|[September 03, 2014]
Fitch Upgrades Presbyterian Healthcare Services (NM) Revs to 'AA'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings upgrades to 'AA' from 'AA-' the ratings on the following
revenue bonds issued by the New Mexico Hospital Equipment Loan Council
for the benefit of Presbyterian Healthcare Services (PHS):
--$75 million hospital revenue bonds, series 2012A;
--$134.6 million hospital revenue bonds, series 2009A;
--$144.5 million hospital revenue bonds, series 2008A;
--$206.8 million hospital revenue bonds, series 2008B-D.
The Rating Outlook is Stable.
Bonds are secured by a pledge of unrestricted gross receivables of the
KEY RATING DRIVERS
VERTICALLY ALIGNED HEALTHCARE SYSTEM: The upgrade to 'AA' reflects the
increasing strategic benefits of PHS' vertically aligned healthcare
delivery network (includes eight acute care facilities, 600+ employed
physician group and a 437,000-member health plan) combined with a
strengthening liquidity position. Unlike the majority of Fitch's rated
hospital universe, which do not have an owned health plan, Fitch is
placing greater emphasis on the strategic benefits of PHS' health plan,
as it better aligns incentives throughout the enterprise as the
organization moves towards value based/population health management
reimbursement models. Furthermore, PHS' management has demonstrated its
ability to successfully manage the financial and operational risk of the
STRONG LIQUIDITY POSITION: On a consolidated basis (including the
non-obligated Presbyterian Health Plans) PHS' unrestricted cash and
investments totaled approximately $1.69 billion at June 30, 2014
equating to 272 days cash on hand (DCOH), a cushion ratio of 42.2x, and
273.9% cash-to-long-term debt. PHS' liquidity position provides a
substantial financial cushion against adverse changes in operations or
SOLID DEBT SERVICE COVERAGE: Although PHS' operating profitability
ratios are weak compared to Fitch's 'AA' category medians, debt service
coverage by EBIDA and operating EBIDA are consistent with 'AA' category
medians reflecting PHS' light leverage position. In 2013, PHS generated
coverage of maximum annual debt service (MADS) by EBIDA and operating
EBIDA of 6.4x and 4.3x, respectively.
ADDITIONAL DEBT PLANS: PHS may issue additional debt within the next
year to fund a portion of its capital plan. Although PHS' projected
capital plan is healthy at approximately 1.7x depreciation expense for
the next few years, Fitch believes there is significant cushion in these
figures and that capital spending will be adjusted according to
financial performance. Fitch believes PHS has additional debt capacity
at the higher rating level given its current light leverage.
MARKET SHARE LEADER: PHS is the market share leader in the Albuquerque
metropolitan area with a 43% market share in 2013 and is the only
clinically integrated network provider in the market. Further, PHS
enjoys strong customer satisfaction scores and very high brand-name
recognition which will become increasingly important in a
consumer-driven healthcare market place.
CONSISTENT FINANCIAL RESULTS: Fitch expects PHS to deliver consistent
financial results that are in line for an 'AA' rated credit as it
maximizes its vertically integrated delivery platform.
Headquartered in Albuquerque, NM, PHS is a large, fully integrated
health care delivery system including eight hospitals, a 600+ provider
employed medical group and the 425,000+ member Presbyterian Health Plan
(PHP). On a consolidated basis, PHS had total revenues of $2.05 billion
in 2013 (year ending Dec. 31). Fitch's analysis is based primarily on
the results of the consolidated entity which includes the non-obligated
PHP reflecting a change from prior year's analysis and reporting, which
focused mainly on obligated group (OG) results. For the year ended Dec.
31, 2013, the OG represented 52% of operating revenue (before
eliminations) and 80% of combined net assets.
VERTICALLY INTERGRATED DELIVERY MODEL
In light of its leading market position in the Albuqerque metropolitan
area, Fitch believes the strategic, operational and financial benefits
that accrue from its vertically integrated delivery network will allow
the organization to maintain a strong financial profile as the sector
transitions to an increasingly value based, consumer oriented market.
