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TMCNet:  Fitch Affirms Seattle Cancer Care Alliance, WA's Rev Bonds at 'A+'; Outlook Stable

[August 26, 2014]

Fitch Affirms Seattle Cancer Care Alliance, WA's Rev Bonds at 'A+'; Outlook Stable

SAN FRANCISCO --(Business Wire)--

Fitch Ratings has affirmed the 'A+' rating on the $82.2 million Washington Health Care Facilities Authority, WA (Seattle Cancer Care Alliance (SCCA) revenue bonds series 2008. SCCA also has $20.2 million series 2010 direct bank loan outstanding, which is not rated by Fitch but incorporated in the analysis.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group, consisting of SCCA, and a lien on SCCA's main outpatient clinic. There is a debt service reserve fund. Neither Fred Hutchinson Cancer Care Center (FHCRC), University of Washington Medicine (UWM) nor Seattle Children's Hospital (Children's) 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.

MARKET LEADER IN CANCER SERVICES: SCCA has maintained a leading market position in the Seattle region for specialized oncology services and, along with the members, is one of the leading providers of bone marrow and stem cell transplant services in the country. SCCA patients have a higher long-term survival rate than patients treated elsewhere according to data from the National Cancer Data Base.

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.

FUTURE CAPITAL PLANS: SCCA has longer-term capital plans for additional clinical space. Management is in the process of updating a long range financial plan that is expected to be completed in fall 2014.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL PROFILE: While SCCA's financial profile well exceeds many of Fitch's 'A' category medians, a rating upgrade is precluded at this time due to SCCA's single clinical service line, the potential issuance of additional debt related to future capital plans and the ability of SCCA to make distributions to its members. Fitch expects SCCA to maintain its strong financial profile, which will continue to build its debt capacity for the potential clinical expansion project that is estimated to be four to five years away.

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 as well as housing (80 units) for patients. 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, 2013, SCCA generated total revenue of $394 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 melanoma, leukemia, myeloma, non-Hodgkin's lymphoma, breast, lung, prostae and colon cancers.

SCCA/FHCRC performed the fourth highest number of bone marrow transplants (BMT) in the U.S., and SCCA and its members perform the dominant share of BMT cases in Washington State. There has been increasing competition from the community hospital providers and SCCA continues to grow its reach throughout its service area with two new oncology clinics at Evergreen Hospital and UW Medicine at Northwest Hospital.

SCCA's concentration in one business line is somewhat mitigated by SCCA's overall focus on all aspects of cancer care. As part of its role as a comprehensive cancer care site, it provides a broad spectrum of services related to the dissemination of education, research, and community support to other hospitals and providers in the region and coordinates with other specialized cancer treatment centers throughout the country. A relatively abrupt change in treatment for cancer could have a negative effect on SCCA's operating profile, but given SCCA's effectiveness in developing its multi-faceted role in cancer care, it is far more likely that SCCA would be on the leading edge of potential changes in treatment modalities.

Strong Profitability

SCCA's overall financial profile is strong and has improved from Fitch's last rating review in 2012. SCCA has robust liquidity, strong and consistent operating cash flow, and a manageable debt burden. Operating performance continues to be driven by good revenue growth and strong demand as well as a favorable payor mix with 56% of gross revenues from commercial/managed care. The majority of SCCA's activities are provided in the outpatient setting. Outpatient revenue accounted for 87% of total revenue in fiscal 2013. Operating margin was 7.6% in fiscal 2013 compared to 6.3% in fiscal 2012 and 5.3% in fiscal 2011 and was 7.8% through the nine months ended March 31, 2014. Management has conservatively budgeted a 3.2% operating margin for fiscal 2015.

Robust Liquidity

At March 31, 2014, SCCA had $268 million unrestricted cash and investments, which translated to 255.9 days cash on hand and 266.3% cash to debt. These metrics exceeded Fitch's A category medians of 199.2 and 131.2%, respectively. Liquidity growth has been driven by solid operating cash flow and modest capital spending the last three years.

Future Capital Plans

Capital spending has been below 1x depreciation expense the last three years. Near-term priorities include information technology investments and the fiscal 2015 capital budget totals $24 million (approximately 1.5x depreciation expense). Given the strong demand, SCCA needs additional clinical space and management is currently in the process of developing its long range financial plan. The expected timeline for a new outpatient facility is four to five years away. Fitch will evaluate the impact of the capital plans on SCCA's rating at the time that financing plans are finalized.

Manageable Debt Burden

Total outstanding debt is $102.4 million and includes $20.2 million indexed floating direct bank loan with Key Bank and $82.2 million fixed rate series 2008 bonds. The direct bank loan has a mandatory tender date of Nov. 18, 2016, and the bank agreement includes more restrictive covenants than under the master trust indenture (MTI (News - Alert)). Bank covenants include a debt service coverage ratio of 1.75x (1.1x under MTI), 75 days cash on hand and less than 50% debt to capitalization. There are no swaps outstanding.

Debt metrics are favorable and MADS of $8.77 million accounted for 2.2% of total revenue in fiscal 2013. Debt service coverage by EBITDA is very strong at 6.5x in fiscal 2013 compared to 5.7x in fiscal 2012 and the A category median of 3.8x. Debt service coverage remained strong through the nine months ended March 31, 2014 at 6.6x compared to the same prior year period with 5.9x.

Proton Facility Performance Below Expectations

SCCA has a 19% equity interest in a proton facility operated through a joint venture with ProCure, which constructed a proton facility on UW Medicine at Northwest Hospital's campus and opened in March 2013. SCCA's total investment in the facility was $29.5 million. The facility has performed below expectations, which resulted in a $24.5 million loss on investment in the joint venture in fiscal 2013, which was booked as a non-operating loss, but did not impact debt service coverage. SCCA is evaluating options to organize the facility in a way to be successful.

Disclosure

SCCA covenants to provide annual and quarterly disclosure to EMMA.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2014.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=857934

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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