Fitch Ratings has affirmed the 'AA' long-term ratings on Providence
Health & Services' (PHS) approximately $1.48 billion of outstanding
bonds issued through various authorities in Washington, Oregon, Alaska,
California and Montana. In addition, Fitch has assigned a short-term
rating of 'F1+' to the $213.4 million Clackamas County Hospital
Authority revenue bonds series 2003 (Providence Health System) based on
self-liquidity provided by PHS related to the issuance of an
unconditional tender offer to purchase the series 2003 auction rate
bonds at par. The Outlook is revised to Stable from Positive.
The 'F1+' rating reflects the sufficiency of PHS' cash and investment
position relative to the cost of an unconditional tender offer on the
Clackamas County Hospital Authority series 2003 auction rate securities
(ARS). At Jan. 31, 2008, PHS had cash and fixed income investments of
$791.4 million. Based on Fitch's rating criteria related to self
liquidity (see Fitch's report 'Guidelines for Rating Variable rate
Demand Bonds and Commercial Paper Issued with Internal Liquidity' dated
Mar. 7, 2006), PHS' eligible cash and investment position available for
same day settlement would cover the cost of the maximum tender exposure
on any given date by 11.9 times (x). PHS will provide Fitch monthly
investment reports which will be used to monitor its cash and investment
position relative to the tender coverage.
The 'AA' rating reflects PHS' strong profitability, a low debt burden
and strong debt service coverage, solid liquidity ratios, leading market
share in geographically dispersed markets, and excellent management
practices and controls. For the fiscal year ended Dec. 31, 2007, PHS
generated operating earnings before interest, depreciation and
amortization (EBIDA) of $660.4 million (10.4% operating EBIDA margin);
marking the third consecutive year of operating EBIDA margins at or
above 10%. Due to PHS strong operating profitability, management has
been able to fund capital investments through cash flow and minimize the
use of debt. Thus, PHS' debt burden is light, with maximum annual debt
service (MADS) at 1.6% of 2007 revenues, debt to 2007 EBIDA of 1.5
times(x) and debt to capitalization of 25%. Coverage of MADS has been
strong at 10.1x and 7.7x in fiscal 2007 and 2006, respectively. Despite
funding numerous capital projects from cash flow, PHS has maintained a
solid liquidity position. At Dec. 31, 2007, PHS had unrestricted cash
and investments of $2.6 billion, which translates into 168.4 days cash
on hand (DCOH), a cushion ratio of 25.4x and cash to debt of 171.6%,
which compare favorably to Fitch's 2007 'AA' medians of 237.4 DCOH,
20.4x and 153.9%, respectively.
PHS owns or leases 25 hospitals in five states. PHS maintains leading
market share positions in most of its service areas, with facilities in
Everett and Spokane, WA, Anchorage, AK and Missoula, MT holding
substantial market share positions. PHS also operates several critical
care hospitals and physician groups, which help generate increased
volumes. Revenue generation and operating profitability is well
diversified with no region accounting for more than 36% of total system
revenues. The system benefits from excellent management practices and
controls. Management has consolidated system services in areas such as
supplies ordering, human resources, managed care contracting, physician
recruitment and revenue cycle management, resulting in improved expense
control and efficiency. Excellent financial reporting systems allow
management to actively monitor and control the various business units
throughout the organization.
Primary credit concerns are PHS' increasingly competitive service areas
and weak security for bondholders. PHS controls and operates facilities
in what Fitch believes to be competitive markets, most notably in Oregon
and Southern California. PHS maintains a leading market share of
approximately 38% in its Portland market; however, PHS competes for
patient volume with a number of other large health systems as well a
growing number of independent physician ventures. Some of the
geographical regions in which PHS operates continue to be pressured by
nursing shortages and rising malpractice premiums. In general, PHS'
business and financial covenants, while standard, are weak and provide
minimal bondholder protection.
The Outlook revision to Stable from Positive indicates a lower
likelihood of a rating upgrade over the near to medium term, due in part
to uncertainties related to health care reform, economic conditions and
state and federal budgetary pressures. The Outlook revision is also due
to Fitch's evolving criteria for the 'AA+' rating level, which should
reflect exceptional credit characteristics compared to the 'AA' category
portfolio, in terms of size, geographic diversification, or strongly
compensating financial flexibility metrics. The Outlook revision does
not imply any deterioration in PHS' operating performance, as PHS
continues to be among the strongest 'AA' credits in Fitch's non-profit
healthcare portfolio. Consistent with the Stable Outlook, Fitch believes
that PHS will continue to produce and sustain strong financial
performance. Execution on the tender offer would not have a negative
credit impact on the rating as the decrease in cash and investments to
fund the tender would be offset by a similar decrease in total debt
outstanding.
PHS is comprised of 25 hospitals and other related healthcare entities
and had $6.4 billion in total operating revenue in fiscal 2007.
Headquartered in Bellevue, Washington, the system has core operations in
Washington, Oregon, Alaska, California and Montana. PHS 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 some utilization statistics.
Fitch's rating definitions and the terms of use of such ratings are
available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality, conflicts
of interest, affiliate firewall, compliance and other relevant policies
and procedures are also available from the 'Code of Conduct' section of
this site
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