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New Issue:

MOODY'S ASSIGNS A2 LONG-TERM AND UNDERLYING RATINGS TO SWEDISH HEALTH SERVICES (WA) SERIES 2011 BONDS; A2 RATINGS ON PARITY DEBT AFFIRMED; OUTLOOK IS STABLE

11 Feb 2011

TOTAL OF $800 MILLION OF RATED DEBT TO BE OUTSTANDING

Washington Health Care Facilities Auth
Health Care-Hospital
WA

Moody's Rating

ISSUE

RATING

Fixed Rate Revenue Bonds Series 2011A

A2

  Sale Amount

$175,000,000

  Expected Sale Date

02/16/11

  Rating Description

Healthcare Revenue Bonds

 

Variable Rate Demand Bonds Series 2011B

A2

  Sale Amount

$100,000,000

  Expected Sale Date

02/28/11

  Rating Description

Healthcare Revenue Bonds

 

Variable Rate Demand Bonds Series 2011C

A2

  Sale Amount

$75,000,000

  Expected Sale Date

02/28/11

  Rating Description

Healthcare Revenue Bonds

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Feb 11, 2011 -- Moody's Investors Service has assigned A2 long-term and underlying ratings to Swedish Health Services Series 2011 revenue bonds, and has affirmed the A2 ratings on Swedish's outstanding parity debt (listed at the end of this report). Bonds will be issued by the Washington Health Care Facilities Authority. The series 2010B and 2010C bonds are variable rate demands and will be backed by direct pay letters of credit (LOC) from Citibank N.A. Short-term and long-term ratings reflecting the LOCs will be assigned separately. The outlook is stable.

RATING RATIONALE: The affirmation of the A2 rating and the stable outlook reflects Swedish's strong, competitive market position in the greater Seattle region, the maintenance of good, stable operating performance, and the improvement of liquidity balances. With the additional debt, and inclusive of significant non-cancelable operating leases, Swedish is significantly leveraged and thus highly reliant on the maintenance of strong operating performance in order to maintain adequate debt service coverage levels. A drop in operating performance, or a further weakening of the balance sheet, could result in the immediate weakening of Swedish's credit position.

USE OF PROCEEDS: Bond proceeds will be used to: (1) refund the Series 2006 variable rate demand bonds (approximately $100 million); (2) fund various capital projects; and (3) pay certain costs of issuance. The series 2011 bonds will increase Swedish's total debt liability by approximately $246 million.

LEGAL SECURITY: Bonds are secured by a gross receivables pledge of Swedish Health Services. Swedish Medical Center Foundation is not obligated on the bonds. Swedish may not incur liens except for certain permitted liens. Substitution of notes is not permitted.

INTEREST RATE DERIVATIVES: None

STRENGTHS

*Largest healthcare provider in the Seattle metropolitan region with net patient revenue in excess of $1.5 billion, four established acute care hospitals totaling nearly 1000 staffed beds, and 16 primary care clinics located throughout the region; system generates over 40,000 admissions annually and employs over 800 providers

*Market leader in the competitive Seattle metropolitan region with approximately 22% market share; next largest competitor is University of Washington / Harborview with a combined 18% of the market; with the recent acquisition of Steven's hospital, and the planned opening of a new hospital in Issaquah in 2012, Swedish expects to gain market share over the next several years

*History of stable and relatively strong operations, with the operating margin ranging between 1.3% and 3.1% over the last five years, and with the operating cashflow margin ranging between 9.0% and 11.2%; in fiscal year (FY) 2011 (based on 11-month unaudited interim results annualized), operations were somewhat weaker than the previous year, but still strong, with an operating margin of 3.1%, and an operating cashflow margin of 10.2%

*Improved cash balances; due to strong cashflow generation, favorable investment markets, and increased leverage, cash on hand improved to 167 days at fiscal year end (FYE) 2009, from a much weaker 105 days at FYE 2008; as of November 30, 2010 (per unaudited interim financial statements), cash balances were weaker but remained relatively strong at 152 days; on a proforma basis, inclusive of reimbursement payable at closing, cash on hand improves to 184 days

CHALLENGES

*High leverage producing relatively weak debt ratios; proforma FY 2010 measures (inclusive of the issuance of the Series 2011 bonds and based on 11-month unaudited interim results annualized) are weak for the A2 category, with cash to debt of 81% (A2 median is 132%), adjusted maximum annual debt service coverage of 4.6 (A2 median is 5.0), debt to operating revenue of 57.5% (A2 median in 33.8%), and debt to cashflow of 5.3 (A2 median is 3.2); inclusive of an additional $250 million of non-cancelable operating lease obligations, ratios become further stressed, with cash to debt dropping further to 63%, and debt to cashflow further weakening to 6.8 times

