CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the expected issuance of $308.2 million California Health Facilities Financing Authority revenue bonds, series 2014A issued on behalf of Providence Health & Services (PH&S).
In addition, Fitch affirms the 'AA' long-term ratings on approximately $3.4 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 $308.2 million of series 2014A bonds through negotiated sales the week of June 9. Proceeds will used to refund / advance refund the $249 million of series 2008C revenue bonds issued through the California Health Facilities Financing Authority (CHFFA) and pay costs of issuance. PH&S is considering issuing another $250 million of revenue bonds in the second half of 2014 which would be a combination of new money and refunding debt and has been incorporated into the current rating action.
SECURITY
Unsecured corporate obligation of the Obligated Group.
KEY RATING DRIVERS
STRONG MARKET POSITION: 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.
WEAK 2013 PROFITABILITY: Operating profitability continued to decline in fiscal 2013. Although Fitch expected PH&S' profitability to be compressed in 2011 and 2012, the poor operating results in 2013 were not anticipated and reflect, in part, continued challenges in reacting to changing clinical volumes throughout the system, lower than expected reimbursement from governmental payors and continued investment in IT. Profitability is expected to rebound in 2014 due to cost reduction initiatives and decreased IT implementation costs.
EXCELLENT BUSINESS PRACTICES: Despite the poor operating performance in 2013, 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 $242 million equating to a modest 2.2% of 2013 combined system revenues. However, historical coverage of pro-forma MADS in 2013 was light relative to the 'AA' category median at 3.9x.
LIGHT LIQUIDITY METRICS: At March 31, 2014, PH&S had $4.65 billion of unrestricted cash and investments which equates to 167.3 days cash on hand, a 21.6x cushion ratio (based on pro-forma MADS) and 135% cash to long-term debt which lag the respective 'AA' category medians of 254.3 days, 23.4x and 173.6%. However, Fitch notes that internal cash flow has been used to fund a portion of the costs of the system's ongoing capital projects as well as its substantial investment in a system-wide IT platform.
RATING SENSITIVITIES
PROFITABILITY IMPROVEMENT: Fitch expects that operating profitability will improve in fiscal 2014, providing cash flows sufficient to increase MADS coverage by operating EBITDA to levels consistent with Fitch's 'AA' medians. Failure to do so could result in negative rating pressure.
CREDIT PROFILE
PH&S is a large, multi-state health system that is composed of 33 acute care hospital facilities located across five states, an Oregon health insurer with over 500,000 members and over 3,200 employed physicians. In 2013, PH&S generated total revenues of $11.1 billion. Fitch 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 33 hospitals in Washington, Oregon, Alaska, Montana and California. PH&S maintains strong competitive positions in most of its service areas, with facilities 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. While Fitch has viewed PH&S' geographic and business line diversity as key credit strengths, the strategy to increase the breadth of healthcare services across Washington State and in southern California is viewed favorably as it is increasingly important to position the organization for the development of population health management services.
In 2013, roughly 42% of total system revenues were generated in Washington State, 31% in Oregon (including the health plan), 17% in California and 10% from Alaska and Montana.
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. In discussions with management Fitch believes that PH&S is very attuned to the changing demands of employers and patients in certain markets for greater transparency, value and service. Continued consolidation of corporate services is likely to generate increased efficiencies and allow for improved and timely decision-making. The investment in its system-wide clinical and financial information systems are expected to allow the system to react more timely to changes in clinical volumes and payor mix and preserve profitability.
WEAK 2013 PROFITABILITY
Although Fitch expected PH&S' profitability to be compressed in 2011 and 2012, the poor operating results in 2013 were not anticipated and reflect, in part, continued challenges in reacting to changing clinical volumes throughout the system, lower than expected reimbursement from governmental payors, and the on-going costs associated with a system-wide IT implementation. In 2013, PH&S reported $37.6 million in operating income compared to $204 million in income from operations in 2012 and $220 million budgeted for 2013. As a result operating margin in 2013 fell to 0.3% from 1.9% in 2012 while operating EBITDA margin slipped to 6.9% from 8.6% in the prior year.
Management implemented a number of performance improvement initiatives to improve profitability in 2014. In addition, the clinical IT implementation is expected to be mostly completed in by the summer of 2014 which should allow for lower capital investment and improving efficiency going forward. Through March 31, operating and operating EBITDA margins were 1.8% and 8.6%, respectively. The Stable Outlook reflects Fitch's expectation that the improvement in first quarter 2014 (1Q'14) will be sustained throughout the year.
MODERATE DEBT BURDEN
With the issuance of the series 2014A bonds, PH&S' debt burden remains modest with pro-forma MADS of $242 million equating to 2.2% of 2013 combined system revenues. Debt-to-capitalization of 34.5% at March 31, 2014 is moderate and in line with the 'AA' category median of 32.7%. Historical coverage of pro-forma MADS in 2013 is light at 3.9x when compared to the 'AA' category median of 5.0x. However, Fitch notes that historical pro-forma coverage in 2012 was a solid 4.5x and is 4.8x through 1Q'14. Fitch has estimated that MADS could increase to $252 million should PH&S issue additional debt in 2H'14, which would result in historical coverage by EBITDA of 3.2x in 2013 and 4.1x through 1Q'14. Fitch expects that pro-forma MADS coverage by operating EBITDA will improve in 2014 to levels consistent with Fitch's 'AA' category median. However, an inability to improve coverage could result in negative rating pressure.
LIGHT LIQUIDITY METRICS
PH&S' liquidity metrics reflect the system's use of operating cash flow to help fund substantial capital investments. Since 2010, PH&S has spent over $2.74 billion in capital additions (equating to 164% of annual depreciation expense) while total debt has increased roughly $1.4 billion and unrestricted cash has grown by $1.8 billion. At March 31, 2014, PH&S had $5.21 billion of unrestricted cash and investments which equated to 179.2 days cash on hand, a 21.6x cushion ratio (based on pro-forma MADS of $242 million) and 134.8% cash to debt which lag the respective 'AA' category medians of 254.3 days, 23.4x and 173.6%. Fitch believes that liquidity growth will be constrained due to ongoing capital spending and pension funding requirements.
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. As of March 31, 2014, PH&S had over $500 million of highly liquid investments available on a same-day basis. Based on Fitch's rating criteria related to self-liquidity, PH&S' position of 'eligible cash and investments' available for same-day settlement easily exceeds 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 and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'US Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014);
--'Rating US Public Finance Short Term Debt' (Dec 9, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860
Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833193
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