Fitch Ratings has assigned an 'A+' rating to the expected issuance of Washington Health Care Facilities Authority as follows:
--$250.4 million revenue bonds, series 2010 (Swedish Health Services).
In addition, Fitch affirms the 'A+' rating on approximately $547 million of revenue bonds outstanding issued through the Washington Health Care Facilities Authority (WHCFA) on behalf of Swedish Health Services (Swedish).
The Rating Outlook is Stable.
The series 2010 bonds are expected to be structured as uninsured fixed-rate bonds. Proceeds will be used to refund the $197.5 million of WHCFA series 1998 bonds currently outstanding, reimburse Swedish $57.5 million for prior capital expenditures and pay costs of issuance. The series 2010 bonds are expected to sell the week of Nov. 15th through negotiation.
RATING RATIONALE:
--The 'A+' rating reflects Swedish's integrated delivery system in the favorable Seattle/King County service area that has led to a leading market position and a solid financial profile. .
--Swedish's operating cash flow over the last three years has been consistent with Fitch's 'A' rated medians. In fiscal 2009, Swedish's operating EBITDA margin of 11.2 percent exceeded the 'A' category median of 10 percent.
--Swedish's debt burden is manageable. Historical coverage of pro forma maximum annual debt service (MADS) by EBITDA was robust in 2009 at 4.2 times (x) while pro forma MADS equates to 2.8 percent of fiscal 2009 revenues.
--Swedish's liquidity metrics have improved since fiscal 2007 and are adequate when compared to the 'A' category medians. At Aug. 31, Swedish had $570.6 million of unrestricted cash and investments that translate into 158.8 days cash on hand, a pro forma cushion ratio of 14.7x and 97.3 percent of long-term debt.
KEY RATING DRIVERS:
--Maintaining strong cash flow is critical to mitigating the dilutive effects of the expected issuance of up to $190 million of additional debt in the first half of 2011 to fund the construction of inpatient facilities at its Issaquah facility.
SECURITY:
A pledge of and security interest in the 'Gross Receivables' of the Obligated Group and negative mortgage pledge. Expected financial covenants are typical for the rating category.
CREDIT SUMMARY:
The 'A+' rating is supported by Swedish's leading market position in the Seattle metropolitan area, the service area's favorable demographic profile, solid operating profitability and manageable debt burden and adequate liquidity. In 2009, Swedish held a 22 percent inpatient market position in King County compared to 17 percent for University of Washington/Harborview and 12 percent for Overlake Hospital. Furthermore, the lease agreement with Stevens Hospital in Edmonds, WA and the development of inpatient capacity at the Issaquah facility is expected to further extend the system's market share position. The primary service area demographics are favorable with above average wealth and education levels. While unemployment has risen in the area it remains below state and national averages. Currently, Fitch rates the limited tax general obligation bonds of both King County and the City of Seattle 'AA+'. Operating profitability rebounded nicely in 2009 after being negatively impacted by weather related disruptions in 2008 with operating and operating EBITDA margins of 3.1 percent and 11.2 percent, respectively; both, of which, exceed the respective 'A' category medians of 3 percent and 10 percent. Through the eight month interim period, operating and operating EBITDA margins have remained solid at 3.20 percent and 10.7 percent, respectively. Swedish's debt burden is manageable. Historical coverage of pro forma MADS by EBITDA was robust in 2009 at 4.2x while pro-forma MADS equates to 2.8 percent of fiscal 2009 revenues. Finally, Swedish enjoys an excellent reputation for quality due in part to the development of clinical institutes in orthopedics, neurosciences, cardiac and oncology.
Fitch's primary credit concern reflects the expected issuance of additional debt in the first half of 2011 to fund the construction of an ambulatory/inpatient facility in Issaquah, WA. Swedish received certificate of need approval to develop a 175-bed acute care hospital in June 2008. Construction began in late 2009 with availability of inpatient beds facilities projected in early 2012. The total cost of the project is approximately $270 million, of which, $77.2 million has been expended through August. Management expects to issue no more than $190 million of debt in the first half of 2011 which would reimburse the corporation for project related capital expenditures. Fitch view the Issaquah development favorably as it extends Swedish's footprint in a favorable service area.
The Stable Outlook reflects Fitch's expectation that Swedish will maintain its solid financial profile which should be able to absorb the additional debt issuance in 2011. However, negative rating action could occur if Swedish's financial profile deteriorates or a larger amount of additional debt than planned is issued.
Swedish is an integrated health care system consisting of four acute care hospitals, over 400 employed physicians and a free standing emergency/outpatient facility. In 2009, Swedish had total revenues of $1.38 billion. Swedish will provide annual and quarterly disclosure for the first three quarters of each fiscal year to the Municipal Securities Rule-making Board's EMMA system. The content of Swedish's quarterly disclosure is adequate and includes a balance sheet and income statement. Inclusion of a statement of cash flows, utilization data and a management discussion and analysis would be viewed favorably.
In addition to the sources of information identified in the report 'Revenue-Supported Rating Criteria', this action was additionally informed by information from the Underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct. 8,;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 16.
For information on Build America Bonds, visit 'fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Revenue-Supported Rating Criteria
http://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
More Information:
www.fitchratings.com
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