*Significant unfunded pension liability; Swedish's unfunded pension liability improved in FY 2009, but remained high, dropping to a total liability of $201 million on a PBO basis (equal to a funded level of 66%), compared to a liability of $245 million at FYE 2008 (equal to a funded level of 56%)

*Strong competition from numerous district, academic, and not-for-profit hospitals including University of Washington Medical Center (part of University of Washington, rated Aaa), A3-rated Overlake Hospital Medical Center, A3-rated Evergreen Healthcare, Aa3-rated Seattle Children's Hospital, and Baa2-rated Virginia Mason Medical Center

*High exposure to construction, execution and operating risk associated with a large number of new projects; projects include: the construction of a new $443 million, campus in Issaquah including an acute care hospital; construction of three, 3rd-party financed, stand-alone emergency departments (in Redmond, Ballard and Millcreek); and the acquisition (through a lease arrangement) of Steven's Hospital in Edmonds

MARKET POSITION/COMPETITIVE STRATEGY: DOMINANT PROVIDER OF HEALTHCARE SERVICES IN THE VERY COMPETITIVE SEATTLE MARKET; UNDERGOING RAPID EXPANSION OF SERVICE SITES

Swedish Health Services is the Seattle region's largest provider of healthcare services. Seattle is a very competitive market, and is home to a number of prestigious, and clinically important organizations. Washington state exercises strict Certificate of Need, and though some consolidation has taken place, Seattle remains a fairly fractured market. In 2009, Swedish garnered 22% of all inpatient admissions in King County. Swedish's closest competitors with respect to market share include University of Washington Medical Center / Harborview, with a combined 18% of the market, Valley Hospital with 11% of the Market, Overlake Hospital (rated Baa2) with 12% of the market, and Virginia Mason Medical Center (rated Baa2) with 6%. Other significant competitors include Seattle's Children's Hospital (rated Aa3), and the Seattle Cancer Care Alliance (rated A3), both of which have national reputations. Swedish's long term strategic plan includes substantial growth, which may involve opportunistic and accretive strategic alliances. With the recent addition of a fourth hospital in Edmonds, and the planned addition of a fifth hospital in Issaquah, Swedish expects its market share in King country to grow in the coming years.

Swedish is currently comprised of two large downtown facilities (697-bed First Hill Campus and 385-bed Cherry Hill Campus), a smaller community hospital in Ballard (the 163-bed Ballard Hospital), and a second community hospital in Edmonds (formally the 156-bed Public Hospital District No. 2 dba Steven's hospital, which became part of Swedish on September 1, 2010). In 2010 (based on 11-month results annualized), the system generated over 42,000 admissions, and produced over $1.5 billion of net patient revenue. Swedish uses a mixed staff model, with approximately 800 employed providers, and a strong open staff. Swedish has benefited from a large footprint throughout the Seattle region, operating 16 primary care clinics in the city and throughout its suburbs. The system offers a wide array of community, tertiary, and quaternary services, including a recently completed, stand-alone orthopedic institute, a neuroscience institute, a heart & vascular institute, a cancer institute, and a women and infants center.

Swedish is currently in the process of rapidly expanding its organizational footprint, and is undertaking a number of projects concurrently. Of largest significance is the construction of a new campus, including a green-field hospital in the town of Issaquah, located approximately 20 miles from down town Seattle. Construction of the campus began in 2009, and is expected to cost a total of $443 million. The hospital is licensed for 175 beds, and the project will include an ambulatory care center, and a medical office building. The project will be completed in phases, with the medical office building scheduled to open in mid 2011, and the first 80 inpatient beds operational in early 2012. Approximately $191 million has been spent on the project to date. Swedish already has a standalone emergency department in this market, which it opened in 2005, and which has reportedly experienced strong volumes. Nevertheless, we believe a full acute care hospital in this market represents a significant investment, and entails significant construction, execution, and operating risk.

Other current projects include: the construction of a freestanding emergency department in Ballard, completed in November 2010; the construction of a freestanding emergency department in Redmond, completed in December 2010; the construction of a freestanding emergency department in Mill Creek, to be completed this month; and the acquisition of Steven's Hospital in Edmonds through a long-term lease with Snohomish County Public Hospital District 2 for a period of 30 years. The freestanding emergency departments cost approximately $40 million each, and have been financed by 3rd party vendors, which in turn have entered into long-term non cancellable leases with Swedish. We treat the leases as the equivalent of debt.

