News Column

Fitch Upgrades Presbyterian Healthcare Services (NM) Revs to 'AA'; Outlook Stable

September 3, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings upgrades to 'AA' from 'AA-' the ratings on the following revenue bonds issued by the New Mexico Hospital Equipment Loan Council for the benefit of Presbyterian Healthcare Services (PHS):

--$75 million hospital revenue bonds, series 2012A;

--$134.6 million hospital revenue bonds, series 2009A;

--$144.5 million hospital revenue bonds, series 2008A;

--$206.8 million hospital revenue bonds, series 2008B-D.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a pledge of unrestricted gross receivables of the obligated group.

KEY RATING DRIVERS

VERTICALLY ALIGNED HEALTHCARE SYSTEM: The upgrade to 'AA' reflects the increasing strategic benefits of PHS' vertically aligned healthcare delivery network (includes eight acute care facilities, 600+ employed physician group and a 437,000-member health plan) combined with a strengthening liquidity position. Unlike the majority of Fitch's rated hospital universe, which do not have an owned health plan, Fitch is placing greater emphasis on the strategic benefits of PHS' health plan, as it better aligns incentives throughout the enterprise as the organization moves towards value based/population health management reimbursement models. Furthermore, PHS' management has demonstrated its ability to successfully manage the financial and operational risk of the health plan.

STRONG LIQUIDITY POSITION: On a consolidated basis (including the non-obligated Presbyterian Health Plans) PHS' unrestricted cash and investments totaled approximately $1.69 billion at June 30, 2014 equating to 272 days cash on hand (DCOH), a cushion ratio of 42.2x, and 273.9% cash-to-long-term debt. PHS' liquidity position provides a substantial financial cushion against adverse changes in operations or reimbursement.

SOLID DEBT SERVICE COVERAGE: Although PHS' operating profitability ratios are weak compared to Fitch's 'AA' category medians, debt service coverage by EBIDA and operating EBIDA are consistent with 'AA' category medians reflecting PHS' light leverage position. In 2013, PHS generated coverage of maximum annual debt service (MADS) by EBIDA and operating EBIDA of 6.4x and 4.3x, respectively.

ADDITIONAL DEBT PLANS: PHS may issue additional debt within the next year to fund a portion of its capital plan. Although PHS' projected capital plan is healthy at approximately 1.7x depreciation expense for the next few years, Fitch believes there is significant cushion in these figures and that capital spending will be adjusted according to financial performance. Fitch believes PHS has additional debt capacity at the higher rating level given its current light leverage.

MARKET SHARE LEADER: PHS is the market share leader in the Albuquerque metropolitan area with a 43% market share in 2013 and is the only clinically integrated network provider in the market. Further, PHS enjoys strong customer satisfaction scores and very high brand-name recognition which will become increasingly important in a consumer-driven healthcare market place.

RATING SENSITIVITIES

CONSISTENT FINANCIAL RESULTS: Fitch expects PHS to deliver consistent financial results that are in line for an 'AA' rated credit as it maximizes its vertically integrated delivery platform.

CREDIT PROFILE

Headquartered in Albuquerque, NM, PHS is a large, fully integrated health care delivery system including eight hospitals, a 600+ provider employed medical group and the 425,000+ member Presbyterian Health Plan (PHP). On a consolidated basis, PHS had total revenues of $2.05 billion in 2013 (year ending Dec. 31). Fitch's analysis is based primarily on the results of the consolidated entity which includes the non-obligated PHP reflecting a change from prior year's analysis and reporting, which focused mainly on obligated group (OG) results. For the year ended Dec. 31, 2013, the OG represented 52% of operating revenue (before eliminations) and 80% of combined net assets.

VERTICALLY INTERGRATED DELIVERY MODEL

In light of its leading market position in the Albuquerque metropolitan area, Fitch believes the strategic, operational and financial benefits that accrue from its vertically integrated delivery network will allow the organization to maintain a strong financial profile as the sector transitions to an increasingly value based, consumer oriented market. PHS has the most hospitals, the largest employed physician network and, along with Blue Cross Blue Shield of New Mexico, the largest health plan in the state. With the hospitals, physicians and health plan as part of one organization, PHS, on a consolidated basis, can realize the full value from its initiatives to better coordinate care, manage chronic conditions and lower overall costs.

With the recent sale of Lovelace Health Plan to Blue Cross Blue Shield of New Mexico, PHS is the only vertically integrated health system (owned hospitals, physicians and health plan) in New Mexico. Further, PHS enjoys very strong name recognition and high consumer preference rankings relative to its competitors, which Fitch believes will be increasingly important in a growing consumer driven health care marketplace.

In 2013, PHP was selected as one of four providers to provide coverage under New Mexico's managed Medicaid program, Centennial Care. The program replaced the existing 'Salud!' program and added behavioral health and long-term care benefits and is expected to provide coverage to roughly 700,000 residents. PHP's contract with Centennial Care runs for five years and is expected to add roughly $200 million of additional revenues annually. With coverage effective Jan. 1, 2014, management reports that enrollment and results in Centennial Care are in line with expectations. Similarly, PHP was one of five organizations that offered an exchange plan on the state-run health insurance exchange. According to management, PHP enrolled approximately 8,000 individuals through the exchange, which equated to about 1/3 of total exchange enrollment.

STRONG LIQUIDITY

On a consolidated basis, PHS' unrestricted cash and investments totaled $1.69 billion at June 30 (six-month interim) which is improved from $1.58 billion and $1.36 billion at fiscal year ends 2013 and 2012, respectively. Thus, PHS' liquidity metrics at June 30 are very strong with 272 days cash on hand, a 42.2x cushion ratio and 273.9% cash-to-debt; each of which exceed the respective 'AA' category median. PHS' liquidity position provides a substantial financial cushion against adverse changes in operations or reimbursement and is considered a primary credit strength. Management reviewed its asset allocation strategy in early 2014 which resulted in no major changes and continuation of its hedge strategy to provide greater protection against market declines.

SOLID DEBT SERVICE COVERAGE

On a consolidated basis, PHS' profitability has been very stable over the last three years. Operating margins have ranged from 3.0% to 3.4% from 2011-2013 while operating EBITDA margins have ranged from 8.2% to 8.4% over the same period. While PHS' profitability metrics are weak relative to Fitch's 'AA' medians, the corporation has generated solid coverage of MADS by EBIDA and operating EBIDA reflecting its light leverage position. MADS of $40.1 million equates to a light 2% of 2013 total revenues. In 2012 and 2013 PHS' generated debt service coverage by EBIDA of 5.8x and 6.4x, respectively, which exceeds the 2014 'AA' category median of 5.5x. Similarly, MADS coverage by operating EBIDA was 4.3x in both 2012 and 2013, which is in line with the 'AA' category median of 4.4x. Through the six months ended June 30, PHS generated MADS coverage by EBIDA of 8.3x and MADS coverage by operating EBIDA of 5.4x.

Fitch notes that profitability is somewhat diluted by the inclusion of the health plan in consolidated results. Further, PHS absorbed approximately $140 million of reimbursement reductions from Medicaid payors in 2011 and 2012, opened the new Presbyterian Rust Medical Center in Oct. 2011, and has invested almost $200 million in its electronic health record over the last 3-4 years, all of which have had a negative impact on profitability. Management budgets to maintain 3% operating margins on a consolidated basis.

DISCLOSURE

PHS covenants to disclose annual and quarterly financial information to bondholders. Disclosure, which includes a balance sheet, income statement, a cash flow statement, utilization statistics and a management discussion and analysis, is disseminated through the MSRB's EMMA system and DAC.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014);

--'Revenue Supported Rating Criteria' (June 16, 2014).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=863914

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, +1-312-368-2059

Senior Director

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst:

Jennifer Kim, +1-212-908-0740

Associate Director

or

Committee Chairperson:

Emily Wong, +1-212 908-0651

Senior Director

or

Elizabeth Fogerty, +1-212-908-0526

Media Relations, New York

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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