Fitch Rates $152.4MM Providence Health & Services' (WA) Series 2011A&C 'AA'; Outlook Stable
SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a long-term rating of 'AA' to the following bonds to be issued for the benefit of Providence Health & Services (PH&S)(WA):
--$127,555,000 Alaska Health Care Facilities Authority revenue bonds series 2011A;
--$24,800,000 Oregon Health Facilities revenue bonds series 2011C.
In addition, Fitch affirms the 'AA' long-term rating on approximately $1.9 billion in outstanding bonded debt and the 'F1+' short-term rating based on the self-liquidity provided by PH&S on approximately $200 million auction-rate bonds and the $194 million commercial paper program of the system.
The Rating Outlook is Stable.
The series 2011A and C bonds are expected to be issued as uninsured fixed-rate bonds and to sell the week of November 7 via negotiated sale. Bond proceeds will be used to refinance certain outstanding debt of the system, to fund the construction projects in Anchorage; and to pay the costs of issuance of the bonds.
Unsecured corporate obligation of the Obligated Group defined as: PH&S, PH&S-Washington, PH&S-Oregon, Providence Health System-Southern California, Little Company of Mary Ancillary Service Corporation, Providence St. Joseph Medical Center and PH&S-Montana.
KEY RATING DRIVERS
Strong Market Position: PH&S maintains the leading market share position in the majority of its service areas and it is the dominant provider in its markets of Everett, Olympia and Spokane, WA; Anchorage, AK; and Missoula, MT. PH&S' geographic and business line diversity is another key credit strength.
Excellent Business Practices: PH&S' solid operating performance is supported by the system's excellent management practices and controls. A robust IT platform delivers detailed monthly operational evaluations that allow management to make effective and timely decisions to maintain the system's solid operating profile.
Solid Coverage and Modest Debt Burden: Due to PH&S' low debt burden and solid cash generation, maximum annual debt service [MADS] is only 1.9% of revenues and debt to capitalization is 30.5% vs the medians for the rating category of 2.6% and 34.4%, respectively. Through the nine-month period ending Sept. 30, 2011, despite the recent decline in profitability, debt service coverage of MADS by EBITDA is solid at 5.1 times (x) on an historical pro forma basis compared to the median of 5.0x.
Adequate Liquidity Metrics: PH&S had $3.3 billion in unrestricted cash and investments at Sept. 30, 2011 that calculates to 156 days cash on hand, a 20.2x cushion ratio and 149% cash to debt ratio on an historical pro forma basis, which is low for the rating level. However, internal cash flow has historically been used to fund a portion of the costs of the system's ongoing capital projects.
Decline in Profitability: For the nine-month period ending Sept. 30, 2011, PH&S' operating margin and operating EBITDA margin have declined compared to the nine-month period ending Sept. 30, 2010. Continued utilization declines coupled with a shifting payor mix from commercial payors to Medicaid and self-pay has negatively affected the system's profitability trend.
The 'AA' rating reflects PH&S' leading market share in geographically dispersed markets, excellent management practices and controls and a low debt burden resulting in solid historical coverage of pro forma debt service. Fitch views the recent decline in profitability as a temporary trend, which reflects the impact of softer utilization rates and further deterioration in payor mix quality throughout the region. Fitch expects PH&S' balance sheet to improve as its future capital spending is expected to decrease.
Strong market position
PH&S owns or leases 27 hospitals in Washington, Oregon, Alaska, Montana and California. PH&S maintains strong competitive positions in most of its service areas, with facilities in Portland, OR; Everett, Olympia and Spokane, WA; Anchorage, AK and Missoula, MT holding leading or substantial market share positions. PH&S also operates several critical access hospitals and physician groups. Revenue generation and operating profitability is well balanced with no region accounting for more than 40% of total system revenues in FY 2011.
Excellent business practices
PH&S' historical solid operating performance is due, in part, to the system's excellent management practices and controls which have driven improved operating efficiency and bolster the system's clinical integration strategy. PH&S' management information system tracks each facility on a 17-item dashboard monthly which allows management to adjust staffing and supply ordering to changes in patient volumes and clinical use rates. PH&S is further enhancing its strong management information capabilities with a major upgrade of its clinical information and networking systems at an estimated cost of approximately $577 million to be spent through 2013. The costs of the implementation are expected to be funded from internal cash flow.