Steven's Hospital (which prior to the lease agreement had a revenue bond rating of Ba2, and a general obligation bond rating of A2) is an existing, 217-licended bed facility receiving approximately 7,800 admissions annually, and in 2009, generated over $190 million in operating revenues. While the facility has a history of poor operating performance, the organization has achieved a significant operational turn around and in 2009, achieved 10.3% operating cashflow margins and produced nearly $20 million of operating cashflow. Swedish has agreed to lease the hospital for the cost of $7.2 million a year (subject to inflation), and has agreed to commit $90 million of capital to the facility over the next 10 years dependent upon operating margins of the facility. The transaction closed in September.

Overall, while we believe these projects have the potential of being highly accretive to Swedish, they represent a significant expansion of operations over a short period of time, and may compete with one another for senior management's attention. Given Swedish's highly leveraged balance sheet, it will be important for the organization to maintain strong, consistent operating cashflow in support of its debt service in order to remain stable at the current rating level.

OPERATING PERFORMANCE: RECENT HISTORY OF RELATIVELY STABLE OPERATING PERFORMANCE

Swedish has a recent history of relatively stable and favorable operating performance. For the last five years, operating margin has averaged 2.5% and operating cashflow margin has averaged 9.9%. During this period there has been meaningful growth of the revenue base, with net operating revenues growing at an average rate of 9.3% per year.

Performance in FY 2009 improved significantly over the prior year. Operating income improved to $42.8 million (3.1% margin) from $16.7 million (1.3% margin) in FY 2008 and operating cashflow improved to $154.4 million (11.2% margin) from $113.4 million (9.0% margin). The improvement was achieved despite a drop in inpatient admissions, and despite increased overhead relating to the newly opened orthopedic facility, increased pension expense, and increased labor costs. Profitability enhancements included a reduction in force equal to 200 non-clinical FTEs (implemented in early February), the rationalization of consulting costs, and the reduction of leased space. Also, while inpatient admissions dropped, adjusted admissions remained flat, indicating a partial migration of the business model toward increased outpatient activity. We view favorably management's ability to quickly address operating problems, and consider this to be a strong credit positive.

Year to date (through 11 months ended November 30, 2010, based on unaudited interim financial statements) Swedish is on track to exceeding FY 2009 on an absolute basis, though on a margin basis, operating cashflow has somewhat declined. Based on 11-month YTD results annualized, operating income in FY 2010 improved to $49.8 million (3.1% margin), and operating cashflow reached an all time high of $162.9 million (10.2% margin). Results in 2010 were driven by the maintenance of consistent volume numbers, continued improvements in expense management, and savings from modified vendor relationships. Looking forward, in addition to the challenges cited above associated with operating a large number of new facilities, there is a significant labor contract to be renewed in 2011 which will have material bearing on the organization's future performance. Over 50% of Swedish's workforce is unionized, and while negotiations may be extensive, there is no history of work stoppages or strikes at Swedish.

BALANCE SHEET POSITION: CASH POSITION HAS IMPROVED; ADDITIONAL DEBT STRESSES BALANCE SHEET RATIOS

Swedish's cash balances have improved significantly since FYE 2008. Due to strong cashflow generation, favorable investment markets, a temporary reduction in capital spending, and increased debt, cash on hand improved to 167 days as FYE 2009, from a much weaker 105 days at FYE 2008. Year to date, cash balances remain strong, though have somewhat declined. As of November 30, 2010 (per unaudited interim financial statement), liquidity measured 152 days. The Series 2011 bonds will include approximately $243 million of construction fund proceeds, approximately $200 million of which will be reimbursed to Swedish upon closing. Approximately $135 million of the reimbursement pertains to expenditures incurred through November 30, 2010. Inclusive of these funds, days cash on hand improves to 184 days as of November 30, 2010 on a proforma basis. Approximately 60% of Swedish's assets are allocated to equities, with the remaining 40% allocated to highly rated fixed income instruments and cash. Swedish's investments are highly liquid, with essentially all of its assets available within 30 days. Approximately 40% of Swedish debt is demand debt, and Swedish's ratio of monthly cash to demand debt was good at 229% as of FYE 2009.

With the issuance of the Series 2011 bonds, Swedish significantly increases its leverage, producing debt measures that are weak for the A2 category. Based on proforma of FY2010 results (inclusive of the issuance of the Series 2011 bonds and based on 11-month unaudited interim results annualized) cash to debt measured 81% compared to 101% at FYE 2009 (A2 median is 132%), adjusted maximum annual debt service coverage dropped to 4.6 times from 5.2 times (A2 median is 5.0), debt to operating revenue reaches 57.5% from 40.8% (A2 median in 33.8%), and debt to cashflow weakens to 5.3 times from 3.3 times (A2 median is 3.2).

