NEW YORK--(BUSINESS WIRE)--
Fitch Ratings assigns an 'AA' rating to the following bonds to be issued on behalf of Providence Health & Services (PH&S):
--$281 million Oregon Facilities Authority revenue bonds series 2013A&C;
--$144 million California Health Facilities Financing Authority (CHFFA) revenue bonds, series 2013B;
--$541 million Providence Health & Services Direct Obligation Notes, series 2013D&E.
In addition, Fitch affirms the 'AA' long-term ratings on approximately $3.1 billion in outstanding debt issued through various authorities and the 'F1+' short-term rating based on the self-liquidity provided by PH&S on approximately $200 million of series 2003 variable rate demand bonds issued by Clackamas County Hospital Facility Authority and the $200 million Providence Health System Obligated Group (WA) taxable CP notes series 2008.
The Rating Outlook is Stable.
PH&S expects to issue a total of $965 million of series 2013 bonds. The preliminary plan of finance is subject to market conditions and currently includes: $219.0 million of uninsured fixed rate series 2013A&B bonds; $206.0 million of series 2013C tax exempt floating rate notes (FRNs); $288.0 million of series 2013D taxable FRNs and $250.0 million series 2013E taxable fixed rate bonds. Bond proceeds will be used to refund all or a portion of PH&S' outstanding CHFFA series 2008C bonds; all or a portion of the series 2004 bonds issued Multnomah County OR; all or a portion of the series 2003D-G bonds issued through Clackamas County OR and the outstanding series 2008A taxable commercial paper notes (both of which are supported by PH&S' internal liquidity); repay an $86.0 million line of credit draw; provide $250 million of new money to be used for general corporate purposes and pay bond issuance expenses.
The series 2013A,B &E fixed rate bonds are expected to sell the week of July 22 through negotiated sale while the series 2013C&D FRNs are expected to be sold at a date closer to settlement.
Unsecured corporate obligation of the Obligated Group.
KEY RATING DRIVERS
STRONG MARKET POSITION: Providence Health and Services maintains the leading market share position in the majority of its service areas and is the dominant provider in its markets of Everett, Olympia and Spokane, WA, Anchorage, AK and Missoula, MT. Fitch views PH&S' geographic and business line diversity as a key credit strength
SOLID COVERAGE AND MODEST DEBT BURDEN: Upon closing of the series 2013 issue, PH&S' debt burden will remain modest with pro-forma maximum annual debt service (MADS) of $229.2 million equating to 2.2% of 2012 combined system revenues. Despite lower operating profitability, historical coverage of pro-forma MADS was solid at 4.9x in 2012 and remains consistent with the 'AA' category median of 4.8x.
EXCELLENT BUSINESS PRACTICES: Fitch believes that PH&S benefits from excellent management practices and controls, which should result in the continued success of integrating Swedish Health Services, achievement of system-wide operating efficiencies and improvement of consolidated operating profitability.
LIGHT LIQUIDITY METRICS: At March 31, 2013 PH&S had $4.65 billion of unrestricted cash and investments which equates to 167.3 days cash on hand, a 20.3x cushion ratio (based on pro-forma MADS) and 135% cash to pro-forma long term debt which lag the respective 'AA' category medians of 241, 24.0x and 169.4%. However, Fitch notes that internal cash flow has been used to fund a portion of the costs of the system's ongoing capital projects as well as its substantial investment in a system-wide IT platform. Liquidity growth is expected to be muted due to ongoing capital needs and pension funding requirements.
IMPROVED OPERATING PROFITABILITY: Fitch expects operating profitability to improve incrementally in fiscal years 2013 and 2014. PH&S experienced lower operating profitability in fiscal years 2011 and 2012, due primarily to the dilutive impact of both the Swedish Health Services (Swedish) affiliation and the system-wide electronic health record implementation. Although dilutive to operating profitability in the near term, Fitch believes the acquisition of Swedish and the substantial investment in IT will be strategically advantageous to PH&S over the long term.
PH&S is large, multi-state health system that is composed of 32 acute care hospital facilities located across five states, an Oregon health insurer with over 500,000 members and over 2,900 employed physicians. In 2012, PH&S generated total revenues of $10.6 billion.
