Fitch Affirms MultiCare's (WA) Rev Bonds at 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'AA-' on MultiCare Health System's (MultiCare) outstanding debt, which is listed at the end of the press release.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross receivables pledge of the obligated group.

KEY RATING DRIVERS

CONTINUED STRONG FINANCIAL PERFORMANCE: MultiCare's overall financial profile is solid for its rating level with strong profitability and good liquidity tempered by an above average debt burden. Profitability has been strong due to a continued focus on expense management and robust cash flow has resulted in very good debt service coverage.

INTEGRATED DELIVERY NETWORK: MultiCare is a regional provider with five hospitals and an extensive outpatient and physician network that is connected through a mature electronic health record (EHR; Epic) that was implemented in 1998. This platform is being leveraged to enhance access and improve quality outcomes.

TRANSITION TO NEW PAYMENT MODELS: MultiCare is pursuing various payer and population management strategies to effectively grow revenue in a reduced reimbursement environment. Fitch believes MultiCare should be successful in these strategies given their network and capabilities.

LEADING MARKET SHARE: MultiCare maintains a leading market position in its primary service area of 49%, which has increased since 2009 and partially driven by acquisition activity. However, the market is competitive and the next leading provider, Franciscan Health System (part of Catholic Health Initiatives, rated 'A+', Stable Outlook), had 39.8% market share. There has been significant consolidation and affiliation activity in the market and MultiCare continues to pursue opportunities that fit their strategy.

STRONG CAPITAL REINVESTMENT: MultiCare invested over $1 billion in its facilities in fiscal 2008-2012 to expand capacity and build its network. Its five year capital plan is still robust at $910 million for fiscal 2013-2017 with a focus on technology and ambulatory/community based spending. Fitch believes this level of capital spending is manageable at MultiCare's current cash flow. No additional debt is expected.

RATING SENSITIVITIES

CURRENT PERFORMANCE PROVIDES FLEXIBILITY: Despite potential reimbursement pressures, Fitch believes MultiCare is well positioned to handle the changing landscape and believes its current financial performance provides the necessary financial flexibility to navigate through new payer partnerships.

CREDIT PROFILE

MultiCare is an integrated regional system based in Tacoma, WA with four adult hospitals and one pediatric hospital (1,130 licensed beds), various outpatient and physician clinics throughout its service area in South Puget Sound, as well as home health/hospice and behavioral health services. Total admissions were 43,707 in fiscal 2012. The obligated group accounted for 99% of total assets and total revenue of the consolidated entity in fiscal 2012 (Dec. 31 year end). Fitch's analysis is based on the consolidated entity.

Continued Improvement in Profitability

MultiCare's profitability has been consistently strong for its rating level. Operating margin in fiscal 2012 was 10.2% from 6.1% the prior year. Through the nine months ended Sept. 30, 2013, operating margin was 9.2% compared to 7.7% the prior year. MultiCare acquired Auburn Regional Medical Center as of Oct. 1, 2012 and total revenue was $1.56 billion in fiscal 2012 from $1.39 billion the prior year. Strong profitability has been driven by MultiCare's continued revenue growth and focus on expense management. Expense per adjusted admission declined in 2011 and 2012 and is being held relatively flat through 2013.

MultiCare's projected operating performance indicates a decline given the expected reduction in reimbursement; however, operating margins are still healthy in the 5%-7% operating margin range for fiscal 2014 to 2018.

Good Liquidity

Total unrestricted cash and investments were $1.2 billion as of Sept. 30, 2013, which has increased from $780 million at fiscal year-end 2009 despite healthy capital spending. MultiCare had 300 days cash on hand at Sept. 30, 2013, while cash to debt of 133% is on the lower side for the rating category compared to the 'AA' category median of 173.6%.

