SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on the $91.3 million Washington Health Care Facilities Authority revenue bonds, series 2014, issued on behalf of Seattle Cancer Care Alliance (SCCA).
The Rating Outlook is Stable.
SECURITY
Debt payments are secured by a pledge of the gross revenues of the obligated group, consisting of SCCA. The member organizations are Fred Hutchinson Cancer Research Center (FHCRC), University of Washington Medicine (UWM) and Seattle Children's Health System (Children's), none of which are obligated to provide financial support.
KEY RATING DRIVERS
UNIQUE SERVICE PROVIDER: SCCA was formed in 1998 by FHCRC, UWM and Children's (rated 'AA' by Fitch, together, the members) to provide a comprehensive program of integrated cancer care services. The three members initially funded the startup capital for SCCA and although distributions can be made to the members, cash flow has been retained at SCCA.
NCI DESIGNATED COMPREHENSIVE CANCER CENTER: SCCA is one of 11 dedicated comprehensive cancer centers nationwide that operates as an exempt cancer hospital and is the only one in the Northwest, which results in enhanced reimbursement under Medicare. SCCA is also one of 45 NCI designated comprehensive cancer centers nationwide, which signifies world class, state of the art programs in multidisciplinary cancer research. SCCA, along with the members, is one of the leading providers of bone marrow and stem cell transplant services in the country and SCCA patients have a higher long-term risk adjusted survival rate than patients treated elsewhere according to data from the National Cancer Database and Center for International Bone Marrow Transplant Registry.
STRONG FINANCIAL PROFILE: SCCA's financial profile is strong with robust liquidity, strong operating cash flow and excellent debt service coverage. Strong financial performance has been driven mainly by continued growth and demand for services.
NICHE SERVICE LINE: As a provider of a single clinical service line, SCCA's financial performance and profile is highly influenced by changes to reimbursement, competition and clinical and pharmacological advances in the treatment of cancer.
MASTER FACILITY PLAN: SCCA is in the process of developing its facility master plan, which includes a significant expansion of clinical space for outpatient services. Plans are still preliminary; however, a portion of the capital plan is expected to be funded by additional debt. Fitch will assess the impact on the rating when plans are finalized.
RATING SENSITIVITIES
MAINTENANCE OF STRONG FINANCIAL PROFILE: Fitch expects Seattle Cancer Care Alliance to maintain its strong financial profile to offset its exposure to risks related to one specialty service line and changing market dynamics.
ADDITIONAL DEBT: Fitch will assess the impact of additional debt plans at the time of issuance and there could be negative rating pressure depending on the size and scope of the final plan.
CREDIT PROFILE
SCCA is located in Seattle, WA and predominately provides outpatient oncology services but also operates a 20-bed licensed hospital within University of Washington Medical Center. SCCA also owns and operates SCCA House (80 units) and manages Pete Gross House (70 units), which provide housing for patients and family members. SCCA, FHCRC, UWM, and Children's form the only NCI designated comprehensive cancer center in the Pacific Northwest. For the fiscal year ended June 30, 2016, SCCA generated total revenue of $525 million.
MARKET LEADER IN CANCER SERVICES
SCCA's primary function is to coordinate the treatment, diagnosis, delivery and research associated with cancer with its members. SCCA is a leading provider of specialized clinical oncology services in the Seattle / Pacific Northwest region and oncology care is provided in a multidisciplinary approach and includes the full continuum of care including supportive services. Patients that have been diagnosed and treated at SCCA had a higher five year survival rate for diseases such as leukemia, lymphoma, breast, lung, prostate and colon cancers by comparison to other providers. SCCA/FHCRC performed the fifth highest number of bone marrow transplants in the U.S. (2013 data; most recent available).
SCCA has presence at two community sites: Evergreen Health and UW Medicine at Northwest Hospital. SCCA also founded a regional network that currently has 13 facilities to facilitate clinical trials for patients and provide support to community based physicians in the latest cancer diagnostic and treatment information.
The local market has experienced acute care consolidation as well as changing payor dynamics. Fitch will continue to monitor the impact of these changes as well as the shift toward value based reimbursement on SCCA.
STRONG PROFITABILITY
Operating performance continues to be driven by good revenue growth and strong demand as well as a favorable payor mix with 52% of gross revenues from commercial/managed care in fiscal 2016. The majority of SCCA's activities are provided in the outpatient setting. Outpatient revenue accounted for over 90% of total revenue in fiscal 2016. Operating margin was 9.8% in fiscal 2016 compared to 7.2% in fiscal 2015, 6.2% in fiscal 2014 and Fitch's 'A' category median of 3.8%.
ROBUST LIQUIDITY
At Sept. 30, 2016, SCCA had $326.8 million of unrestricted cash and investments, which translated to 244 days cash on hand and 297.3% cash to debt. Although these metrics easily exceed Fitch's 'A' category medians of 215.5 and 148.6%, respectively, this is expected given SCCA's exposure to one service line.
FUTURE CAPITAL PLANS
Capital spending has been below 1x depreciation expense the last four years and a facility master plan is underway. In addition, there are other strategic investments that are being evaluated, including a replacement electronic medical record. The fiscal 2017 capital budget totals $45.7 million (2x depreciation expense). Fitch will evaluate the impact of the longer-term capital plan on SCCA's rating when plans are finalized. Although the current financial profile is strong, there could be negative rating pressure depending on the size of scope of the overall capital plan and financing sources. Philanthropy is also being evaluated as a potential source of funding, which has not been pursued in the past.
DEBT PROFILE
Total outstanding debt is $110.2 million at June 30, 2016 and includes $18.9 million indexed floating direct bank loan with Key Bank (series 2010) and $91.3 million fixed rate series 2014 bonds. The direct bank loan has a mandatory tender date of Nov. 18, 2024. Bank covenants include additional financial covenants than what is in the master trust indenture (days cash on hand and debt to capitalization). There are no swaps outstanding.
MADS of $7.7 million assumes a 2.5% interest rate on the series 2010 bonds. MADS equates to a very light 1.5% of total revenue in fiscal 2016. MADS coverage is excellent at 8.5x through the three months ended Sept. 30, 2016, 11.2x in fiscal 2016, and 8.6x in fiscal 2015. The debt service coverage covenant is on annual debt service, which was calculated at $6.9 million in fiscal 2016 (based on actual rates, around 1%, for series 2010 bonds) and resulted in 12.4x coverage.
PROTON FACILITY
SCCA had a 19% equity interest in a proton therapy facility operated through a joint venture with ProCure Washington Holdings (ProCure) that constructed a proton therapy facility on UW Medicine at Northwest Hospital's campus. This facility has been performing below expectations and various options were being evaluated. In 2016, SCCA was able to exit from this investment and previous non-cash losses on its investment in Procure are no longer reflected in the financial statements as of June 30, 2015. The previous non-cash losses had already been excluded from net income available for debt service for debt service coverage calculations, per SCCA's master trust indenture.
Disclosure
SCCA covenants to provide annual and quarterly disclosure to EMMA.
Fitch has withdrawn its rating for the following bonds due to prerefunding activity:
--Washington Health Care Facilities Authority (WA) (Seattle Cancer Care Alliance) revenue bonds series 2008 (prerefunded maturities only: 93978E2A9, 93978E2B7, 93978E2C5, 93978EZ96, 93978EZ70, 93978EZ88) 'A+', Outlook Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016399
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016399
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https://www.fitchratings.com/regulatory
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