Fitch Ratings has assigned a long-term rating of 'AA' to the expected issuance of approximately $95 million revenue bonds series 2011B to be issued by the Washington Health Care Facilities Authority on behalf of Providence Health & Services (PH&S).
In addition, Fitch affirms the 'AA' rating on approximately $2.2 billion of outstanding long-term debt 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 PH&S on its $194 million taxable commercial paper (CP) program and its $212.3 million Clackamas County (OR) Hospital Finance Authority series 2003D-G variable rate demand revenue bonds.
The series 2011B bonds are expected to be issued as uninsured fixed-rate bonds and are expected to sell the week of June 13th through negotiated sale. Bond proceeds along with the other funds provided by the system will be used to current refund all of the outstanding Washington Health Care Facilities Authority revenue bonds, Series 2001A (Providence Health System) and to pay all or a portion of the costs of issuance for the bonds.
This is the first of a series of three bond issues that PH&S is planning to issue in 2011 depending on market conditions. The rating reflects the issuance of two more series of long-term debt to be issued by the Oregon and Alaska authorities to fund the cost of capital projects and refund certain outstanding debt. Total outstanding debt assuming the series 2011A and 2011B bonds are issued will increase to approximately $2.4 billion from $2.2 billion and maximum annual debt service on a pro-forma basis is estimated to increase to $173 million from the current $158 million.
For certain bond series, this will be an underlying rating.
The Rating Outlook is Stable.
RATING RATIONALE:
--Providence Health and Services (PH&S) maintains the leading market share positions in most of its service areas, with facilities in Everett, Olympia and Spokane, WA, Anchorage, AK and Missoula, MT holding dominant market share positions. Fitch views the geographic dispersion of PHS's facilities favorably with no region accounting for more than 40% of total system revenues;
--PH&S' has solid profitability trends as demonstrated by operating margins and operating EBITDA margin of 3.7% and 8.3%, respectively, for the first quarter ending April 2011;
--PH&S' solid operating performance is due, in part, to the system's excellent management practices and controls. Strong management information systems allow each facility to be tracked on a 17 item dashboard monthly;
--PH&S' has low debt burden ratios and solid coverage of maximum annual debt service (MADS). Pro forma MADS represents 2.0% of total revenues and historical coverage of pro forma MADS is a solid 4.2 times(x) and 3.7x, respectively, for the first quarter of 2011;
--PHS' liquidity is strong relative to its 'AA' peers. At April 30, 2011, PHS had $3.4 billion in unrestricted cash and investments equating to 159.6 days of cash on hand, a pro-forma cushion ratio of 19.7 times (x) and cash to long term debt of 145%.
KEY RATING DRIVER:
PH&S continues to be one of the strongest 'AA' credits in Fitch's non-profit healthcare portfolio. The risks to PH&S reflect the general risks to health care providers nationally including increasing volumes of self pay and co-pay resulting in rising bad debt expense due to the persistence of the economic downturn and a tighter reimbursement environment stemming from the effects of health care reform.
SECURITY:
The bonds will be secured by a note under the master trust indenture which is an unsecured joint and several obligation of the obligated group.
CREDIT SUMMARY:
The 'AA' rating reflects PH&S' leading market share in geographically dispersed markets, solid profitability, excellent management practices and controls, a low debt burden resulting in solid historical coverage of pro-forma debt service and solid liquidity. 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, which help generate increased volumes. Revenue generation and operating profitability is well balanced with no region accounting for more than 40% of total system revenues in FY 2010.
PH&S solid operating performance is due, in part, to the system's excellent management practices and controls which have driven improved operating efficiency. 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. In fiscal 2009 and 2010 (year ended Dec. 31), PH&S generated operating EBITDA (earnings before interest, taxes, depreciation and amortization) of $752 million and $777 million resulting in operating EBITDA margins of 9.8% and 9.6%, respectively. Due to PH&S' strong operating cash flow, management has been able to fund roughly over $3 billion of capital additions since 2006 while adding only $600 million in additional long-term debt prior to this bond issuance.
The rating reflects the issuance of all three bond issues that PH&S is planning to issue in 2011. On a combined basis, PH&S' debt burden remains modest with pro-forma maximum annual debt service (MADS) being just 2.1% of fiscal 2010 revenues and pro forma debt being 3.0x of 2010 operating EBITDA compared to the 'AA' medians 2.6% and 3.7x, respectively. Historical coverage of pro-forma MADS, estimated at $173 million, by EBITDA is solid at strong at 3.5x and 5.3x in fiscal 2009 and 2010, respectively. Fitch notes that debt service coverage in fiscal 2009 was negatively impacted by realized losses incurred during the year from the corporation's decision to rebalance its investment portfolio in an effort to reduce volatility and increase liquidity.
PH&S' liquidity indicators are consistent with its 'AA' peers. At April 30, 2011, PH&S' unrestricted cash and investments totaled $3.4 billion a 17% increase from year end 2010, which translates into 159.6 days of cash on hand, a 19.7x cushion ratio and 144.5% of long term debt on an historic pro-forma basis.
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 $200 million taxable CP program. At April 31, 2011 PH&S had over $1 billion of cash, cash equivalents and fixed income investments. 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.
Fitch believes that PH&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. PH&S has continued to strengthen its operations with the continuing consolidation of system operations in an effort to neutralize the potential negative effects of health care reform, including the establishment of a single physician management company throughout the system and the creation of clinical documentation standardization of work flows and order sets to enhance efficiency and quality metrics, and reduce costs.
The Everett project, including the construction of 12 story replacement facility to expand the system's services in Everett is on time and on budget with the hospital scheduled to open in June 2011.
The Rating Outlook is Stable. Fitch believes that PH&S' strong management practices, geographic dispersion of its operations and solid service area demographics will continue to produce strong financial performance in the near term. Furthermore, Fitch believes management is proactively positioning the organization to meet the changing delivery and reimbursement environment embodied in the federal health care reform legislation and 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 revenue in fiscal 2010. Headquartered in Seattle, Washington, 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 some utilization statistics.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Oct. 08, 2010);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (Dec. 29, 2009);
--'Criteria for Assigning Short Term Ratings Based on Internal Liquidity' (Dec. 29, 2009).
For information on Build America Bonds, visit www.fitchratings.com/BABs'
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493176
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