Swedish makes significant use of non-cancelable leases to finance projects, and in the last year has significantly increased its exposure to these leases in support of the construction of the three new ambulatory care centers, among other uses. As of November 30, 2010, the debt equivalent of all non-cancelable operating leases was approximately $250 million on a net present value basis. Including this debt in Swedish's debt measures further weakens Swedish's credit profile, with cash to debt dropping to a very weak 63%, and debt to cashflow further weakening to a relatively high 6.8 times.

In addition to these liabilities, Swedish also has exposure to significant unfunded pension obligations. In FY 2009, Swedish's unfunded pension liability improved, but remained high, dropping to a total liability of $201 million on a PBO basis (equal to a funded level of 66%), compared to a liability of $245 million at fiscal year end (FYE) 2008 (equal to a funded level of 56%). Swedish's investment of its pension assets are a bit more aggressive than its allocation of unrestricted system assets, with approximately 77% allocated to equity, and the remaining 23% allocated to fixed income securities.

Outlook

The stable outlook reflects our belief that Swedish will continue to produce strong operating cashflow, grow its current market position, and improve its balance sheet, without taking on additional debt

What could change the rating--UP

Significant organizational growth; sustained operating improvement; significantly improved balance sheet measures

What could change the rating--DOWN

Deterioration of cash balances; deterioration of operating performance; additional debt

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for Swedish Health Services

-First number reflects Audit year ended December 31, 2009

-Second number reflects proforma on 11-month unaudited, interim financial statements ended November 30, 2010, annualized; includes impact of the issuance of the Series 2011 bonds, including $247 million of net additional debt, and $135 million of reimbursement

-Investment returns normalized at 6% unless otherwise noted

*Inpatient admissions: 40,734; 42,320

*Total operating revenues: $1.38 billion; $1.60 billion

*Moody's-adjusted net revenue available for debt service: $190 million; $208 million

*Total debt outstanding: $564 million; $920 million

*Maximum annual debt service (MADS): $36.6 million; $45.3 million

*MADS Coverage with reported investment income: 4.5 times; 4.5 times

*Moody's-adjusted MADS Coverage with normalized investment income: 5.2 times; 4.6 times

*Debt-to-cash flow: 3.3 times; 5.3 times

*Days cash on hand: 167 days; 184 days

*Cash-to-debt: 101.3%; 80.8%

*Operating margin: 3.1%; 3.1%

*Operating cash flow margin: 11.2%; 10.2%

RATED DEBT

-Series 1998 Fixed Rate Revenue Bonds ($204 million outstanding); rated A2; insured by Ambac

-Series 2006 Variable Rate Demand Bonds ($100 million outstanding), supported by a direct pay letter of credit from Citibank N.A.; rated Aa2/VMIG1; A2 underlying rating - to be refunded by current offering

-Series 2009A Fixed Rate Revenue Bonds ($100 million outstanding), rated A2

-Series 2009B variable Rate Demand Bonds ($75 million outstanding), supported by a direct pay letter of credit from US Bank N.A., rated Aa1/VMIG1; A2 underlying rating

-Series 2009C variable Rate Demand Bonds ($75 million outstanding), supported by a direct pay letter of credit from Bank of America N.A., rated Aa1/VMIG1; A2 underlying rating

CONTACTS

Obligor: Jeff Veilleux, Chief Financial Officer, Swedish Health Services, (206) 386-6321

Underwriter: Citigroup Global Markets Inc.; Michael Brown (312) 876-3557

Advisor: Ponder & Co.; Jennifer Daugherty, (206) 331-2364; Glenn Wagner (615) 690-5541

The last action taken with respect to Swedish's long term and underlying ratings was on March 2, 2009 at which time A2 ratings were assigned to the Series 2009 bonds. The outlook was stable. Ratings were subsequently recalibrated to A2 on the global scale on May 7, 2010.

The principal methodologies used in this rating were "Not-for-Profit Hospitals and Health Systems" published in January, 2008.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Brad E. Spielman
Analyst
Public Finance Group
Moody's Investors Service

Daniel Steingart
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S ASSIGNS A2 LONG-TERM AND UNDERLYING RATINGS TO SWEDISH HEALTH SERVICES (WA) SERIES 2011 BONDS; A2 RATINGS ON PARITY DEBT AFFIRMED; OUTLOOK IS STABLE
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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