Fitch Ratings has assigned 'AA' long-term ratings to the expected $350 million issuance of California Health Facilities Financing Authority revenue bonds series 2008C on behalf of Providence Health & Services' (PHS). Moreover, Fitch affirms its 'AA' ratings on approximately $1.3 billion of outstanding bonds issued through various authorities in Washington, Oregon, Alaska, California and Montana, and affirms its short-term rating of 'F1+' on the $213.4 million Clackamas County Hospital Authority revenue bonds series 2003 bonds and the $170 million Providence Health & Services taxable commercial paper (CP) program based on self-liquidity provided by PHS. The Outlook on all bonds is Stable.
The series 2008C bonds are expected to be issued as un-insured traditional fixed rate bonds. Proceeds will be used to refund all of the Authority's series 2001A,B and C auction rate securities (ARS), current refund the Authority's series 1998 bonds issued on behalf of Little Company of Mary Health Services, repay a $150 million bank loan used to acquire 245-bed Tarzana Medical Center and pay associated costs of issuance. The series 2008C bonds are expected to be priced the week of Oct. 20th.
The 'AA' rating reflects PHS' strong profitability, a low debt burden and strong debt service coverage, solid liquidity ratios, leading market share in geographically dispersed markets, and excellent management practices and controls. For the fiscal year ended Dec. 31, 2007 and the eight months ended Aug. 31, 2008, PHS generated operating earnings before interest, depreciation and amortization (EBIDA) margins of 10.4% and 10.2%, respectively. Due to PHS' strong operating profitability, management has been able to fund capital investments through cash flow and minimize the use of debt. Thus, PHS' debt burden is light, with proforma maximum annual debt service (MADS) at 1.7% of 2007 revenues, pro-forma debt to 2007 EBIDA of 1.9 times(x) and proforma debt to capitalization of 27%. Historical coverage of pro-forma MADS is strong at 8.1x and 7.3x in fiscal 2007 and 2006, respectively. Despite funding numerous capital projects from cash flow, PHS has maintained a solid liquidity position. At Aug. 31, 2008, PHS had unrestricted cash and investments of $2.55 billion, which translates into 154.5 days cash on hand (DCOH), a cushion ratio of 25.5x, and cash to debt of 194.3%, which compare favorably to Fitch's 2007 'AA' medians of 237.4 DCOH, 20.4x and 153.9%, respectively.
PHS owns or leases 25 hospitals in five states. PHS maintains leading market share positions in most of its service areas, with facilities in Everett, Olympia and Spokane, WA, Anchorage, AK and Missoula, MT holding substantial market share positions. PHS also operates several critical care hospitals and physician groups, which help generate increased volumes. Revenue generation and operating profitability is well diversified with no region accounting for more than 36% of total system revenues. The system benefits from excellent management practices and controls. Management has consolidated system services in areas such as supplies ordering, human resources, managed care contracting, physician recruitment and revenue cycle management, resulting in improved expense control and efficiency. Excellent financial reporting systems allow management to actively monitor and control the various business units throughout the organization.
Primary credit concerns are PHS' increasingly competitive service areas and weak security for bondholders. PHS controls and operates facilities in what Fitch believes to be competitive markets, most notably in Oregon and Southern California. The acquisition of 245-bed Tarzana Medical Center in Los Angeles is expected to increase PHS presence in the competitive Southern California market. Some of the geographical regions in which PHS operates continue to be pressured by nursing shortages and rising malpractice premiums. In general, PHS' business and financial covenants, while standard, are weak and provide minimal bondholder protection.
The 'F1+' rating reflects the sufficiency of PHS' cash and investment position relative to the cost of an unconditional tender offer on the Clackamas County ARS and/ or failed roll-over on PHS' taxable CP program. At Sept. 30, 2008 PHS had cash and fixed income investments of $717.5 million. Based on Fitch's rating criteria related to self liquidity (see Fitch's report 'Guidelines for Rating Variable rate Demand Bonds and Commercial Paper Issued with Internal Liquidity' dated Mar. 7, 2006), PHS' eligible cash and investment position available for same-day settlement would cover the cost of the maximum tender exposure on any given date by 10.6x. PHS provides Fitch monthly investment reports which will be used to monitor its cash and investment position relative to the tender coverage.
The Stable Outlook reflects that PHS continues to be among the strongest 'AA' credits in Fitch's non-profit health care portfolio. Fitch believes that PHS' geographic dispersion of its operations, solid services area demographics and excellent MIS systems should continue to produce and sustain strong financial performance.
PHS is composed of 25 hospitals and other related health care entities and had $6.4 billion in total operating revenue in fiscal 2007. Headquartered in Seattle, Washington, the system has core operations in Washington, Oregon, Alaska, California and Montana. PHS 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 some utilization statistics.
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