TEXT-Fitch rates MultiCare Health System, Wash. revs 'AA-'
Oct 5 - Fitch Ratings has assigned its 'AA-' rating to the $60 million Washington Health Care Facilities Authority revenue bonds, series 2012A, issued on behalf of MultiCare Health System (MHS). In addition, Fitch has assigned its 'AA-' rating to $764.9 million in outstanding revenue bonds issued on behalf of MHS. A full list of the rated bonds follows at the end of this release. Proceeds of the fixed rate series 2012A revenue bonds will fund various capital projects. Additionally, MHS will also issue $80 million in bank bonds (series 2012B, not rated by Fitch) to reimburse the organization for prior capital expenditure and for a portion of the October 2012 acquisition of Auburn Medical Center in South King County, Washington. The series 2012A bonds will price during the week of Oct. 29, 2012. The Rating Outlook is Stable. SECURITY Debt payments are secured by a pledge of the gross receivables of the obligated group. KEY RATING DRIVERS STRONG PROFITABILITY: Profitability margins over the last four fiscal years and through the eight-month interim period have been consistently strong and have exceeded Fitch's 'AA' category medians. Fitch views favorably management's ability to maintain such strong results whilst facing declining governmental reimbursement rates and modest patient volume growth. ONGOING HEAVY CAPITAL SPENDING: Capital expenditure through fiscal 2015 is sizable and is driven by capacity needs and strategic acquisitions. Financing sources for the $750 million (2012-2015) capital plan rely on operating cash flow and series 2012 bonds proceeds. Given its history of strong cash flow generation, Fitch believes MHS should be able to fund its capital needs without impacting liquidity. MODERATE DEBT BURDEN: Elevated by debt issuance in support of its prior five-year capital plan, MHS' debt burden is moderately high for the rating category. While pro forma maximum annual debt service (MADS) coverage ratios are in line with Fitch's 'AA' medians, pro forma MADS accounts for a high 3.3% of total operating revenue, compared to Fitch's 'AA' median of 2.5%. Additionally, debt to capitalization and debt to operating EBITDA ratios are high. HEALTHCARE REFORM PREPAREDNESS: MHS has invested heavily in a physician alignment strategy and a clinical information platform infrastructure that place the organization in a favorable position to compete in a value-based reimbursement environment. LEADING MARKET SHARE: MHS enjoys a stable and leading 45% market share in its primary service area and a third leading 21% share in its secondary services area. MHS competes directly with Franciscan Health System (an affiliate of Catholic Health Initiatives, rated 'AA' by Fitch) whose respective market share are 42% and 26%. University of Washington Medicine (not rated by Fitch) has a leading 32% market share in MHS' secondary service area. CREDIT PROFILE Favorable Financial Profile MultiCare Health System's financial profile exhibits strong profitability and cash flow generation, solid balance sheet strength, and good debt service coverage for the rating category. MHS' financial success highlights management's laser-like focus on lowering the organization's overall cost structure through productivity initiatives and labor force adjustments. Equally important, management, at an early stage, invested heavily in its information technology and electronic medical record platforms and in a prudent physician alignment strategy. Fitch believes MHS should maintain its current financial profile as it leverages its resources and its clinically-integrated operating model to enhance quality outcomes and lower costs in preparation for healthcare reform. Strong Profitability MHS's profitability and strong cash flow generation compare favorably to Fitch's 'AA' category medians. Despite falling governmental reimbursement rates and a more pressured operating environment, MHS reported $205.3 million in operating EBITDA for fiscal 2011 (13.7% margin). Additionally, operating EBITDA margins over the last four fiscal years averaged 15.1%, far exceeding Fitch's 'AA' category median of 9.8%. The strong performance continued through the eight-month interim period ended Aug. 31, 2012, as MHS reported an operating EBITDA of $161.8 million (15%). Leading Market Share The Strong financial performance has also benefited from MHS' leading market share in the primary service area (PSA). Despite strong competition, MHS enjoys a stable and leading 45% market share in its (PSA) and a third leading 21% share in its secondary services area. Competition in the PSA is limited to facilities owned and operated by Franciscan Health System (an affiliate of Catholic Health Initiatives, rated 'AA' by Fitch) whose respective