Fitch Affs Providence Health & Svcs (Washington) at 'AA'; Assigns 'F1+' S-T Rtg; Outlook to Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA' long-term ratings on Providence Health & Services' (PHS) approximately $1.48 billion of outstanding bonds issued through various authorities in Washington, Oregon, Alaska, California and Montana. In addition, Fitch has assigned a short-term rating of 'F1+' to the $213.4 million Clackamas County Hospital Authority revenue bonds series 2003 (Providence Health System) based on self-liquidity provided by PHS related to the issuance of an unconditional tender offer to purchase the series 2003 auction rate bonds at par. The Outlook is revised to Stable from Positive.

The 'F1+' rating reflects the sufficiency of PHS' cash and investment position relative to the cost of an unconditional tender offer on the Clackamas County Hospital Authority series 2003 auction rate securities (ARS). At Jan. 31, 2008, PHS had cash and fixed income investments of $791.4 million. Based on Fitch's rating criteria related to self liquidity (see Fitch's report 'Guidelines for Rating Variable rate Demand Bonds and Commercial Paper Issued with Internal Liquidity' dated Mar. 7, 2006), PHS' eligible cash and investment position available for same day settlement would cover the cost of the maximum tender exposure on any given date by 11.9 times (x). PHS will provide Fitch monthly investment reports which will be used to monitor its cash and investment position relative to the tender coverage.

The 'AA' rating reflects PHS' strong profitability, a low debt burden and strong debt service coverage, solid liquidity ratios, leading market share in geographically dispersed markets, and excellent management practices and controls. For the fiscal year ended Dec. 31, 2007, PHS generated operating earnings before interest, depreciation and amortization (EBIDA) of $660.4 million (10.4% operating EBIDA margin); marking the third consecutive year of operating EBIDA margins at or above 10%. Due to PHS strong operating profitability, management has been able to fund capital investments through cash flow and minimize the use of debt. Thus, PHS' debt burden is light, with maximum annual debt service (MADS) at 1.6% of 2007 revenues, debt to 2007 EBIDA of 1.5 times(x) and debt to capitalization of 25%. Coverage of MADS has been strong at 10.1x and 7.7x in fiscal 2007 and 2006, respectively. Despite funding numerous capital projects from cash flow, PHS has maintained a solid liquidity position. At Dec. 31, 2007, PHS had unrestricted cash and investments of $2.6 billion, which translates into 168.4 days cash on hand (DCOH), a cushion ratio of 25.4x and cash to debt of 171.6%, which compare favorably to Fitch's 2007 'AA' medians of 237.4 DCOH, 20.4x and 153.9%, respectively.

PHS owns or leases 25 hospitals in five states. PHS maintains leading market share positions in most of its service areas, with facilities in Everett and Spokane, WA, Anchorage, AK and Missoula, MT holding substantial market share positions. PHS also operates several critical care hospitals and physician groups, which help generate increased volumes. Revenue generation and operating profitability is well diversified with no region accounting for more than 36% of total system revenues. The system benefits from excellent management practices and controls. Management has consolidated system services in areas such as supplies ordering, human resources, managed care contracting, physician recruitment and revenue cycle management, resulting in improved expense control and efficiency. Excellent financial reporting systems allow management to actively monitor and control the various business units throughout the organization.

Primary credit concerns are PHS' increasingly competitive service areas and weak security for bondholders. PHS controls and operates facilities in what Fitch believes to be competitive markets, most notably in Oregon and Southern California. PHS maintains a leading market share of approximately 38% in its Portland market; however, PHS competes for patient volume with a number of other large health systems as well a growing number of independent physician ventures. Some of the geographical regions in which PHS operates continue to be pressured by nursing shortages and rising malpractice premiums. In general, PHS' business and financial covenants, while standard, are weak and provide minimal bondholder protection.

The Outlook revision to Stable from Positive indicates a lower likelihood of a rating upgrade over the near to medium term, due in part to uncertainties related to health care reform, economic conditions and state and federal budgetary pressures. The Outlook revision is also due to Fitch's evolving criteria for the 'AA+' rating level, which should reflect exceptional credit characteristics compared to the 'AA' category portfolio, in terms of size, geographic diversification, or strongly compensating financial flexibility metrics. The Outlook revision does not imply any deterioration in PHS' operating performance, as PHS continues to be among the strongest 'AA' credits in Fitch's non-profit healthcare portfolio. Consistent with the Stable Outlook, Fitch believes that PHS will continue to produce and sustain strong financial performance. Execution on the tender offer would not have a negative credit impact on the rating as the decrease in cash and investments to fund the tender would be offset by a similar decrease in total debt outstanding.

PHS is comprised of 25 hospitals and other related healthcare entities and had $6.4 billion in total operating revenue in fiscal 2007. Headquartered in Bellevue, Washington, the system has core operations in Washington, Oregon, Alaska, California and Montana. PHS 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 some utilization statistics.

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