made public this month praised its margins in the 2015 and 2016 budget years as being “particularly good.”

Specifically, the UIHC operating cash flow margin measured 12.1 percent in 2015, up from 10.8 in the 2014 budget year. Through the first six months of the 2016 budget year, the margin measured 13.2 percent, compared with 11.8 percent for the same period in 2015, according to the Moody’s report.

The Aa2 and AA ratings, among the highest assigned by the investors and rating services, indicate high quality and “very low credit risk.” The actions affect $356 million of debt issued through the Board of Regents in 2007, 2009, 2010, 2011, and 2012.

The median operating cash flow margin for Aa2-rated entities is 11.7 percent, according to Moody’s, which credited UIHC patient admissions, observation stays, outpatient visits, and total surgeries for its strong showing of late.

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“These volume trends are particularly impressive given the somewhat modest population trends of Iowa,” according to the report. “We expect UIHC to continue generating good operating cash flow margins, although not necessarily as favorable as FY2015 or interim FY2016.”

Among the UIHC strengths, Moody’s cites its ability to buck state and national trends in volume growth and maintain conservative balance sheet management. Moody’s lists several challenges, however, including “continued construction risk with its significant capital spending program” and the hospital’s highly-unionized workforce.

“With just over $1.3 billion of operating revenues, UIHC is small for an Aa2-rated health system,” according to the Moody’s report.

UIHC leaders said they expect the entity’s financial position will become even stronger after the new Children’s Hospital is complete.

“We are pleased that Standard & Poor’s recognized our success in managing the pace of our capital projects and in achieving our goals of sound financial management,” said Jean Robillard, UI Vice President for medical affairs.

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