Solid debt service coverage
Historical coverage of pro forma MADS ($165 million) by operating EBITDA is solid at 4.4x for the nine-month period ending Sept. 30, 2011, and exceeding the median for the 'AA' rating category of 4.1x. PH&S' debt burden is low with pro forma MADS of less than 2% at the same nine-month period. Debt to capitalization ratios are also better than the medians for the rating category.
Adequate liquidity ratios
PH&S' liquidity indicators are below Fitch's 'AA' category medians due to the funding of approximately $3 billion of capital additions since 2006 while adding less than $1 billion in additional long-term debt. At Sept. 30, 2011, PH&S' unrestricted cash and investments totaled $3.3 billion, which translates into 156 days cash on hand, a 20.1x cushion ratio and 149% of long-term debt on an historical pro forma basis. Fitch expects PH&S' liquidity ratios to improve as capital spending is expected to decline from historical levels.
Decline in profitability
Through the nine-months ended Sept. 30, 2011, PH&S produced a 2.9% operating margin and an operating EBITDA margin of 8.3% which is down from operating margins of 4.1% and 4.2% and operating EBITDA margins of 9.6% and 9.8% in fiscal 2010 and 2009, respectively. The recent compression in operating profitability reflects the effects of the recession on volumes, payor mix, reduced reimbursement from Washington and Oregon Medicaid programs and the system's significant investment in information technology. Fitch believes PH&S will rebound from the decline in profitability as a result of the implementation of several management initiatives. PH&S' operating margin for the nine-month period ending Sept. 30, 2011 is currently in line with budget.
PH&S and Swedish potential affiliation agreement
PH&S has announced that it has entered into a non-binding memorandum of understanding to enter into an affiliation agreement with Swedish Health Services (rated 'A+' with a Stable Outlook by Fitch). PH&S and Swedish have been collaborating together for about 10 years and this will formalize the two systems' existing relationship. Assuming that any regulatory issues are resolved, management expects that the affiliation may be final during first quarter 2012. Fitch views the affiliation of PH&S and Swedish positively.
The 'F1+' rating reflects the sufficiency of PH&S' cash and investments position relative to its potential funding obligations on the $212.3 million Clackamas County series 2003D-G bonds and the $194 million CP program. At Sept. 30, 2011 PH&S had over $3.3 billion of cash and cash equivalents. Based on Fitch's rating criteria related to self-liquidity, PH&S' position of eligible cash and investment available for same-day settlement easily exceeds Fitch's 1.25x threshold to cover the maximum tender exposure on any given date. PH&S provides Fitch regular liquidity reports that are used to monitor its cash and investment position relative the corporation's total self-liquidity exposure.
Stable Rating Outlook
The Rating Outlook is Stable. Fitch believes the deterioration in profitability in fiscal 2011 reflects a confluence of events that have temporarily depressed operating results. Management has taken action to reduce operating expenses in response to weaker volumes and lower than anticipated reimbursement from Medicaid payors. Moreover, the system is proactively positioning itself to meet the changing delivery and reimbursement environment embodied in the federal health care reform legislation, which should sustain PH&S' strong financial performance in the longer term.
PH&S is composed of 27 hospitals and other related health care entities which generated $8.1 billion in total operating revenues in fiscal 2010. Headquartered in Seattle, WA, the system has core operations in Washington, Oregon, Alaska, California and Montana. PH&S posts annual audited financial statements and quarterly unaudited financial statements on its web site, 'www.providence.org', which is viewed positively by Fitch. Quarterly information includes balance sheet, income statement, cash flows, management discussion and analysis and utilization statistics.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
'Revenue-Supported Rating Criteria' dated August 12, 2011
'Nonprofit Hospitals and Health Systems Rating Criteria', dated June 20, 2011
'Criteria for Assigning Short Term Ratings Based on Internal Liquidity', June 20, 2011
For information on Build America Bonds, visit www.fitchratings.com/BABs'
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
Posted: October 27, 2011