SAN FRANCISCO--(BUSINESS WIRE)--
Fitch Ratings has affirmed the 'AA-' rating on Banner Health System,
AZ's (Banner) outstanding debt, which is listed at the end of the press
release. In addition, Fitch has withdrawn the 'AA-' rating on the series
2008B and C bonds since the debt instruments were taken private
(converted to direct bank loans).
The Rating Outlook is Stable.
The bonds are secured by a gross revenue pledge of the obligated group.
The obligated group accounted for 75% of total revenue and 94% of total
assets of the consolidated entity in fiscal 2013 (Dec. 31 year end).
Fitch's analysis is based on the consolidated entity.
KEY RATING DRIVERS
LARGE SYSTEM WITH GOOD MARKET SHARE IN MAIN GEOGRAPHIC REGIONS: Banner
is a large, regional health system with operations concentrated in the
Phoenix, AZ metropolitan area. Banner's market share in the Phoenix
metropolitan service area increased to 45.1% in 2013 from 42.3% in 2009
reflecting the system's investment in facilities and physicians. Fitch
believes the system has been able to use its geographic concentration to
its advantage as it further extends its reach into other areas of the
state and is creating a platform to compete in a value based
STRONG AND CONSISTENT PROFITABILITY: Despite continued revenue pressure
from lower volume, Banner has been able to maintain strong and
consistent operating results that exceed Fitch's 'AA' category medians.
From 2010-2013, Banner has generated operating margins between 5% and
6.1% and operating EBITDA margins between 13.1% and 14.6%, which is well
in excess of the respective 'AA' category medians.
IMPROVING LIQUIDITY: Liquidity continues to improve due to solid
investment returns, strong cash flow and more moderate capital spending
after a period of heavy capital investment. Days cash on hand and cash
to debt were 292.7 and 160.9%, respectively at March 31, 2014.
GOOD DEBT SERVICE COVERAGE: Debt service coverage is solid due to strong
profitability. Debt service coverage was 5x for fiscal 2013 and 2012 and
was 4.9x for the three months ended March 31, 2014.
POOR RESULTS ON RISK BASED CONTRACTS IN 2013: The Banner Health Network
(BHN) was created to enter into various risk based reimbursement
contracting including a Pioneer ACO and senior risk plans. Revenue from
risk based contracts through BHN accounted for approximately 9% of
Banner's net patient service revenue in 2013. While Fitch believes
Banner's movement into risk based reimbursement contracts to be
strategically positive over the long term, BHN posted a $34 million
operating loss in 2013 due primarily to higher than expected claims
expense and management of certain senior risk plans. Management has
implemented improvement initiatives and expects BHN to be profitable in
ACQUISITION ACTIVITY REQUIRING CAPITAL INVESTMENT: Banner has been
active in growing its market reach outside of Phoenix. In June 2014,
Banner acquired 177 bed Casa Grande Regional Medical Center in Casa
Grande, AZ (55 miles south of Phoenix) for $87 million. Later in June
Banner and University of Arizona Health Network (UAHN; revenue bonds not
rated by Fitch) entered into a Principles of Agreement (PA) to combine
the two organizations which would create a statewide health care
organization. While Fitch views the expected strategic benefits and
geographic diversity positively, the PA outlines sizeable capital
investments to be made by Banner into UAHN. Banner expects to issue
additional debt in fall 2014 to early 2015 to fund some of these needs.
Fitch will evaluate the impact of the additional debt on the rating when
financing plans are finalized.
Banner Health is a large, integrated health care provider headquartered
in Phoenix, AZ with operations in seven states that include 25
hospitals, over 1,000 employed physicians (Banner Medical Group),
outpatient and post-acute facilities and insurance products. In 2013,
Banner generated $5.1 billion in total revenue. The majority of Banner's
operations are located in the Phoenix metropolitan area which accounted
for over 60% of total revenue in 2013.
Growing Integrated Delivery System
In June 2014, Banner closed on the acquisition of 177-bed CGRMC which
was funded by a line of credit draw. Banner expects to refinance the
line of credit with permanent financing later this year. CGRMC is a
financially distressed organization that went into bankruptcy for the
acquisition to be completed. However, Banner expects to implement a
financial turnaround fairly quickly due to the resources available now
as part of the Banner system as well as reduction in the level of
outmigration from the service area.