Leading Market Position

MultiCare has maintained a leading market position in its primary service area of Pierce County and the most recent data (fourth quarter 2012) indicates an increase to 49% from 46.4% in the first quarter 2009. An increase in capacity as well as the acquisition of Auburn accounts for most of the market share gain. MultiCare's main competitor, Franciscan, had a loss in market share to 39.8% from 40.8% over the same time period. There is little outmigration to Seattle and management has focused on building its outpatient and physician network in its service area as well as increasing tertiary referral relationships with other providers. The most recent affiliation is with Grays Harbor Community Hospital, which is located in Aberdeen, WA and the affiliation will focus on enhancing services at Grays Harbor. Management also plans to broaden its reach beyond its geographic footprint and grow the number of lives it serves through population management strategies.

New Payer Partnerships Being Established

MultiCare plans to develop strategic payer partnerships to maximize its revenue growth opportunities in a tighter fee for service environment. These strategies include participating in exchange products including narrow networks as well as engaging in gain sharing and risk arrangements. Management has a demonstrated track record in using evidence based medicine to determine best clinical pathways. In addition, MultiCare has a base of aligned physicians through MultiCare Medical Associates with 566 employed physicians and midlevel provider FTEs as of Sept. 30, 2013. This number has grown from 388 in 2008. These capabilities should allow MultiCare to be successful under new value based reimbursement methodologies.

Capital Plan

MultiCare's capital plan from FY 2008-2012 included a patient care tower at Good Samaritan Hospital, a freestanding emergency department at Covington and several new clinic sites. The most recent project is a women and children's expansion project at Tacoma General Hospital and Mary Bridge Children's Hospital that will be completed in 2014.

The capital plan for FY 2013-2017 totals $910 million, which can be supported by its projected level of cash flow while maintaining a target days cash on hand of 245 days. MultiCare has a certificate of need to build a 58 bed hospital at its Covington site, which is expected to breakground in October 2014.

Above Average Debt Burden

Total outstanding debt as of Sept. 30, 2013 was $894 million and the debt profile is conservative with 74% underlying fixed rate and 26% underlying variable rate. MultiCare's only uncommitted capital includes $154 million series 2007C and D variable rate demand bonds with a letter of credit from Barclays that expire April 4, 2014 and Oct. 3, 2014, respectively and a $80 million series 2012B direct bank loan with Wells Fargo that is at an indexed floating rate and has an initial term to Oct. 1, 2019.

MultiCare has two basis swaps and three fixed payer swaps outstanding and the mark to market valuation totaled negative $38.8 million at Sept. 30, 2013. There is no collateral posting requirements on the fixed payer swaps. The basis swaps require collateral posting at a threshold of $11 million and the mark to market valuation of the basis swaps at Sept. 30, 2013 was negative $2.4 million.

MultiCare's debt burden is above average with maximum annual debt service (MADS) accounting for 3.4% of total revenue compared to the 'AA' category of 2.6%. However, given strong cash flow, MADS coverage is good at 6.1x in fiscal 2012 compared to 4x the prior year and was 5.9x through the nine months ended Sept. 30, 2013. Aggregate debt service is level and MADS is $53.4 million.

Disclosure

MultiCare covenants to provide annual and quarterly financial information to the MSRB's EMMA system.

Outstanding Debt:

$60,000,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2012A

$71,180,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2010A

$49,985,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2009B

$48,145,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2009A

$30,000,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2008C

$47,840,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2008B

$47,840,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2008A

$101,610,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2007D

$52,400,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2007C

$77,550,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2007B

$77,575,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2007A

$50,000,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2004C

$50,000,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2004B

$50,000,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) rev bonds ser 2004A

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812132

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Emily Wong, +1-415-732-5620
Senior Director
Fitch Ratings, Inc.
650 California St.
San Francisco, CA 94108
or
Secondary Analyst
Dana Sodikoff, +1-312-368-3215
Associate Director
or
Committee Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Emily Wong, +1-415-732-5620
Senior Director
Fitch Ratings, Inc.
650 California St.
San Francisco, CA 94108
or
Secondary Analyst
Dana Sodikoff, +1-312-368-3215
Associate Director
or
Committee Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com