PHS has the most hospitals, the largest employed physician network and,
along with Blue Cross Blue Shield of New Mexico, the largest health plan
in the state. With the hospitals, physicians and health plan as part of
one organization, PHS, on a consolidated basis, can realize the full
value from its initiatives to better coordinate care, manage chronic
conditions and lower overall costs.
With the recent sale of Lovelace Health Plan to Blue Cross Blue Shield
of New Mexico, PHS is the only vertically integrated health system
(owned hospitals, physicians and health plan) in New Mexico. Further,
PHS enjoys very strong name recognition and high consumer preference
rankings relative to its competitors, which Fitch believes will be
increasingly important in a growing consumer driven health care
In 2013, PHP was selected as one of four providers to provide coverage
under New Mexico's managed Medicaid program, Centennial Care. The
program replaced the existing 'Salud!' program and added behavioral
health and long-term care benefits and is expected to provide coverage
to roughly 700,000 residents. PHP's contract with Centennial Care runs
for five years and is expected to add roughly $200 million of additional
revenues annually. With coverage effective Jan. 1, 2014, management
reports that enrollment and results in Centennial Care are in line with
expectations. Similarly, PHP was one of five organizations that offered
an exchange plan on the state-run health insurance exchange. According
to management, PHP enrolled approximately 8,000 individuals through the
exchange, which equated to about 1/3 of total exchange enrollment.
On a consolidated basis, PHS' unrestricted cash and investments totaled
$1.69 billion at June 30 (six-month interim) which is improved from
$1.58 billion and $1.36 billion at fiscal year ends 2013 and 2012,
respectively. Thus, PHS' liquidity metrics at June 30 are very strong
with 272 days cash on hand, a 42.2x cushion ratio and 273.9%
cash-to-debt; each of which exceed the respective 'AA' category median.
PHS' liquidity position provides a substantial financial cushion against
adverse changes in operations or reimbursement and is considered a
primary credit strength. Management reviewed its asset allocation
strategy in early 2014 which resulted in no major changes and
continuation of its hedge strategy to provide greater protection against
SOLID DEBT SERVICE COVERAGE
On a consolidated basis, PHS' profitability has been very stable over
the last three years. Operating margins have ranged from 3.0% to 3.4%
from 2011-2013 while operating EBITDA margins have ranged from 8.2% to
8.4% over the same period. While PHS' profitability metrics are weak
relative to Fitch's 'AA' medians, the corporation has generated solid
coverage of MADS by EBIDA and operating EBIDA reflecting its light
leverage position. MADS of $40.1 million equates to a light 2% of 2013
total revenues. In 2012 and 2013 PHS' generated debt service coverage by
EBIDA of 5.8x and 6.4x, respectively, which exceeds the 2014 'AA'
category median of 5.5x. Similarly, MADS coverage by operating EBIDA was
4.3x in both 2012 and 2013, which is in line with the 'AA' category
median of 4.4x. Through the six months ended June 30, PHS generated MADS
coverage by EBIDA of 8.3x and MADS coverage by operating EBIDA of 5.4x.
Fitch notes that profitability is somewhat diluted by the inclusion of
the health plan in consolidated results. Further, PHS absorbed
approximately $140 million of reimbursement reductions from Medicaid
payors in 2011 and 2012, opened the new Presbyterian Rust Medical Center
in Oct. 2011, and has invested almost $200 million in its electronic
health record over the last 3-4 years, all of which have had a negative
impact on profitability. Management budgets to maintain 3% operating
margins on a consolidated basis.
PHS covenants to disclose annual and quarterly financial information to
bondholders. Disclosure, which includes a balance sheet, income
statement, a cash flow statement, utilization statistics and a
management discussion and analysis, is disseminated through the MSRB's
EMMA system and DAC.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30,
--'Revenue Supported Rating Criteria' (June 16, 2014).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
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