Fitch Rates UPMC's (Pennsylvania) 2008C Revs 'AA-'; Affs Outstanding Debt

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AA-' on up to approximately $350 million Allegheny County Hospital Development Authority (University of Pittsburgh Medical Center, UPMC) revenue bonds, series 2008C. Additionally, Fitch has affirmed the rating of 'AA-' on UPMC's outstanding parity debt (issued through the Pennsylvania Higher Educational Facilities Authority and Allegheny County Industrial Development Authority) and affirmed the 'F1+' on the outstanding series 2005B bonds. The Rating Outlook is Stable.

Proceeds from the 2008C bonds will be used to fund various ongoing capital expenditures and refund portions of UPMC's outstanding debt. The final 2008C principal amount issued will depend on market conditions. UPMC may opt to fund certain capital expenditures through bank lines of credit on an interim basis.

The 'AA-' rating affirmation is supported by UPMC's dominant market position in Western Pennsylvania and stable operating profitability, which compensate for liquidity and debt service coverage metrics that are low for this rating category. As of Sept. 30, 2008 (unaudited), UPMC had a 55.4% market share in Allegheny County, which is up from 47.7% in fiscal 2007. The increase in market share is primarily due to the acquisition of Pittsburgh Mercy Hospital which occurred in January 2008. UPMC continues to observe strong volume growth as inpatient medical-surgical admissions grew by approximately 7.3% to 164,429 in fiscal 2008 from 153,233 in fiscal 2007. Additionally, emergency department visits increased to 457,047 from 420,833 over the same time period, representing 8.6% growth.

Through the three-month September 2008 interim period, UPMC recorded approximately $41 million in income from operations (2.1% operating margin), which is improved from fiscal 2008's 1.3% operating margin. Management indicated that the improvement is primarily due to improved results in insurance services. In addition, management expects to get cost savings realized through personnel reductions that took place in the second quarter of fiscal 2009. Additional credit strengths include UPMC's manageable debt burden and strong cash flow generation. In fiscal 2008, UPMC's maximum annual debt service (MADS) as a percentage of revenue was 2.7% and the organization's cash flow was approximately $385 million.

The chief credit concern is UPMC's investment losses, which have significantly eroded liquidity and debt service coverage. UPMC's unrestricted cash and investments were approximately $2.48 billion as of Sept. 30, 2008, translating into 130 days cash on hand, 12.3x (times) cushion ratio, and cash to debt of 98%. Strategic investments in facilities and personnel have also contributed to the decline in UPMC's unrestricted cash position, which has dropped by approximately $336 million since June 30, 2007. Non-operating losses have adversely affected UPMC's debt service coverage, which was 3.2x for fiscal 2008 (excluding unrealized losses), which compares unfavorably with Fitch's 'AA' category median of 5.6x. While variability in investment performance is expected, significant continuing liquidity declines will produce negative rating pressure.

The 'F1+' short-term rating is based on UPMC's long-term credit characteristics, $2.48 billion unrestricted cash position and the high degree of financial flexibility available to meet short-term liquidity demands.

UPMC's quarterly and annual disclosures to industry participants (including NRMSIRs) have been thorough and timely, and consist of full financial statements, utilization and other information, and management's discussion and analysis of results. In addition, UPMC has been voluntarily Sarbanes-Oxley compliant for the past two years.

Headquartered in Pittsburgh, PA, UPMC is a large, integrated health enterprise comprising 20 hospitals, over 400 clinical locations, an insurance division, and other related entities, with operations primarily covering the western part of the state. In 2008, UPMC had total revenues of approximately $7 billion.

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