Fitch Ratings has assigned its 'AA' rating to PeaceHealth's expected issuance of $100 million of series 2009 revenue bonds through the Washington Health Care Facilities Authority and $105.2 million series 2009 revenue bonds through the Oregon Facilities Authority. Furthermore, Fitch affirms the 'AA' rating on approximately $601.8 million of bonds outstanding issued on behalf of PeaceHealth. The Rating Outlook is Stable.
Both series of bonds will be issued as uninsured, fixed-rate bonds. Proceeds from the series 2009 bonds will be used to refund a portion of PeaceHealth's series 2008A&B bonds issued through the Oregon Facilities Authority, refund the series 2008B, C&D issued through the Washington Health Care Facilities Authority, repay approximately $77.4 million of bank debt and pay associated costs of issuance. Both series of bonds are expected to price the week of Sept. 28th through negotiation.
The 'AA' rating is based on PeaceHealth's leading market share in each of its regions, the clinical and strategic benefits resulting from its physician integration and financial performance which is line with Fitch's expectations. PeaceHealth's primary credit strength is its dominant market share position in its major service areas. PeaceHealth's hospital facilities in Eugene/Springfield, OR; and Bellingham and Longview, WA each maintain market share positions in excess of 75% in their respective service areas and collectively account for two-thirds of total system revenues. Furthermore, PeaceHealth has built a sizable group of employed physicians in its service areas which includes both primary care physicians and specialists. In fiscal 2009, PeaceHealth's 367 employed physicians accounted for over 40% of the system's total admissions. Fitch believes the corporation's physician integration strategy will drive improved clinical outcomes, improve the efficiency of care delivery throughout the system, limit physician competition and allow for a better value proposition in managed care negotiations.
PeaceHealth's historical operating profitability has been consistent with its 'AA' rating. In the five fiscal years from 2004 to 2008, the system generated consistent operating and operating EBITDA margins, averaging 4.5% and 10.6%, respectively. As projected by management, operating profitability in fiscal 2009 was depressed with the opening of 337-bed Sacred Heart-Riverbend Hospital in Springfield, OR in August 2008 due to the increased costs associated with the transfer of all acute care inpatient services from its existing facility in Eugene (approximately five miles away). Additionally, fiscal 2009's negative 1.3% operating margin and 7.9% operating EBITDA margin are in line with management's forecast of 0% and 7.8%, respectively. Similarly, liquidity indicators, although much weaker than Fitch's 2009 'AA' medians, are in-line with forecasted results reflecting the effects of unrealized investment losses and equity contributions toward the Riverbend project. At June 30, 2009, PeaceHealth had approximately $437.8 million of unrestricted cash and investments which translates into 128 days cash on hand (DCOH), a cushion ratio based on pro-forma maximum annual debt service (MADS) of 9.9 times(x) and 70% of long-term debt - almost identical to management's forecast of unrestricted cash and investments of $447.8 million at June 30, 2009, resulting in DCOH of 137, cushion ratio of 12.0x and a ratio of cash to long-term debt of 71%. At fiscal year end 2009, operational , liquidity and capital ratios should be at their lows, and management projections show these ratios steadily improving and returning to figures more in line with 'AA' over the next three years.
Moreover, the series 2009 plan of finance reduces capital structure risk by replacing bank support with permanently committed capital which is more appropriate given PeaceHealth's relatively light liquidity position. Upon closing of the series 2009 bond issue, PeaceHealth's total amount of unrestricted cash and investments will exceed the total amount of putable debt.
Fitch's primary credit concern is the impact of the weaker economy on PeaceHealth's ability to return to profitability consistent with its rating and repair its balance sheet strength. Oregon's unemployment is among the highest in the country and per capita income in 2008 was just 90.5% of the national average. However, the University of Oregon, with an enrollment of 20,000, should blunt the effects of the weaker economy in the Eugene/ Springfield market.
The Stable Outlook reflects Fitch's expectation that operating profitability and liquidity will improve over the next three years and become more consistent with Fitch's 'AA' medians. PeaceHealth's dominant market share positions combined with the reduction in capital structure risk mitigate the system's current liquidity position. Improved operating profitability combined with lower capital spending requirements should allow for a rebuilding of liquidity measures. Negative pressure is expected absent such improvement.
PeaceHealth is a multi-state health care system with seven acute care hospital sites operating a total of 903 beds in Washington, Oregon, and Alaska. Total revenue in fiscal 2009 is approximately $1.4 billion. PeaceHealth has covenanted to provide annual audited financial statements to each Electronic Municipal Market Access (EMMA) with 150 days of each fiscal year end and unaudited quarterly financial statements (including a consolidated balance sheet, income statement, statement of cash flows, and utilization statistics) within 60 days of each fiscal quarter end.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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or
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Email: cindy.stoller@fitchratings.com