Fitch Assigns 'AA-' Bank Bond Rating to Providence St. Joseph Health's (WA) Series 2016G Bonds
The series 2016G bonds will be issued as taxable variable-rate demand bonds supported by an irrevocable direct-pay letter of credit. The 'AA-' bank bond rating reflects the overall credit profile of PSJH and includes an assessment of the factors associated with potential bank bonds. The series 2016G bonds are expected to price the week of Sept. 26 via negotiation.
Bond payments are an unsecured corporate obligation of the obligated group.
KEY RATING DRIVERS
BROAD OPERATION PLATFORM: Fitch views PSJH's geographic diversity and business line diversity as key credit strengths. The increased breadth of operations subsequent to the combination of PH&S and Saint Joseph Health System (SJHS), with 50 hospitals, operations in seven states, and resulting diversity of operations decreases the system's overall operating risk profile.
EXCELLENT MANAGEMENT PRACTICES: Fitch believes management is proactively transitioning the organization to maintain its leadership positions as key markets move to population health management payment models. PSJH's excellent management practices are reflected in a robust IT platform and continued centralization of shared services that allows for detailed operational reporting and extraction of further operational efficiencies.
COMPRESSED OPERATING PROFITABILITY: Consolidated operating profitability has been compressed over the past three years with operating EBITDA margin averaging 7.6% as both PH&S and SJHS pursued dilutive strategic initiatives that should be accretive in the mid-term. Operating EBITDA margin further compressed to 6% in the six-month interim period ending June 30, 2016, primarily due to increased compensation expenses, adverse shifts to the system's payor mix and weaker performance at the health plan.
MODERATE DEBT BURDEN: The pro forma debt burden remains moderate with pro forma maximum annual debt service (MADS) equal to approximately 1.8% of fiscal 2015 operating revenue. However, MADS coverage is light for the rating category reflecting the compressed operating profitability.
ADEQUATE LIQUIDITY: Liquidity metrics remain adequate for the rating category given PSJH's size and scope of operations with 167.1 days cash on hand, 22.5x cushion ratio and 135.3% cash-to-pro forma debt at June 30, 2016.
SUCCESSFUL INTEGRATION: Fitch expects PSJH to successfully integrate the operations of PH&S and SJHS, achieving economies of scale, while successfully executing operating improvement initiatives to bring the system's credit profile more in line with the 'AA-' rating. Failure to demonstrate incrementally improving operating performance through successful integration and operating improvement initiatives could lead to negative rating pressure.
PSJH, headquartered in Renton, WA, became the sole member of PH&S and SJHS on July 1, 2016. Operations include 50 hospitals, 23 long-term care facilities, 829 clinics, 14 senior housing facilities, 23,000 physicians, a health plan with 1.9 million covered lives and other related services. The system's operations cover seven states: Alaska, Washington, Oregon, Montana, California, New Mexico and Texas. The affiliation will be accounted for as an acquisition, but the accounting for the acquisition is not yet complete. Therefore, Fitch's analysis is based upon unaudited combined financial statements of PH&S and SJHS. Total consolidated operating revenue equaled $20.8 billion in fiscal 2015, of which PH&S accounted for $14.4 billion (69%) and SJHS accounted for $6.4 billion (31%). The obligated group accounted for approximately 84.2% of consolidated operating revenue and 90% of consolidated total assets in fiscal 2015.