SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to MultiCare Health System's (MultiCare) series 2015A&B bonds. In addition, Fitch has affirmed MultiCare's outstanding debt at 'AA-'. A full list of rating actions follows at the end of this release.
The Rating Outlook is Stable.
The series 2015A&B bonds will be fixed rate and are expected to price the week of April 13th. The series 2015A bonds will be new money and up to $88 million, will be issued to fund a portion of MultiCare's capital plan. The series 2015B bonds will refund the outstanding series 2004A-C and 2008A-C bonds (total par outstanding of $274 million).
SECURITY
The bonds are secured by a gross receivables pledge of the obligated group (OG). The OG comprised 97% of total assets and 99% of total revenue of the consolidated entity in fiscal 2014 (Dec. 31 year end; audited). Fitch's analysis is based on the consolidated entity.
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. MultiCare is also implementing $300 million of cost reductions over the next three years.
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.
EVOLVING TO POPULATION BASED CARE: MultiCare has formed a clinically integrated network to be able to coordinate care with independent providers and offer narrow network products. Currently, MultiCare has approximately 60,000 lives under value based agreements including an employer offered accountable care organization agreement (Boeing/University of Washington). Fitch views these strategies favorably as the environment continues to transition to a value based model.
COMPETITIVE MARKET: MultiCare has a strong presence in its primary service area of Pierce County and recent growth has been concentrated in its secondary service area, South King County. Market share has increased; however, the area is highly competitive. In the PSA, MultiCare had 46.7% market share compared to its main competitor, Franciscan Health System (part of Catholic Health Initiatives, rated 'A+'; Stable Outlook by Fitch), with 42.3% 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. The current five year capital plan is still robust at $1 billion for fiscal 2015 - 2019; however, this includes $154 million of carry forward capital, $99 million for approved strategic projects, and $275 million of routine capital. The remainder is a placeholder for future strategic projects. Although no additional debt was expected during Fitch's last rating review, Fitch believes MultiCare has the debt capacity for the series 2015A issuance as proforma debt service coverage remains strong at 7.2x in fiscal 2014 compared to the AA category median of 5.4x.
ELEVATED DEBT BURDEN: Proforma total debt is $978 million with 76% underlying fixed rate and 24% underlying variable rate. MultiCare's debt burden is slightly high for its rating level with MADS accounting for 3.2% of total revenue compared to the AA category of 2.6% and proforma cash to debt is a weaker 152% compared to the AA category median of 178.5%.
RATING SENSITIVITIES
CURRENT PERFORMANCE PROVIDES FLEXIBILITY: Fitch believes MultiCare's financial profile provides the organization with the financial flexibility to implement the necessary initiatives to achieve its strategic priorities.
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 revenue in fiscal 2014 was $1.8 billion.
New Mission and Vision
A new CEO joined the organization in May 2014 and a new mission, vision and strategic priorities were established in addition to the implementation of a multi-year cost reduction plan that included a voluntary termination option that was offered at the end of 2014 and eliminated 200 positions. The organization's new strategic priorities are focused on performance excellence, population based care, and expanding its market presence and access to care.
Good Market Position
MultiCare has a strong presence in the South Puget Sound area (Pierce and South King counties) with an expanding presence of ambulatory sites and physician clinics. Future growth strategies include a 120 bed free standing psychiatric hospital, which will be a joint venture with its main competitor, Franciscan, and a certificate of need application has been filed. In addition, there are expansion plans underway at Covington and Auburn.
Transition to Population Based Care
MultiCare has established a clinically integrated network (CIN) to be able to coordinate care with independent providers in the service area. Providers in the CIN include MultiCare's employed physicians, MultiCare Medical Associates with 680 providers. To date, MultiCare has approximately 60,000 lives that have an underlying fee for service reimbursement model with a quality incentive bonus opportunity. Management is positioning the organization to be able to offer and participate in additional accountable care and narrow network products. These products are expected to offer greater value to the patients due to a focus on costs, quality, and service.