STRONG MARKET POSITION
PH&S owns or leases 32 hospitals in Washington, Oregon, Alaska, Montana and California. PH&S maintains strong competitive positions in most of its service areas, with facilities in Seattle, WA; 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. With the addition of Swedish Health Services (four hospitals with a total of 1,542 licensed beds) in Feb 2012, PH&S has a leading market share position in the favorable Seattle metropolitan area and makes PH&S the largest health care system in the State of Washington.
Fitch believes PH&S' revenue generation from various geographic markets is well balanced which helps to insulate overall results from changes in any one market or region. With the addition of Swedish Health Services, roughly 43% of total system revenues in 2012 was generated in the State of Washington.
MODERATE DEBT BURDEN
PH&S' debt burden remains modest with pro-forma maximum annual debt service (MADS) of $229.2 million equating to 2.2% of 2012 combined system revenues. Debt -to- capitalization of 34.5% at March 31, 2013 is moderate and in line with the 'AA' category median of 33.9%. Despite a decline in operating profitability in fiscal years 2011 and 2012, the modest debt burden allowed PH&S to achieve good coverage metrics for the 'AA' category. Historical coverage of pro-forma MADS by EBITDA was 4.9x in 2012; slightly ahead of the 'AA' median of 4.8x. Debt service coverage in fiscal 2011 and prior is lighter as Swedish's debt is included in the MADS without the corresponding cash flow from Swedish since they were not consolidated into PH&S until Feb. 2012.
COMPRESSED OPERATING PROFITABILITY
Operating profitability declined over the past two years with operating EBITDA margins of 8.6% in fiscal years 2011 and 2012 relative to an average of 10% between fiscal years 2008 and 2010. The compressed profitability reflects the dilutive impact of the Swedish Health Services acquisition and the ongoing electronic health record implementation. Both negative factors were expected. Additionally, operations were negatively impacted by declining utilization, weaker Medicaid reimbursement and rising self-pay volumes. Despite the decline in operations, PH&S exceeded its fiscal 2012 operating income budget by $50 million. Fitch expects operating profitability to improve in fiscal years 2013 and 2014.
EXCELLENT BUSINESS PRACTICES
Fitch believes that PH&S benefits from excellent management practices and controls which have driven improved operating efficiency and bolsters the system clinical integration strategy. 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. PH&S is further enhancing its strong management information capabilities with a major upgrade of its clinical information and networking systems at an estimated cost of approximately $775 million to be spent through 2014. Fitch expects the management team will effectively implement strategies to continue to integrate Swedish Health Services and to improve system-wide operating performance.
LIGHT LIQUIDITY METRICS
PH&S' liquidity metrics reflect the system's use of operating cash flow to help fund substantial capital investments. Since 2009, PH&S has spent over $2.8 billion in capital additions (equating to 164% of annual depreciation expense), of which, less than $1.0 billion was funded from additional debt. At March 31, 2013, PH&S had $4.65 billion of unrestricted cash and investments which equated to 167.3 days cash on hand, a 20.3x cushion ratio (based on pro-forma MADS) and 135.4% cash to pro-forma long term debt which lag the respective 'AA' category medians of 241, 24.1x and 169.4%. Upon closing of the series 2013 financing, PH&S' liquidity position should improve as roughly $250 million of bond proceeds will be added to the balance sheet for general corporate purposes. However, Fitch believes that liquidity growth will be constrained due to ongoing capital spending and pension funding requirements.
SELF- LIQUIDITY RATING
The 'F1+' rating reflects the sufficiency of PH&S' cash and investments position relative to its potential funding obligations on the $202 million Clackamas County series 2003D-G bonds and the $200 million taxable CP program. As of May 31, 2013, PH&S had over $1 billion of highly liquid investments. Based on Fitch's rating criteria related to self-liquidity, PH&S' position of 'eligible cash and investments' 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.
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 utilization statistics.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 2013);
--'Criteria for Assigning Short Term Ratings Based on Internal Liquidity' (June 13, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria - Effective Aug. 12, 2011 to July 23, 2012
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
- Security Upgrades & Downgrades
- Fitch Ratings
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