Fitch Ratings has affirmed Group Health Cooperative's (GHC) Insurer Financial Strength (IFS) rating along with the ratings on senior secured bonds issued by the Washington Health Care Facilities Authority (WHCFA) on behalf of GHC at 'BBB-'. The Rating Outlooks are Stable. A complete list of rating actions can be found at the end of this comment.
The rating actions reflect Fitch's belief that GHC's credit-quality remains materially unchanged by the effective termination of the company's previously planned $225 million senior secured bond issuance. Fitch's understanding is that GHC has decided to forgo the issuance of the new senior secured bonds for the foreseeable future due to an inability to place the bonds under terms acceptable to the company.
Fitch views the negative credit aspects of GHC's inability to access the market at acceptable terms as largely offset by the favorable impact on leverage and interest coverage resulting from the forgone issuance. The additional financial leverage and anticipated decline in interest coverage that would have resulted from the issue were key factors in Fitch's May 21, 2012 decision to downgrade GHC's ratings to their current 'BBB-' levels.
Proceeds from the planned issue were to be used to refund $45 million of GHC's outstanding series 2001 amortizing bonds, fund anticipated contributions to pension plans, and for general corporate purposes.
Fitch's understanding is that GHC will not redeem the amortizing series 2001 bonds, the annual principal and interest requirements of which approximate $7 million per year from 2012 through 2019, and that the company's required 2012 pension plan contribution of $40 million has already been made.
GHC's ratings continue to reflect the company's small size and scale and geographically concentrated, albeit strong, market position in Washington. The ratings also reflect the company's comparatively weak profitability and interest coverage and solid risk-based capitalization.
GHC's profitability has been poor in recent years as the company has struggled to cope with operational issues that resulted from its gradual expansion outside its traditionally strong HMO product. Through the first quarter 2012, the company's statutory accounting basis net income was $8 million compared to $31 million in the prior year period and a $14 million net loss for the full year 2011.
The company has taken various steps to improve its financial results. However, Fitch views the ultimate outcome of these actions as uncertain given the highly competitive nature of the health insurance and managed care market.
GHC's year-end 2011 NAIC risk-based capital (RBC) ratio (on a company-action-level basis) and operating leverage measured by its year-end premiums-to-surplus ratio were 254% and 4.1x, both of which are better than median guidelines for Group Health's IFS rating category.
Rating Triggers:
Key rating triggers that could lead to an upgrade of Group Health's ratings include run-rate:
--EBITDA/Revenue margins approximating 5%;
--Net income/average capital ratios approximating 5%;
--Debt-to-EBITDA ratios and debt-to-capital ratios that are less than 4.5x and 35%, respectively;
--EBITDA-based interest coverage ratios that exceed 5x.
Key rating triggers that could lead to a downgrade of Group Health's ratings include:
--Sustained negative operating cash flow or material declines in liquidity available from invested assets;
--Run-rate EBITDA/revenue margins that are less than 3%;
--Run-rate net income/average capital ratios that are less than 3%;
--Earnings charges or balance sheet adjustments that are expected to reduce the company's NAIC RBC ratios (company-action-level basis) below 225%;
--Run-rate debt-to-EBITDA ratios and debt-to-capital ratios greater than 3.0x and 35% respectively;
--Loss of key contracts that contribute significantly to membership.
Fitch has affirmed the following ratings:
--$99.7 million series 2006 revenue bonds issued by the Washington Health Care Facilities Authority on behalf of Group Health Cooperative at 'BBB-';
--$45 million series 2001 revenue bonds issued by the Washington Health Care Facilities Authority on behalf of Group Health Cooperative at 'BBB-';
--Group Health Cooperative - IFS at 'BBB-';
--Group Health Cooperative - IDR at 'BB+';
--Group Health Options, Inc. - IFS at 'BBB-'.
In addition, Fitch has withdrawn the following rating:
--Group Health Cooperative $225 million senior secured bonds at 'BBB-'.
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.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 22, 2011);
--'Revenue-Supported Rating Criteria' (Oct. 8, 2010);
--'Nonprofit Hospitals and Health Systems Rating Criteria'(Dec. 29, 2009).
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018
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Fitch Ratings
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