Sustained Strong Profitability
MultiCare's profitability has been consistently strong for its rating level. Operating margin in fiscal 2014 was 10.6% and exceeded budget. This compared to 9.1% in fiscal 2013 and 9.8% in fiscal 2012. Profitability metrics reflect the reclassification of the cash settlement on swaps to operating expense from non-operating expense in the audited statements. Management has implemented cost reduction initiatives of $100 million a year in 2015, 2016 and 2017 as the organization has historically been a high cost provider. The areas of focus include corporate and shared services and productivity improvements. MultiCare has budgeted an operating margin of 9.8% for 2015.
A change in the state of Washington's safety net assessment program in 2014 will result in a net benefit of $15.3 million in 2015 compared to $7.3 million in 2014 and $1.3 million in 2013. The increase in 2015 is mainly attributable to the timing of the approvals of the various components of the program.
Good Liquidity
Total unrestricted cash and investments were $1.5 billion as of Dec. 31, 2014, which has increased from $804 million at fiscal year-end 2010 despite healthy capital spending. MultiCare had 364.6 days cash on hand at Dec. 31, 2014 compared the AA category median of 277.1 while proforma cash to debt compares unfavorably at 152% to the AA category median of 178.5%. However, since a portion of the capital plan will now be funded by debt, further growth of unrestricted liquidity is likely to occur more quickly.
Capital Plan
MultiCare has continued to significantly invest in its plant and major projects included a patient care tower at Good Samaritan Hospital, a freestanding emergency department at Covington, a women and children's expansion project at Tacoma General Hospital and Mary Bridge Children's Hospital, and several outpatient clinics.
The capital plan for FY 2015 - 2019 totals $1.04 billion and includes $154 million of carry forward capital, $99 million for approved strategic projects, and $275 million of routine capital. The remaining is a placeholder for other strategic capital projects. Current strategic projects include the construction of a hospital at Covington with an initial 24 beds for short stay inpatient and observation cases and will leverage the current outpatient presence in that market. The inpatient facility is expected to open in the first quarter of 2017 and the cost of this project is approximately $49 million. MultiCare also has an expansion project at Auburn with a new emergency department opening in 2016 and a new 68 bed tower opening in 2017, which is expected to cost $64 million. The Covington and Auburn projects will primarily be funded from the proceeds of the series 2015A bonds ($100 million).
Above Average Debt Burden
Total proforma debt is approximately $978 million assuming an issuance of up to $88 million of new money (will net $100 million of project funds due to bond premium). The proforma debt profile is conservative with 76% underlying fixed rate and 24% underlying variable rate. MultiCare's only uncommitted capital includes $151 million series 2007C and D variable rate demand bonds with a letter of credit from Barclays that expires April 4, 2017 and Oct. 3, 2017, 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 $58.3 million at Dec. 31, 2014. There is no collateral posting requirements on the fixed payer swaps. The basis swaps require collateral posting at a threshold of $15 million and the mark to market valuation of the basis swaps at Dec. 31, 2014 was negative $1.2 million.
MultiCare's debt burden is above average with proforma maximum annual debt service (MADS) accounting for 3.2% of total revenue compared to the 'AA' category of 2.6%. However, given strong cash flow, proforma MADS coverage is good at 7.2x in 2014 compared to 6x in 2013 and 5.8x in 2012. Proforma MADS increases to $57.1 million with the series 2015A&B issuance compared to prior MADS of $53.4 million. Aggregate debt service is level.
Disclosure
MultiCare covenants to provide annual and quarterly financial information to the MSRB's EMMA system.
Outstanding Debt affirmed at 'AA-':
$60,000,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2012A
$64,505,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2010A
$49,985,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2009B
$48,145,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2009A
$30,000,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2008C
$47,360,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2008B
$47,360,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2008A
$99,485,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2007D
$52,015,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2007C
$76,950,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2007B
$77,025,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2007A
$50,000,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2004C
$50,000,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2004B
$50,000,000 Washington Health Care Facilities Authority (WA) (MultiCare Health System) revenue bonds series 2004A
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 16, 2014);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Nonprofit Hospitals and Health Systems Rating Criteria - Effective July 23, 2012 to May 20, 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982438
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