|[February 14, 2014]
Fitch Downgrades PeaceHealth Bonds to 'A+'; Outlook Stable
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has assigned an 'A+' rating to the following bonds:
--Approximately $66 million Oregon Facilities Authority refunding
revenue bonds (PeaceHealth Project), 2014 series A;
--$42 million Washington Health Care Facilities Authority refunding
revenue bonds, series 2014A (PeaceHealth).
In addition, Fitch has downgraded the rating on PeaceHealth's
outstanding debt (listed at the end of the press release) to 'A+' from
The Rating Outlook is revised to Stable from Negative.
The series 2014 fixed rate bonds will be used to refinance PeaceHealth's
series 2001 Oregon bonds and Southwest Medical Center's (SWMC) series
1999 bonds. The bonds are expected to price the week of Feb. 24.
The bonds are secured by a gross revenue pledge of the obligated group
(OG). The OG accounted for 99% of total assets and 97% of total revenue
of the consolidated entity in fiscal 2013 (June 30 year-end). Fitch's
analysis is based on the consolidated entity.
KEY RATING DRIVERS
INCREASED LEVERAGE: The rating downgrade is driven largely by
PeaceHealth's increased leverage as $176 million of additional debt was
issued through a direct bank loan in fall 2013 to fund its investment in
Epic. The increased leverage combined with PeaceHealth's compressed
profitability reflects a financial profile that is no longer consistent
with Fitch's 'AA' category medians.
LIGHT PROFITABILITY: PeaceHealth's profitability declined in fiscal 2012
and 2013 with margins that are light relative to the 'A' category
medians. Fiscal 2013 performance dropped from the prior year due to flat
net patient revenue from lower volume and a one-time accrual for its
defined contribution plan. Profitability has improved through the
interim period despite continued decline in volume, especially in its
Columbia Network due to the termination of a Kaiser contract. Management
has targeted $130 million of performance improvement for fiscal 2014,
which Fitch believes is achievable.
SIZABLE CAPITAL PLANS: PeaceHealth has been committed to rebuilding its
balance sheet after the significant investment in its replacement
facility in Eugene, OR in 2008. After several years of light capital
spending, capital expenditures are projected to increase to $200-300
million annually in fiscal 2014-2019 compared to under $150 million
annually in fiscal 2009-2013. However, management has stated that the
capital plan is flexible and spending will be contingent on cash flow.
The only major item that is committed is the investment in Epic.
DOMINANT MARKET POSITION: PeaceHealth's primary rating strength
continues to be its geographic diversity and the dominant market
position in its major service areas. PeaceHealth is structured into
three networks: Columbia Network (Longview/Vancouver, WA), Oregon West
Network (Eugene/Springfield/Florence, OR) and Northwest Network
(Bellingham, WA and Alaska facilities), where the system held market
share positions of 59%, 76% and 86%, respectively.
GOOD LIQUIDITY: PeaceHealth's liquidity metrics have significantly
improved and are somewhat driven by its additional debt issuance as the
funds from the debt issuance are included in unrestricted cash and
investments. This amount is invested separately with a low volatility,
highly liquid investment strategy. Days cash on hand compares favorably
to the 'A' category median, which is necessary given PeaceHealth's
operational pressures related to lost volume in the Columbia Network and
the Epic implementation.
STRATEGIC INITIATIVES UNDERWAY: There are several initiatives underway
especially focused on the improvement of the Columbia Network, which
will depend on its ability to build a platform that will be successful
in recapturing the loss volume from the termination of the Kaiser
contract. Other initiatives include continued focus on physician
alignment and investment in information technology. PeaceHealth recently
formed an IPA with the Vancouver Clinic (largest physician group in the
service area) to be able to offer risk based contracting. The investment
in Epic is expected to improve operational efficiency with workflow
standardization and a common platform across the system.
OPERATIONAL PRESSURES AHEAD: Fitch believes PeaceHealth's profitability
will continue to be compressed over the near term as the realization of
initiatives in the Columbia Network is expected to take two to three
years. In addition, management plans to expense approximately 50% of the
$277 million Epic implementation costs, which will have a drag on
performance over the next three years. A further deterioration in
operating performance than projected or capital sending outside of its
affordability could lead to further downward rating pressure.
PeaceHealth is a multi-state health care system with nine acute care
hospitals operating a total of 1,570 licensed beds in Washington,
Oregon, and Alaska and had total revenue of $2.2 billion in fiscal 2013.
PeaceHealth recently revised its legal structure so that its sole
corporate parent is PeaceHealth Networks. Currently, there is no
activity at the parent level but the structure was created to foster
merger/affiliation opportunities with non-Catholic providers.
