CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' ratings on the following revenue bonds issued on behalf of PeaceHealth:
--$100.8 million Oregon Facilities Authority series 2009 A;
--$146
million Oregon Facilities Authority series 2008A&B(#) ;
--$70
million Oregon Health, Housing, Educational & Cultural Facilities
Authority series 2001(*);
--$3.7 million Oregon Health, Housing,
Educational & Cultural Facilities Authority series 1995;
--$83.2
million Washington Health Care Facilities Authority revenue bonds series
2009;
--$80.6 million Washington Health Care Facilities Authority
series 2008A.
(*)The series 2001 bonds are insured by Ambac Assurance Corp whose Insurer Financial Strength is not rated by Fitch.
(#) This is an underlying rating. The series 2008 A and B bonds are supported by a direct pay letters of credit provided by US Bank National Association (rated 'AA-/F1+').
The Rating Outlook is revised to Negative from Stable.
In addition, Fitch has withdrawn its ratings on the following bonds due to pre-refunding activity:
--Oregon Facilities Authority (OR) (PeaceHealth) revenue bonds series 2004A.
KEY RATING DRIVERS
DOMINANT MARKET POSITION: PeaceHealth's primary rating strength continues to be its geographic diversity and the dominant market position in its major service areas. In PeaceHealth's major service areas of Eugene/Springfield (OR), Bellingham (WA) and Longview/Vancouver (WA), the system held market share positions of 77%, 87% and 58%, respectively.
SIZABLE CAPITAL PLANS: After several years of light capital spending, PeaceHealth expects to increase capital spending to roughly 150% of 2012 depreciation expense over the next three years to fund various improvements throughout the system and fund its clinical and business IT platform. The increase in capital spending is likely to retard any improvement in current financial metrics.
ADEQUATE PROFITABILITY: On a consolidated basis, PeaceHealth's profitability is somewhat light for the 'AA' category with operating EBITDA margins of 10.3% and 9.3% in fiscal 2011 and 2012, respectively compared to the 'AA' median of 10.6%
LIGHT LIQUIDITY: PeaceHealth's liquidity metrics, while improved, remain light relative to its 'AA' category peer group. At Dec. 31, 2012, PeaceHealth had $1.1 billion of unrestricted cash and investments which equates to 211.4 days cash on hand, a 17.9 times (x) cushion ratio and 127.2% cash to debt compared to the respective 'AA' medians of 241.1, 24.1x and 169.4%.
REFORM READINESS: PeaceHealth's investment in its physician alignment strategy and its clinical information platform has (and will) compressed profitability in the near term. However, Fitch believes these investments combined with the system's strong market share positions will positively position the corporation for the implementation of health reform which emphasizes population health management.
RATING SENSITIVITIES
IMPACT OF ADDITIONAL DEBT: Management anticipates issuing additional debt sometime in the second half of 2013 to fund various capital expenditures throughout the system. The Outlook revision to Negative reflects Fitch's concern that the additional debt will further dilute PeaceHealth's already light liquidity and leverage metrics. Fitch will take appropriate rating action once the size and structure of the debt plans become final.
SECURITY:
Pledge of gross revenues of the obligated group.
CREDIT SUMMARY:
The Outlook revision to Negative from Stable reflects Fitch's concern about the level of erosion to PeaceHealth's financial profile from the possible issuance of up to $180 million of new debt in the fall of 2013 to fund various capital projects throughout the system. The size and structure are not yet firm and Fitch will assess the impact of the financing when the timing and structure become final.
The affirmation of the 'AA-' reflects the benefit of system's geographic diversity and leading / dominant market position in most of its service areas in Washington, Oregon and Alaska. In Bellingham (WA), Longview (WA) and Eugene/Springfield (OR), PeaceHealth held market share positions of 87%, 68% and 76%, respectively, in 2012. In addition, critical access hospitals which receive cost based reimbursement from Medicare are located in Ketchikan, AK, Florence, OR and Cottage Grove, OR and San Juan Island, WA. On a combined basis, the critical access hospitals and the Bellingham, Eugene/Springfield and Longview markets accounted for approximately 75% of consolidated net patient revenues in fiscal 2012. Southwest Medical Center, located in Vancouver, WA (450 beds, $556 million in net patient revenues in 2012) had a 56% inpatient market share in 2012 and competes in the competitive Portland metropolitan area. The system has been making a substantial investment in physician alignment and its clinical information system in an effort to position the system for value based reimbursement models and population health management capabilities. While these investments should benefit the organization over the long term, this spending has diluted the corporation's financial profile and will continue to compress financial performance over the near term.
On a consolidated basis, PeaceHealth's operating profitability is adequate for the rating and reflects both its strategy and the effects of the economy. Operating EBITDA margins of 10.3% and 9.3% in fiscal 2011 and 2012, respectively, trail the 'AA' category median of 10.6%. Profitability was negatively impacted in fiscal 2012 by a jump in bad debt expense from the prior year, reduced reimbursement from Medicaid payors in both Oregon and Washington, reduced volume from Kaiser members at St John's and SWMC and expenses related to clinical IT system. However, through the six months ended Dec. 31, 2012, PeaceHealth (combined) has generated operating EBITDA of $112.3 million on total revenues of $1.05 billion or a 10.7% operating EBITDA margin.
Many of PeaceHealth's liquidity and leverage metrics lag the 'AA' category medians. At Dec. 31, 2012, combined unrestricted cash and investments totaled $1.11 billion equating to 211.4 days cash on hand, a 17.9x cushion ratio (based on maximum annual debt service [MADS] of $62 million) and cash to debt of 127.2%. While liquidity metrics have improved sharply since 2009 due to lower capital spending, they still lag the 'AA' category medians of 241.1 days cash on hand, 24.1x cushion ratio and 169.4% cash to debt. Similarly, leverage metrics are solid but trail the 'AA' category medians. While coverage of MADS by EBITDA has improved year over year since 2009, the 3.6x coverage in fiscal 2012 is below the 'AA' category median of 4.8x. Similarly, MADS as a percentage of revenue (2.8% of fiscal 2012 revenues) and debt to capitalization (36.8% in 2012), although on an improving trend, lag the 'AA' category medians. Capital spending is expected to roughly $175 million in fiscal 2013, $275 million in fiscal 2014 and $250 million in fiscal 2015 which will limit any improvement in liquidity and leverage.
PeaceHealth is a multi-state health care system with eight acute care hospital sites operating a total of 1,520 licensed beds in Washington, Oregon, and Alaska. On a consolidated basis (including SWMC), total system revenues in fiscal 2012 were $2.3 billion. PeaceHealth has covenanted to provide annual audited financial statements to each Electronic Municipal Market Access (EMMA) within 150 days of each fiscal year end and unaudited quarterly financial statements (including a consolidated balance sheet, income statement, statement of cash flows, and utilization statistics) within 60 days of each fiscal quarter end.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--Revenue-Supported
Rating Criteria, June 12, 2012;
--Non-Profit Hospital and Health
System Rating Criteria, July 23, 2012.
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=681015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789731
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