market share are 42% and 26%. The University of Washington Medicine (not rated by Fitch) has a leading 32% market share in the secondary service area. Over the near term, Fitch expects MHS' market share in the secondary service area to increase due to its recently opened free-standing emergency center and its acquisition of Auburn Regional Medical Center. Good Balance Sheet Strength At Aug. 31, 2012, MHS had $957.7 million in unrestricted cash and investments, equating to a very good 272.4 days-cash-on-hand and comparing favorably to Fitch's 'AA' category median of 241.1 days. However, given its heavy capital spending in recent years, MHS' pro forma cash-to-debt position of 104.9% is weak for the rating category when compared to Fitch's 'AA' category median of 169.4%. Sizable Capital Plan In 2011, MHS embarked on a five-year $870 million capital plan. The plan addresses capacity needs at MHS' current campuses, strategic acquisition and growth opportunities, IT investments, and routine maintenance. Funding sources include operating cash flow, cash reserves, and $140 million in new debt (series 2012A&B). Having recently completed its $930 million five-year (2006-2010) capital plan on time and on budget, Fitch believes MHS has demonstrates strong management skills to mitigate project execution risk. Part of the proceeds of the $80 million series 2012B bonds (not rated by Fitch) and the series 2012A bonds will reimburse MHS for a portion of its cash outlay in acquiring the assets of Auburn Regional Medical Center. The 195 licensed-bed hospital in Auburn, Washington is part of MHS' strategic growth in South King County and should serve as a referral center from its recently-opened free-standing emergency center and its network of affiliated physicians in Covington (also in South King County). Remaining bond proceeds, along with operating cash flow and cash reserves, will fund expansion projects at the Covington Emergency Department, Tacoma General, and Mary Bridge hospitals. Management believes that MHS derives a competitive advantage from its heavy investments in its patient electronic medical record and patient billing and accounting systems across all sites. Management has allocated $25 million toward its information system strategic plan, including installation and implementation initiatives at its recently acquired Auburn facility. Debt Profile Overall debt burden is above average as pro forma maximum annual debt service (MADS) of $53.4 million accounts for a relatively high 3.6% of fiscal 2011 operating revenue and 3.3% through August, 31 2012. However, MADS coverage by fiscal 2011 EBITDA is very good at 4.0x and 5.1x through the interim period. Post issuance of the series 2012 bonds, long term debt will total $905 million with 74% underlying fixed and 26% underlying variable rate. MHS' variable-rate debt will include $80 million in series 2012B direct bank indexed floating-rate bonds; $103.7 million and $52.8 million in daily and weekly VRDBs, supported by a letter of credit from Barclays. MHS has five swaps outstanding: three fixed payer swaps with an outstanding notional value of $210.4 million and a July 31 2012 mark-to-market liability of $67.4 million; and two basis swaps with a notional value of $237.5 million and a July 31 2012 mark-to-market liability of $1.7 million. The fixed payer swaps are insured and currently require no collateral posting. STABLE OUTLOOK The Stable Outlook is predicated on Fitch's belief that MHS will successfully execute its strategic initiatives, which should result in the maintenance of strong profitability and preservation of current liquidity. About the Organization MultiCare Health System owns and operates five acute care facilities, collectively licensed for 1,130 beds. The hospitals are located in three regions: West Pierce region in Tacoma, Washington; East Pierce region in and around Puyallup, Washington; and the South King County region including the cities of Covington and Auburn, Washington. MHS had $1.5 billion in operating revenue for fiscal 2011 (not excluding bad debt). DISCLOSURE: MHS covenants to disclose quarterly financial statements and annual financial information with utilization statistics to the MSRB's EMMA system. Fitch assigns an 'AA-' rating to the following revenue bonds issued by Washington Health Care Facilities Authority on behalf of MHS: --$50,000,000 series 2004A; --$50,000,000 series 2004B; --$50,000,000 series 2004C; --$78,125,000 series 2007A; --$78,100,000 series 2007B; --$52,770,000 series 2007C; --$103,665,000 series 2007D; --$48,295,000 series 2008A; --$48,295,000 series 2008B; --$30,000,000 series 2008C; --$48,145,000 series 2009A; --$49,985,000 series 2009B; --$77,530,000 series 2010A.
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