October 30, 2008
Fitch Rates Presbyterian Healthcare Services’ (New Mexico) $389MM 2008 Revs ‘AA-‘
Fitch Ratings has assigned 'AA-' ratings to the New Mexico Hospital Equipment Loan Council's approximately $388.9 million hospital revenue bonds, series 2008 (Presbyterian Healthcare Services). In addition, Fitch has affirmed the 'AA-' rating on Presbyterian Healthcare Services' (PHS) outstanding series 2001A and the 'AA-' underlying ratings on the PHS' outstanding series 2005A&B bonds. The Rating Outlook is Stable.
The series 2008 bonds are expected to consist of the following:
-- $164 million uninsured fixed-rate series A and E bonds;
-- $225 million series B, C and D variable-rate demand bonds.
The series 2008B-D bonds will be secured by liquidity facilities issued by JP Morgan Chase and Wells Fargo Bank, N.A. Fitch expects to assign short term ratings on the series 2008 B-D bonds based on the liquidity facilities at a date closer to pricing. Proceeds from the series 2008 issue will be used to refund all of PHS' series 2005A&B variable-rate revenue bonds currently outstanding, repay a $146.6 million bank loan (which was used to redeem PHS' series 2004 and series 1993 auction-rate securities in April 2008), reimburse the corporation approximately $30 million for prior capital expenditures, fund a swap termination fee and pay associated costs of issuance. The series A & E bonds are expected to price the week of Nov. 10 and the series B-D bonds are expected to price the week of Nov. 24.
The 'AA-' rating and Stable Outlook continues to be supported by the strategic, operational and financial benefits that accrue from PHS' vertically integrated delivery network, which has allowed the system to develop a strong financial profile and leading market position in Albuquerque and throughout New Mexico. PHS, through the support and coordination of its employed medical group (approximately 497 employed physicians) and health plan (approximately 380,000 total members), has increased its inpatient market share in Albuquerque to 43% in 2007 from 37.7% in 2004.
The Obligated Group operating results were improved with operating income of $51.6 million (4.5% operating margin) in fiscal 2007 as compared to $27.1 million income from operations (2.6% operating margin) in the prior year period. Through the seven months ended July 31, 2008 operating margin has dipped to 2.3%. Strong volume growth in the interim period has been outpaced by increased staffing and salary expenses. PHS obligated group's liquidity and capital related ratios remains solid with most ratios at or near Fitch's AA category medians. At July 31, 2008, the obligated group's unrestricted cash and investments totaled $647 million equating to 223 days cash on hand, a pro-forma cushion ratio of 24.0 times (x) and pro-forma cash to debt of 166.4%. Coverage of pro-forma maximum annual debt service (MADS) in fiscal 2007 of 5.5x, proforma MADS as a percent of revenue of 2.3% and debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) of 2.4x reflect the obligated group's manageable debt burden and compare favorably to Fitch's 2007 medians of 5.6x, 2.8% and 2.6x, respectively.
On a consolidated basis (including the results of non-obligated Presbyterian Health Plans), PHS generated operating income of $99.3 million (5.6% operating margin) in fiscal 2007 as compared to the $59.1 million operating profit (3.6% operating margin) in fiscal 2006. Liquidity indicators are strong at Dec. 31, 2007 with 222 day cash on hand, proforma cushion ratio of 35x and proforma cash to debt of 236%. Coverage of proforma MADS in fiscal 2007 is 7.3x.
Fitch's primary credit concerns include PHS' future debt plans, the competitive Albuquerque market and the ability of the Obligated Group to make transfers to PHP. PHS expects to issue approximately $230 million of new debt to fund the construction of a new 96-bed acute care hospital in the northwest suburb of Rio Rancho, NM. The first phase of construction for the hospital and a connected medical office building began in August 2008. The facility is expected to open in late 2010 with approximately 80 physicians locating their practices on the new campus.
Management projects total capital spending from 2009-2011 to be approximately $397 million including the new hospital construction. PHS faces increasing competition from University Hospital and University of New Mexico Medical Group which has increased its market share in the Albuquerque metropolitan area to 27.7% in 2007 from 25.5% in 2005. In addition, University of New Mexico Medical Group announced a joint venture with Legacy Health Partners to develop and construct a 100-bed acute care hospital at the City Center in Rio Rancho, due for completion in 2010.
In 2007, Presbyterian held a 48% share of the Rio Rancho inpatient discharge market and employs approximately 60 physicians located in Rio Rancho. In contrast, the University of New Mexico held an 18% share of the Rio Rancho inpatient discharge market and currently employs no physicians in Rio Rancho. Finally, the Obligated Group can make transfers to the PHP without recourse and without limit subject to various covenants in the Master Indenture. Although the OG has not made any loans or capital contributions to PHP since 2001, Fitch recently revised its Rating Outlook on the U.S. health/managed care insurance sector to Negative from Stable (more information is available in Fitch's July 9 special report 'US Health Insurers' Outlook Changed to Negative', available at www.fitchratings.com).
The Stable Outlook reflects PHS' leading market position and management's track record of successfully operating and managing costs of its integrated delivery system. The Albuquerque metropolitan area has experienced solid population growth which Fitch believes supports PHS' Rio Rancho hospital development. Although the debt associated with the Rio Rancho project will negatively impact certain of PHS' liquidity and capital ratio in the near term, Fitch believes the project has strategic value and will enhance PHS' market position over the long term.
Headquartered in Albuquerque, NM, PHS is a large, fully integrated health care delivery system. The obligated group includes the hospitals, the medical group and other entities but does not include PHP. As of Dec. 31, 2007 the OG's net assets represented approximately 69% of PHS' total combined net assets, 50% of total operating revenues and 67% of total excess over revenues. PHS had total revenues of $1.8 billion in 2007. 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 national information repositories and DAC.