News Column

Fitch Rates $117.3MM Providence Health & Services' (WA) Ser 2014B Revs 'AA'; Outlook Stable

July 14, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings assigns a 'AA' rating to the expected issuance of $117.3 millionCalifornia Health Facilities Financing Authority revenue bonds, series 2014B issued on behalf of Providence Health & Services (PH&S).

In addition, Fitch affirms the 'AA' long-term ratings on approximately $3.5 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 $117.3 million of series 2014B bonds through negotiated sales the week of July 14th. Proceeds from the Series 2014B Bonds will be used to refinance taxable commercial paper issued to fund the acquisition of St John's Health Center in Santa Monica, CA and pay costs of issuance. PH&S is considering issuing $100 million of series 2014C revenue bonds in August which has been factored 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: Fitch estimates pro-forma maximum annual debt services (MADS) at $252 million (inclusive of the series 2014B&C issuance) which is a modest 2.3% of 2013 combined system revenues. However, historical coverage of pro-forma MADS in 2013 was a light 3.7x compared to the 'AA' category median of 5.0x.

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 34 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.

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.

For more information, see Fitch's rating action commentary:

'Fitch Rates $308.2MM Providence Health & Services' (WA) Ser 2014A Revs 'AA'; Outlook Stable' dated June 5, 2014

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=750012

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=839418

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Jim LeBuhn

Senior Director

+1-312 368-2059

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

Adam Kates

Director

+1-312 368-3180

or

Committee Chairperson

Eva Thein

Senior Director

+1-212-908-0674

or

Media Relations:

Elizabeth Fogerty, New York, +1 212-908-0526

Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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