Fitch Ratings has assigned its 'AA' long-term rating to the expected issuance of $150 million California Health Facilities Financing Authority revenue bonds series 2009B (Providence Health & Services [PHS]). In addition, Fitch affirms its 'AA' ratings on approximately $1.7 billion of outstanding bonds issued through various authorities in Washington, Oregon, Alaska, California and Montana, and affirms its short-term rating of 'F1+' based on the self-liquidity provided by PHS' on its $200 million taxable commercial paper (CP) program and $212.3 million Clackamas County (Oregon) Hospital Finance Authority series 2003D-G revenue bonds. The Outlook on all bonds is Stable.
The series 2009B bonds are expected to be issued as uninsured traditional fixed-rate bonds. Bond proceeds will be used to fund construction of a four-story patient tower at Holy Cross Medical Center in Mission Hills, CA, fund approximately 27 months of capitalized interest on the 2009B bonds and pay costs of issuance. The series 2009B bonds are expected to price the week of July 13, 2009.
The 'AA' rating reflects PHS' strong profitability, its low debt burden and strong historical debt service coverage, excellent management practices and controls, leading market share in geographically dispersed markets and solid liquidity. In fiscal 2007 and 2008 (year ended Dec. 31), PHS generated operating EBIDA (earnings before interest, depreciation and amortization) of $660.4 million and $684.5 million or operating EBIDA margins of 10.7% and 9.7%, 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 maximum annual debt service (MADS) being just 1.5% of fiscal 2008 revenues and debt to 2008 EBIDA of 2.4 times (x). Upon closing of the series 2009B bond issue, MADS increases to $142.9 million (from $134.6 million) which represents a modest 2.0% of fiscal 2008 revenues. Historical coverage of proforma MADS by EBIDA is strong at 5.0x and 6.0x in fiscal 2008 and 2007, respectively. However, debt service coverage in fiscal year (FY) 2009 is expected to be depressed due to the impact of realized losses resulting from the corporation's decision to rebalance its investment portfolio during March and has been factored into the rating action.
Fitch believes that PHS's strong financial performance reflects the system's excellent management practices and controls. Management has consolidated system services in areas such as supply 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.
PHS owns or leases 26 hospitals in five states. PHS maintains strong competitive positions in most of its service areas, with facilities in Everett, Olympia and Spokane, WA, Anchorage, AK and Missoula, MT holding leading or substantial market share. PHS also operates several critical access hospitals and physician groups, which help generate increased volumes. Revenue generation and operating profitability is well diversified with no region accounting for more than 41% of total system revenues in FY 2008.
Due to PHS's strong cash flow, liquidity indicators have been less impacted by the recent investment declines relative to Fitch's 'AA' rated hospital group. On March 31, 2009 PHS' unrestricted cash and investments totaled $2.43 billion as compared to $2.55 billion on Dec. 31, 2007. The corporation recently liquidated certain equity holdings to mitigate investment volatility with proceeds placed in cash, cash equivalents and U.S. treasury securities on an interim basis. Thus, liquidity indicators have remained solid relative to Fitch's other 'AA' hospitals with 135.3 days cash on hand (DCOH), a proforma cushion ratio 17.0x, and cash to debt of 143.2% on March 31, 2009.
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. PHS' business and financial covenants, while not unusual for the rating category, are weak and provide minimal bondholder protection. Series 2009 bondholders are not expected to be granted a security interest in any revenues or property of the obligated group nor is debt service reserve expected to be created.
The 'F1+' rating reflects the sufficiency of PHS' cash and investments position relative to its potential funding obligations on the $212.3 million Clackamas County series 2003D-G bonds and the $200 million taxable CP program. On March 31, 2009 PHS had over $1 billion of cash, cash equivalents and fixed income investments. 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 March 7, 2006), PHS' position of eligible cash and investment available for same-day settlement easily exceeds Fitch's 1.25x requirement to cover the maximum tender exposure on any given date. PHS provides Fitch regular liquidity reports that are used to monitor its cash and investment position relative the corporation's total self-liquidity exposure.
The Rating Outlook remains Stable. PHS is among the strongest 'AA' credits in Fitch's non-profit health care portfolio. Fitch believes that PHS' strong management practices, geographic dispersion of its operations and solid service area demographics will continue to produce and sustain strong financial performance.
PHS is composed of 26 hospitals and other related health care entities and had $7 billion in total operating revenue in fiscal 2008. 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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