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Fitch Rates PeaceHealth's (Oregon) $150MM 2007 Bonds 'AA'; Outlook Stable

Posted on: Monday, 24 September 2007, 17:15 CDT

Fitch Ratings has assigned an underlying 'AA' rating to the Oregon Facilities Authority's approximately $150,000,000 revenue bonds (PeaceHealth), series 2007A and 2007B. The bonds are expected to be insured by MBIA (insurer financial strength rated 'AAA' by Fitch). The bonds are expected to be sold during the week of Oct. 23 through negotiation by Goldman Sachs. In addition, Fitch has affirmed the underlying 'AA' rating on PeaceHealth's $486.5 million of outstanding debt. The Rating Outlook is Stable.

Bond proceeds will be used to reimburse the corporation for capital expenditures related to the RiverBend Hospital development in Springfield, OR and pay costs of issuance including the bond insurance policy. The bonds are expected to be issued in an auction-rate mode. PeaceHealth has entered into LIBOR-based floating to fixed rate swaps that will effectively convert the series 2007 to a synthetic fixed rate obligation.

The 'AA' rating is based on PeaceHealth's leading market share in each of its regions, improved profitability and strong cash flow, good volume growth, and excellent management practices. PeaceHealth's primary credit strength is the dominant market share position that the system's facilities occupy in each of their four service areas. Each of the system's hospitals maintains market share positions in excess of 75% in their markets. PeaceHealth's substantial market presence, particularly in high-end tertiary services, has led to improved profitability and cash generation.

The system has posted year over year improvement in operating profitability since 2001 with operating margins of 4.7% and 5.5% in fiscal 2006 and 2007, respectively. Earnings before interest, taxes, depreciation and amortization (EBITDA) margins of 14.3% and 14% in fiscal 2006 and 2007, respectively are in line with Fitch's 2007 'AA' median of 14.1%. Overall admissions (including both inpatient and outpatient) have continued to show solid growth with inpatient admissions growing more modestly and outpatient visits growing more rapidly. Fitch believes inpatient growth has been somewhat constrained by capacity constraints at Sacred Heart Medical Center in Eugene. Fitch views PeaceHealth's management practices as credit strength due to their rigorous financial and strategic planning. The financial performance has consistently exceeded budget in each of the past five years.

Credit concerns are mostly unchanged from Fitch's prior rating actions in 2004 and 2005 and revolve around the projected decline in PeaceHealth's liquidity and profitability measures in fiscal 2008 and 2009 associated with completion and opening of the RiverBend project, the system's extensive long term capital plan and the possible downsizing at a major employer in the Lower Columbia Region. Construction of the 397-bed RiverBend replacement hospital in Springfield is expected to be completed and opened in the third quarter of 2008. As of June 30, 2007 approximately $395.6 million has been expended with another $185 million needed for completion. In addition, management has budgeted $97.7 million in capital expenditures to reconfigure the existing Sacred Heart Medical Center (known as the University District campus). The costs of the RiverBend development have increased 13.5% over original projections, with approximately half the increase reflecting higher material costs and zoning and land use delays, and the other half reflecting scope changes related primarily to increased physician interest in being located on the campus.

Management's financial forecast projects liquidity indicators falling to 138 days cash on hand and 65% cash to debt in fiscal 2008 and break even operating profitability in fiscal 2009. Thereafter, liquidity and operating profitability begin to rebound reflecting normalized operations at the new RiverBend campus. Although PeaceHealth's 10-year capital plan is extensive, routine capital needs over the next five years are projected at roughly $60 million a year. New capital projects including the University District campus can be scaled down depending on future financial performance or changes in the marketplace. Finally, the largest employer in Lower Columbia Region, Longview Fibre Company, was recently acquired by a Canadian-based property and infrastructure investor. Any large scale employment reduction initiatives at the Longview plant could have a significant negative impact on St. John Medical Center.

The Stable Outlook reflects the diminishing development risk associated with the RiverBend campus. Construction on the hospital building is approximately 81% complete as of Sept. 1 with completion expected by March 2008. Liquidity and profitability measures are expected to fall below 'AA' category medians over the next two fiscal years as the transition is made to the new campus and the Sacred Heart site is redeveloped. Fitch will monitor the system's actual results versus financial projections. Negative variance could put downward pressure on the rating.

PeaceHealth is a multi-state health care system with six acute care hospital sites operating a total of 899 beds in Washington, Oregon, and Alaska. Total revenue in fiscal 2007 is approximately $1.1 billion. PeaceHealth has covenanted to provide annual audited financial statements to each Nationally Recognized Municipal Securities Information Repository (NRMSIR) with 150 days of each fiscal year end and unaudited quarterly financial statements (including a consolidated balance sheet, income statement, statement of cash flows, and utilization statistics) within 60 days of each fiscal quarter end.

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.

Source: Business Wire

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