|[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.
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
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.
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.
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
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
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.
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.
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
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.
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
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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