SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following Washington Health Care Facilities Authority (WHCFA) expected issuance:
--$350 million revenue bonds, series 2011A, 2011B and 2011C (Swedish Health Services).
In addition, Fitch affirms the 'A+' rating on approximately $547 million of revenue bonds outstanding issued through the WHCFA on behalf of Swedish Health Services (Swedish).
The Rating Outlook is Stable.
Approximately $175 million of the bonds are expected to be issued as unenhanced fixed rate debt. The balance of the bond issue will be issued as variable rate debt supported by a letters of credit issued by Citibank, N.A.. Bond proceeds will be used to fund/reimburse Swedish primarily for the costs related to the construction of a 175-bed hospital in Issaquah, WA, (including the pay-down of a $110 million line of credit and the reimbursement of approximately $90 million for prior capital expenditures), to refund the $100 million series 2006 bonds currently outstanding, and to pay costs of issuance. Total proforma debt after this debt issuance will be approximately $805 million with 59% fixed rate and 41% variable rate debt The series 2011 bonds are expected to sell the week of Feb. 14 through negotiation.
RATING RATIONALE:
--The 'A+' rating reflects Swedish's integrated delivery system in the favorable Seattle/ King County service area that has led to a leading market position and a solid financial profile.
--Swedish's operating cash flow over the last three years has been consistent with Fitch's 'A' rated medians. In fiscal 2009, Swedish's operating EBITDA margin of 11.1% exceeded the 'A' category median of 10%.
--Swedish's debt burden will increase with this new debt issuance. Historical coverage of pro forma maximum annual debt service (MADS) by EBITDA was still solid at 3.6x in 2009 and was 3.5x for the 11 month interim period ending Nov. 30, 2010.
--Although Swedish's capital spending will be elevated over the near term as a result of the $397 million in costs associated with the Issaquah campus project, Fitch views the capital investment favorably because it expands the system's service area in a demographically favorable and growing service area and has the potential to enhance the system's credit profile.
--Swedish's liquidity metrics have improved since fiscal 2007 and are adequate when compared to the 'A' category medians. After this financing, proforma cash metrics (including the reimbursement for prior capital expenditure and new debt issuance) should be 200 days cash on hand, 14.6x cushion ratio and 82% cash to debt on a proforma basis.
KEY RATING DRIVERS:
--Maintaining solid operating cash flow;
--Realization of benefits related to the new Issaquah campus.
SECURITY:
A pledge of and security interest in the 'Gross Receivables' of the Obligated Group and negative mortgage pledge. Other financial covenants are typical for the rating category.
CREDIT SUMMARY:
The 'A+' rating is supported by Swedish's leading market position in the Seattle metropolitan area, the service area's favorable demographic profile, solid operating profitability and manageable debt burden and adequate liquidity. In 2009, Swedish held a 22% inpatient market position in King County compared to 17% for University of Washington/Harborview and 12% for Overlake Hospital. Furthermore, the lease agreement with Stevens Hospital in Edmonds, WA and the development of inpatient capacity at the Issaquah facility is expected to further extend the system's market share position. The primary service area demographics are favorable with above average wealth and education levels. While unemployment has risen in the area it remains below state and national averages. Currently Fitch rates the limited tax general obligation bonds of both King County and the City of Seattle 'AA+'. Operating profitability rebounded nicely in 2009 after being negatively impacted by weather related disruptions in 2008 with operating and operating EBITDA margins of 3.1% and 11.2%, respectively; both exceed the respective 'A' category medians of 3% and 10%. Through the 11-month interim period, operating and operating EBITDA margins have remained solid at 3.3% and 10.8%, respectively. Although certain of Swedish's debt metrics will become elevated upon closing of the series 2011 bond issue, Fitch believes the debt burden is manageable. Historical coverage of pro forma MADS by EBITDA was solid in 2009 at 3.6x while pro forma MADS equates to 3.3% of fiscal 2009 revenues. Finally, Swedish enjoys an excellent reputation for quality due in part to the development of clinical institutes in orthopedics, neurosciences, cardiac and oncology.
Swedish received certificate of need approval to develop a 175-bed acute care hospital in June 2008. Construction began in late 2009 with availability of inpatient beds facilities projected in early 2012. The total cost of the Issaquah campus project is approximately $397 million, of which $162 million has been expended through November 2010. Fitch views the Issaquah development favorably as it extends Swedish's footprint in a favorable service area
The Stable Outlook reflects Fitch's expectation that Swedish will maintain its solid financial profile after this debt issuance. Swedish is not planning on issuing any additional debt over the near term and expects to fund any additional capital expense from internal operations. Given the system's demonstrated ability of strong cash flow earnings, Fitch would expect the system to maintain its current operational profile over the near term including a steady reduction in capital related ratios to a level more comparable to the rating category. Negative rating action could occur if there is evidence of declining profitability trends or weakened liquidity ratios.
Swedish is not a party to any swap agreements/transactions.
Swedish is an integrated health care system consisting of four acute care hospitals, over 400 employed physicians and a free standing emergency/outpatient facility. In 2009, Swedish had total revenues of $1.38 billion. Swedish will provide annual and quarterly disclosure for the first three quarters of each fiscal year to the Municipal Securities Rule-making Board's EMMA system. The content of Swedish's quarterly disclosure is adequate and includes a balance sheet and income statement. Inclusion of a statement of cash flows, utilization data and a management discussion and analysis would be viewed favorably.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's report 'Revenue-Supported Rating Criteria', this action was additionally informed by information from the Underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct 8, 2010;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug 16, 2010.
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
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