CHICAGO--()--Fitch Ratings has assigned an 'A' rating to the following revenue bonds expected to be issued by or on behalf of Adventist Health System/ West (Adventist):
--$285 million California Health Facilities Financing Authority series 2013A;
--$50 million Adventist Health System/ West series 2013 (taxable)
In addition, Fitch affirms the 'A' rating on approximately $719.3 million of Adventist revenue bonds currently rated by Fitch.
The Rating Outlook is Stable.
The series 2013A tax exempt and series 2013 taxable bonds are expected to be issued as fixed rate debt. Proceeds will be used to refund Adventist's outstanding series 2003A and series 2002A&B bonds; pay down a bank line of credit; provide approximately $132 million of new money to fund various capital projects throughout the system; and pay associated costs of issuance. The bonds are expected to be priced the week of Jan. 21 through negotiated sale.
KEY RATING DRIVERS:
GEOGRAPHIC DIVERSITY: Adventist Health's geographic and business line diversity are key credit strengths. While roughly 80% of the system's net patient service revenues stem from its California facilities, no one facility accounts for more than 14% of system revenues.
MODEST BUT STABLE PROFITABILITY: Excluding the benefit of the California provider fee program, Adventist's core profitability has been very stable with operating EBITDA margins ranging between 6.6% and 7.9% in each of the last four years. Including the benefit of provider fees causes Adventist's operating EBITDA margins in 2010 and 2011 to improve to 10.1% and 7.9%, respectively.
IMPROVING VOLUME TRENDS: From 2009-2011, Adventist has experienced a 6.6% increase in inpatient admissions reflecting market share gains and the investment in inpatient and outpatient facilities and development of its physician network.
ROBUST CAPITAL SPENDING: Adventist Health's annual capital spending has averaged 190% of depreciation over the last four years. As a result certain leverage and liquidity metrics have been diluted. However, all Adventist's hospitals are seismically compliant which should allow the system to further improve liquidity and moderate leverage positions moving forward.
LIGHT LIQUIDITY: While unrestricted cash and investments have grown almost 11% since fiscal year end 2009, Adventist liquidity metrics remain light compared to Fitch's 'A' category medians. The issuance of the new debt will further weaken the system's liquidity metrics.
The bonds are secured by a pledge of the gross revenues of the obligated group.
The rating is supported by Adventist's large and diversified revenue base with 17 hospitals in four states generating total revenues of over $2.7 billion in 2011, stable and consistent operating profitability which results in adequate debt service coverage, improving patient volumes and robust capital investment. However, liquidity metrics continue to be light compared to the medians for the rating category and will be further pressured by the issuance of the series 2013 debt.
Adventist's core operating profitability (excluding the benefit of the California provider fees) has been stable and consistent in each of the last four years with operating EBITDA margins ranging between 6.6% and 7.9% annually. In 2011, Adventist's operating EBITDA exclusive of providers fees dipped to 6.6% from 7.8% in the prior year due primarily to a jump in bad debt expense and investment in physician alignment strategies. Under the provider fee program, Adventist received a net benefit of $79.8 million in 2010 and $41.9 million in 2011. Including those revenues and expenses to core operations causes operating EBITDA margins in 2010 and 2011 to improve to 10.1% and 7.9%, respectively. Upon closing of the series 2013 bond issue, Adventist's maximum annual debt service (MADS) will increase to $67.2 million from $60.8 million which equates to a moderate 2.5% of 2011 total revenues. Coverage of pro forma MADS by EBITDA is adequate at 4.5x in 2010 and 3.8x in 2011 when compared to the 'A' category median of 4.1x. Through the 9-months ended Sept. 30, 2012 Adventist has generated a 9.8% operating EBITDA (including provider fees) resulting in pro forma MADS coverage of 4.4x.
Preparation for the advent of health care reform has been a primary focus of Adventist's management team over the past several years. Management has initiated a multi-year process improvement initiative to generate $125 million in operational savings focusing on centralization of support functions, a streamlined management structure and the effective use of automation and standardization of processes. A key element of Adventist's physician alignment strategy is the creation of the Adventist Health Physician Network in February 2011 which serves as a vehicle for financial and clinical integration. Adventist currently has over 500 employed or contracted physicians located throughout its system which includes the largest rural health clinic network in the state with 39 rural health clinics and a total of 150 clinics and outpatient centers.
Adventist's capital spending has been robust focused primarily on seismic related requirements. In 2009, 2010 and 2011, investment in property, plant and equipment as a percentage of depreciation expense equaled 189.2%, 176.2% and 163%, respectively, compared to the 'A' category median of 124.5%. As a result, all of Adventist's hospital facilities are compliant with California's SB1953. Over the medium term, Fitch anticipates that capital spending should moderate which should allow for growth in liquidity and moderation in leverage.
Fitch believes the investment in plant and facilities has been a driver in Adventist's improved utilization trends. From 2009-2011, Adventist has experienced a 6.6% increase in inpatient admissions reflecting market share gains and the investment in inpatient and outpatient facilities and development of its physician network. Moreover, nine of Adventist's 17 hospitals have experienced year over year inpatient admission gains since 2009.
Adventist's liquidity has historically been light and has been depressed due to its capital spending. Adventist had $882.3 million in unrestricted cash and investments at Sept. 30, 2012 which equates to 122.1 days of cash on hand, a 13.1x cushion ratio (based on pro forma MADS) and 80.5% cash to debt, which are weak relative to the respective 'A' category medians of 191.0, 16.3x and 116.4%.
Adventist currently has $962.5 million in outstanding long-term debt of which approximately 66% is fixed, 15% of variable rate demand bonds supported by bank letters of credit and 19% are variable rate direct bank placements. Upon closing of the series 2013 financing, Adventist will have approximately $1.1 billion of long term debt of which 75% will be fixed rate and 25% will be in a variable rate mode. Given Adventist's light liquidity position, Fitch views the higher percentage of permanent fixed rate debt favorably.
The Stable Outlook reflects Fitch's expectation that Adventist will continue to generate stable albeit modest operating profitability. Due to Adventist's light liquidity metrics for the rating, Fitch will be less tolerant of a decline in operating results going forward. Furthermore, Fitch expects that capital spending will moderate over the next two to three years which should allow for a strengthening of the system's liquidity metrics and moderation in leverage position.
Adventist operates 17 hospitals located throughout California, Oregon, Washington, and Hawaii. In fiscal 2011, Adventist reported total operating revenues of $2.7 billion. Adventist covenants to provide bondholders with quarterly and annual financial disclosure within 60 and 150 days of each fiscal period end, which includes balance sheet and income statement.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 12, 2012.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria