Fitch Affirms Banner Health's (Arizona) Revs at 'AA-'; Outlook Stable

SAN FRANCISCO--(Business Wire)--
Fitch Ratings has affirmed its 'AA-' rating on $2.3 billion outstanding revenue
bonds issued on behalf of Banner Health (Banner). The Rating Outlook is Stable.

The 'AA-' rating is supported by Banner's strong operating performance that is
buoyed by its leading market position in core markets and its excellent
management practices. Lending further strength is Banner's large size, yielding
benefits of scale. Historically, Banner's operating profitability has been solid
and consistent with Fitch's 'AA' medians. After a slight decline in Fiscal Year
2008 (FY08), operating profitability rebounded strongly in the first five months
in FY09. Having averaged a four-year 5.3% operating margin through FY07,
Banner's operating margin dipped to 3.2% ($125.7 million) in FY08, reflecting
increased interest and depreciation expenses, associated with the system's heavy
capital investment. While operating EBITDA margin dipped to 9.4% in FY08 from
9.7% in FY07, Banner generated $371.4 million in operating EBITDA in 2008 versus
$327 million in the prior year. However, 2008 net income was adversely affected
by large realized losses on investments which led to a bottom line loss of $26.8
million (-0.7%).

Due to the negative impact from the recent turbulence in the global financial
market on certain Banner's financial indicators, management implemented several
initiatives in the fourth quarter of FY08 to improve operating profitability. As
a result, Banner's profitability has rebounded strongly through the five months
ended May 31, 2009, with a 7.6% operating margin ($147.7 million) and an
operating EBITDA margin of 13.4% ($261.4 million). Excess income through the
interim period totaled $163.3 million (8.3% net margin).

The system's ability to address softening economic variable and turbulent
capital markets is in no small measure, a reflection of Banner's exceptional
leadership, scale and service line breadth. In light of softening patient
demand, higher costs of capital, low liquidity, and heavy capital investments,
Banner's management revised its strategic financial plan in an effort to rebound
profitability and enhance liquidity. Through sizable cost savings, labor force
adjustments, and capital budget reductions, management succeeded in producing
strong results, without compromising outcomes. Lastly, the system derives its
strength from its scale and geographic diversity as it generates approximately
$4 billion in revenues and maintains market share leadership in two core markets
of Phoenix, Arizona and northern Colorado.

Primary credit concerns center around Banner's low liquidity for the rating
category. As of Dec. 31, 2008, Banner had $1.2 billion in unrestricted cash and
investments, equating to 125.7 days cash on hand (DCOH), dramatically lower than
the 246.3 days at prior year's end. Aside from the dilutive effect of Banner's
acquisition of Sun Health in 2008 (see Fitch's new issue report dated Aug. 13,
2008, for more information regarding the Sun Health acquisition), large realized
and unrealized investment losses, coupled with approximately $273 million in
collateral posting requirements on its swap contracts, eroded Banner's
unrestricted cash and investments position. However, improved investment
performance and a sizable reduction in collateral posting requirements, helped
restore Banner's DCOH to around 150.3 days by May 31, 2009. While also low for
the rating category, Banner's cash to debt position improved to 68.7% in the
interim period and its cushion ratio rose to 10.6 times (x). While Fitch remains
concerned about Banner's low liquidity, such concerns are mitigated by Banner's
healthy cash flow generation, strong operating EBITDA results, and planned
sizable reductions in its capital expenditures.

The Stable Rating Outlook is based on Fitch's expectation that Banner will meet
its targets as projected under a revised strategic financial plan and maintain
strong operating profitability. Although Banner's liquidity metrics are not
consistent with its 'AA-' rating, a rating downgrade is precluded due to
management's effective and timely response to the impairment to its liquidity
position. Banner's revised five-year financial forecast projects operating and
operating EBITDA margins to average around 4% and 10%, respectively, while
liquidity indicators are expected to improve in a measured fashion. Fitch notes
that failure to maintain such strong profitability, coupled with persistently
low liquidity, may result in negative rating pressure.

Headquartered in Phoenix, Arizona, Banner is a large, integrated health care
provider that owns, leases, and/or manages 22 hospitals and several other
related health care entities. Banner had total revenues of $4 billion in fiscal
2008. Banner has agreed to provide certain quarterly financial information to
bondholders, which Fitch views positively. The content of Banner's annual
disclosure to NRMSIRs includes utilization statistics, balance sheet, income
statement, and statement of cash flows, but does not include management
discussion and analysis.

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.

Fitch Ratings
Michael Borgani, +1-415-732-5620 (San Francisco)
James LeBuhn, +1-312-368-2059 (Chicago)
Cindy Stoller, +1-212-908-0526 (Media Relations, New York)
cindy.stoller@fitchratings.com

Copyright Business Wire 2009