Also in June 2014, Banner signed a PA with UAHN located in Tucson, AZ
which states a goal of creating a statewide system that provides high
quality care through a 30-year commitment to University of Arizona'sCollege of Medicine teaching programs in addition to investing capital
in UAHN's facilities. Banner's expected financial commitments at closing
include approximately $146 million to defease UAHN's debt, $500 million
of capital investment over five years , creation of a $300 million
endowment to support clinical and translational research, in addition to
providing operating support for the academic enterprise. This
transaction is expected to close by the end of the year. Fitch will
assess the impact on the rating at the time the transaction and
financing details are available.
As part of its overall strategic plan, Banner has been very proactive in
readying the organization for payment reform, coordinated delivery of
care, and population health management. Banner created BHN to enter into
various full risk and shared risk contracts with a total of
approximately 169k average members. Although BHN's performance in 2013
was below expectations, Fitch believes management's initiatives to
return BHN to profitability in 2014 is attainable and that its
experience and education in managing these risk based contracts is
Solid Financial Profile
Banner's overall financial profile is solid with improving liquidity,
strong and consistent profitability and good debt service coverage.
Despite weak volumes related to the continued shift to observation cases
in addition to lower inpatient surgical and outpatient volume, Banner's
operating income exceeded its budget. In 2013, Banner had a 5% operating
margin ($254 million operating income) compared to 5.9% the prior year.
Through the three months ended March 31, 2014, operating margin was 6.3%
compared to 6.6% the same prior year period.
Liquidity has improved consistently since 2010 with $3.7 billion in
unrestricted cash and investments at March 31, 2014. Capital spending
has moderated to 1.3x depreciation expense and 0.8x depreciation expense
in 2013 and 2012, respectively. Fitch views this as appropriate after a
period of heavy capital investment from 2004-2009, which should allow it
to build some capacity for its future capital needs. Banner has already
made the investment in an electronic medical record and is one of a
small percentage of hospitals to reach HIMSS stage 7. The only major
project currently is a new emergency room at Good Samaritan Medical
Center in addition to the acquisition activity.
Banner's leverage metrics have moderated over the last few years and
MADS accounted for 3% of total revenue from 3.4% in 2010. MADS is $157
million and debt service is fairly level.
Total outstanding debt at March 31, 2014 was $2.3 billion and is all
fixed rate including its swaps (60% underlying fixed rate, 40%
underlying variable rate). Of the variable rate, $400 million are
indexed floaters, $176.6 million are direct bank loans (at indexed
floating rate) and $359 million are variable rate demand bonds. Banner
is overhedged with $1.37 billion in notional amount of fixed payer swaps
outstanding. Total collateral posting at March 31, 2014 was $137 million.
Banner covenants to provide audits within 150 days of fiscal year end
and quarterly disclosure within 60 days of quarter end for the first
three quarters. Banner's financial reporting is excellent. Disclosure is
timely and complete. Interim financial statements are presented in an
audit format and include a management discussion and analysis.
Furthermore, Banner hosts quarterly investor calls.
$67,840,000Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2012B (taxable)
$179,090,000Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2012A
$67,905,000Arizona Health Facilities Authority (AZ) (Banner Health)
variable-rate demand revenue bonds series 2008H (LOC: Northern Trust
Company (The)) & bank bonds
$86,900,000Arizona Health Facilities Authority (AZ) (Banner Health)
variable-rate demand revenue bonds series 2008G (LOC: Wells Fargo Bank,
N.A.) & bank bonds
$92,090,000Arizona Health Facilities Authority (AZ) (Banner Health)
variable-rate demand revenue bonds series 2008F (LOC: JPMorgan Chase
Bank, N.A.) & bank bonds
$112,310,000Arizona Health Facilities Authority (AZ) (Banner Health)
variable-rate demand revenue bonds series 2008E (LOC: Bank of America,
N.A.) & bank bonds
$754,195,000Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2008D
$209,675,000Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2008A
$400,000,000Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2007B
$135,350,000Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2007A
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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Source: Fitch Ratings