Since fiscal 2011, PeaceHealth's profitability metrics have lagged
Fitch's 'AA' and 'A' category medians. In fiscal 2013, PeaceHealth had
an operating margin of negative 0.3% and operating EBITDA margin of 8.5%
compared to the prior year with 0.8% and 9.5%, respectively. Net patient
revenue has been flat with a 2.2% reduction in admissions and 4.5%
reduction in surgeries in fiscal 2013 from the prior year. Through the
six months ended Dec. 31, 2013, PeaceHealth had a 1.7% operating margin
and 9.8% operating EBITDA margin compared to 1.6% and 10.1%,
respectively, the same prior year period and performance through fiscal
2014 year to date is ahead of budget. In addition, there continues to be
pressure on governmental reimbursement and PeaceHealth is a net payer
into both the Oregon and Washington state assessment programs.
In October 2013, Kaiser terminated its contract with PeaceHealth's
facilities in the Columbia Network and Kaiser has been redirecting that
volume to its newly opened facility in the Portland metropolitan market
as well as to a local competing facility, which recently signed a Kaiser
contract. Kaiser volumes at PeaceHealth's Columbia Network facilities
are down 75%. In response, PeaceHealth is developing alternative payor
strategies to capture some of the lost volume. In addition, there was a
reduction in force of approximately 500 FTEs in the Columbia Network in
Sept. 2013. Management has targeted $130 million of systemwide
operational improvement in fiscal 2014 which Fitch believes is
PeaceHealth is almost complete with the ambulatory implementation of
Epic and the remaining investment is for the inpatient side, at a total
cost of $277 million from fiscal 2014-2018. Profitability is expected to
be compressed over the next three years as the system will be expensing
about half of the cost over the next three years. Operating EBITDA
margins are projected between 9-9.7% for fiscal 2014-2016 with Epic
costs compared to 9.5-11.2% without Epic costs.
PeaceHealth's liquidity metrics are good for the rating level with $1.38
billion unrestricted cash and investments at Dec. 31, 2013. Liquidity
metrics of 256.0 days cash on hand, a 17.3x cushion ratio (based on pro
forma MADS and 126.1% cash to pro forma debt compare favorably to the
respective 'A' category medians of 196.3, 15.6x and 129.2%.
Strong Market Position
PeaceHealth's main credit strength is its system's geographic diversity
and leading / dominant market position in most of its service areas in
Washington, Oregon and Alaska. Fitch views the revenue diversity
favorably with the Oregon West Network accounting for 36.2% of
consolidated revenue in fiscal 2013, Columbia Network with 35% and
Northwest Network with 23.5%. 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. PeaceHealth currently has
experience with full risk Medicaid capitated lives. Its ability to
successfully recapture the lost volume through alternative payor
strategies is critical to improving financial performance and would
demonstrate an ability to coordinate care and provide services in cost
PeaceHealth's total pro forma debt is $1.06 billion and is 67%
underlying fixed rate and 33% underlying variable rate. PeaceHealth has
completed several refinancings lately and approximately 50% are now
direct placements or bank loans. The direct placements and variable rate
demand bonds (VRDBs) have a three-year term out provision and the
expiration dates and counterparty exposure are staggered and
diversified, which is viewed favorably. Including the impact of its
swaps, PeaceHealth is 100% fixed rate. PeaceHealth is not posting any
collateral related to its swaps.
The debt burden is moderately high with MADS as 3.7% compared to the 'A'
category median of 3.1%. Given weaker profitability, historical coverage
of pro forma MADS by EBITDA is light for the rating category at 2.9x and
2.6x in fiscal 2012 and 2013, respectively. Pro-forma MADS equals $79.8
million and includes a smoothing of PeaceHealth's bullet maturities
($80.65 million in 2019 for series 2008A and $50 million in 2021 for US
Bank loan) as permitted under the master trust indenture. The debt
service schedule is not level and MADS occurs in 2017, 2031, and 2032.
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.
--$96,375,000 Oregon Facilities Authority (OR) (PeaceHealth) revenue
bonds series 2009A;
--$79,220,000 Washington Health Care Facilities Authority (WA)
(PeaceHealth) revenue bonds series 2009;
--$145,975,000 Oregon Facilities Authority (OR) (PeaceHealth) revenue
bonds series 2008A&B (LOC: U.S. Bank National Association)
--$80,650,000 Washington Health Care Facilities Authority (WA)
(PeaceHealth) revenue bonds series 2008A;
--$70,000,000 Oregon Health, Housing, Educational, & Cultural Facilities
Authority (OR) (PeaceHealth) revenue bonds series 2001 (insured: Ambac
--$2,515,000 Oregon Health, Housing, Educational, & Cultural Facilities
Authority (OR) (PeaceHealth) revenue bonds series 1995.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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