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Fitch Rates $356MM Providence Health & Services' (WA) Series 2015A&B Revs 'AA'; Outlook StableFitch Ratings assigns an 'AA' rating to the expected issuance of $356 million Washington Health Care Facilities Authority (WHCFA) revenue and revenue refunding bonds, series 2015A and series 2015B, issued on behalf of Providence Health & Services (PH&S). In addition, Fitch affirms the 'AA' long-term ratings on approximately $3.7 billion in outstanding debt issued through various authorities and the 'F1+' short-term rating based on the self-liquidity provided by PH&S on the series 2013F Providence Health System Obligated Group (WA) taxable commercial paper (CP) note program authorized up to $200 million. The Rating Outlook is Stable. PH&S expects to issue a total of $356 million of series 2015A&B bonds through negotiated sales the week of July 20, 2015. Bond proceeds will be used to fund approximately $77.6 million of construction at Kadlec Regional Medical Center, reimburse the system for prior capital expenditures, and refund / advance refund roughly $278.4 million of outstanding WHCFA series 2008A, C, and D bonds, and pay costs of issuance. PH&S is considering issuing another approximately $296 million of revenue bonds in the near term which would be used for refinancing and additional new money, and has been incorporated into the current rating action. SECURITY Unsecured corporate obligation of the Obligated Group. KEY RATING DRIVERS STRONG MARKET POSITIONS: Fitch views PH&S' geographic diversity and business line diversity as key credit strengths. The increasing breadth of healthcare services across Washington State and in southern California is viewed favorably as it positions the organization for the evolution and development of population health management services. Fitch views PH&S' top-tier market share in nearly each of its markets positively. FISCAL 2014 PERFORMANCE IMPROVEMENT: At Dec. 31, 2014 (fiscal year-end; audited), PH&S generated $219.2 million in operating income, which was significantly improved from fiscal 2013's $37.7 million gain, and equated to a 1.8% operating margin and 8.5% operating EBITDA margin. Fitch views positively the operational improvement, which exceeded budgeted expectations by $89 million. Management attributes the profitability improvement to cost reduction initiatives, decreased IT implementation costs, and solid system volumes, among other things. EXCELLENT BUSINESS PRACTICES: Fitch believes management is proactively transitioning the organization to maintain its leadership positions as key markets move to population health management payment models. PH&S' excellent management practices are reflected in a robust IT platform and continued centralization of shared services that allows for detailed operational reporting. MODEST DEBT BURDEN: PH&S' debt burden is modest with pro forma maximum annual debt service (MADS) of $268 million equating to 2.2% of 2014 combined system revenues, which compared favorably against Fitch's 'AA' category median of 2.6%. Pro forma MADS debt service coverage in 2014 was sound at 5.5x, but light historically reflective of softened performance in 2013. GOOD ABSOLUTE UNRESTRICTED CASH GROWTH: At May 31, 2015, PH&S had $6.07 billion of unrestricted cash and investments, which is increased from $3.4 billion in fiscal 2010 representing approximately 78% growth. The system's liquidity metrics of 163.4 days cash on hand, 22.6x pro forma cushion ratio and 151% cash to long-term debt lag the respective 'AA' category medians of 277.1 days, 26.5x and 178.5%, but remain relatively consistent with the rated peer group. RATING SENSITIVITIES CONSISTENT PERFORMANCE EXPECTED: Fitch expects that operating profitability will remain consistent in fiscal 2015 from the prior year's level. Fitch believes it's essential for the organization to continue generating solid cash flow to support heightened levels of debt service. CREDIT PROFILE PH&S is a large, multi-state health system that is composed of 34 acute care hospital facilities located across five states, an Oregon health insurer with over 600,000 members and nearly 3,600 employed physicians. In 2014, PH&S generated total revenues of approximately $12.5 billion. Fitch's analysis is based on the consolidated financial results of PH&S, which includes certain non-obligated entities. STRONG MARKET POSITION PH&S owns or leases 34 hospitals in Washington, Oregon, Alaska, Montana and California. PH&S maintains strong competitive positions in most of its service areas, with faclities in Seattle, Everett, Olympia and Spokane, WA; Portland, OR; Anchorage, AK and Missoula, MT holding leading or substantial market share positions. PH&S has been increasing its presence in the competitive southern California marketplace through acquisitions of acute care facilities (including 266-bed Providence St. John's Hospital in Santa Monica in March 2014) and physician alignment. Fitch views PH&S' geographic and business line diversity as key credit strengths with the strategy to increase the breadth of healthcare services across Washington State and in southern California as important for the development of population health management services. In 2014, roughly 44% of total system revenues were generated in Washington State, 29% in Oregon (including the health plan), 17% in California and 10% from Alaska and Montana. FISCAL 2014 PERFORMANCE IMPROVEMENT At Dec. 31, 2014 (fiscal year-end; audited), PH&S generated $219.2 million in operating in operating income, which was significantly improved from fiscal 2013's $37.7 million gain, and equated to a 1.8% operating margin and 8.5% operating EBITDA margin. Fitch views positively the operational improvement, which exceeded budgeted expectations by $89 million. Management attributes the profitability improvement to cost reduction initiatives, decreased IT implementation costs, and solid system volumes, among other things. Through May 31, 2015 (five-month interim period; unaudited), operating and operating EBITDA margins were solid at 2.9% and 8.3%, respectively. Management is budgeting to finish fiscal 2015 with a 1.5% operating margin, which Fitch believes is attainable. MODERATE DEBT BURDEN With the issuance of the series 2015A&B bonds, PH&S' debt burden remains modest with pro forma MADS of $268 million equating to 2.2% of 2014 system revenues. Pro forma debt-to-capitalization of 36.3% at May 31, 2015 is slightly high, but still moderate in comparison with the 'AA' category median of 31.1%. Coverage of pro forma MADS in 2014 was good at 5.5x compared against the 'AA' category median of 5.4x. However, Fitch notes that historical pro forma coverage in 2013 was light at 3.5x in 2013, but reflective of the organization's softened operating performance. Lastly, Fitch's pro forma MADS and debt figures include two additional series of bonds PH&S expects to issue over the near term for a maximum of $296 million for refinancing and new money borrowing purposes. SOLID ABSOLUTE UNRESTRICTED CASH GROWTH At May 31, 2015, PH&S had $6.07 billion of unrestricted cash and investments, which is increased from $3.4 billion in fiscal 2010 representing approximately 78% growth. The system's liquidity metrics of 163.4 days cash on hand, 22.6x pro forma cushion ratio and 151% cash to long-term debt lag the respective 'AA' category medians of 277.1 days, 26.5x and 178.5%, but remain relatively consistent with the rated peer group. SELF-LIQUIDITY RATING The 'F1+' rating reflects the sufficiency of PH&S' cash and investments position relative to the potential funding obligations on its $200 million taxable CP program. Based on Fitch's rating criteria related to self-liquidity (as of May 31, 2015), PH&S' position of 'eligible cash and investments' available for same-day settlement easily exceeded Fitch's 1.25x threshold to cover the maximum tender exposure on any given date. PH&S provides Fitch with regular liquidity reports that are used to monitor its cash and investment position relative to the corporation's total self-liquidity exposure. DISCLOSURE PH&S posts annual audited financial statements and quarterly unaudited financial statements on its web site, 'www.providence.org', which is viewed positively by Fitch. Quarterly information includes balance sheet, income statement, cash flows, management discussion and analysis and utilization statistics. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Revenue-Supported Rating Criteria (pub. 16 Jun 2014) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987485 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987485 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 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. View source version on businesswire.com: http://www.businesswire.com/news/home/20150706005743/en/ |
