Fitch Rates Presbyterian Healthcare Services, NM’s Series 2015A Revs ‘AA’; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA' rating to the expected issuance of approximately $222.8 millionNew Mexico Hospital Equipment Loan Council hospital revenue bonds, series 2015A on behalf of Presbyterian Healthcare Services (PHS).

In addition, Fitch affirms the 'AA' ratings on the following revenue bonds issued by the New Mexico Hospital Equipment Loan Council for the benefit of PHS:

--$75 million hospital revenue bonds, series 2012A;

--$134.6 million hospital revenue bonds, series 2009A;

--$139.4 million hospital revenue bonds, series 2008A;

--$200.1 million hospital revenue bonds, series 2008B-D.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a pledge of unrestricted gross receivables of the obligated group.

KEY RATING DRIVERS

VERTICALLY ALIGNED HEALTHCARE SYSTEM: The 'AA' rating reflects the strategic benefits of PHS' vertically aligned healthcare delivery network (includes eight acute care facilities, 600+ employed physician group and a 443,000-member health plan) which is further bolstered by a strong liquidity position. Unlike the majority of Fitch's rated hospital universe, which do not have an owned health plan, Fitch is placing greater emphasis on the strategic benefits of PHS' health plan, as it better aligns incentives throughout the enterprise as the organization moves towards value based/population health management reimbursement models. PHS' management has demonstrated its ability to successfully manage the financial and operational risk of the health plan.

STRONG LIQUIDITY POSITION: On a consolidated basis (including the non-obligated Presbyterian Health Plans) PHS' unrestricted cash and investments totaled approximately $1.81 billion at Dec. 31, 2014 equating to 294.0 days cash on hand (DCOH), a cushion ratio based on pro forma maximum annual debt service (MADS) of 41.8 times (x) and 296.8% cash to long-term debt. PHS' liquidity position provides a substantial financial cushion against adverse changes in operations or reimbursement.

SOLID DEBT SERVICE COVERAGE: Fiscal 2014 operating performance was very strong but these margins are not expected to be sustained. Ongoing operating margins are budgeted to be in the 4% range, which is consistent with Fitch's 'AA' category median., Debt service coverage by EBIDA and operating EBIDA are consistent with 'AA' category medians reflecting PHS' light leverage position. In 2014, PHS generated coverage of pro forma MADS by EBIDA and operating EBIDA of 9.5x and 6.7x, respectively.

MARKET SHARE LEADER: PHS is the market share leader in the Albuquerque metropolitan area with a 43.5% share in 2014 and is the only clinically integrated network provider in the market. Further, PHS enjoys strong customer satisfaction scores and very high brand name recognition which will become increasingly important in a consumer-driven healthcare market place.

RATING SENSITIVITIES

CONSISTENT FINANCIAL RESULTS: Fitch expects PHS to deliver consistent financial results that are in line for an 'AA' rated credit as it maximizes its vertically integrated delivery platform. While not anticipated, a material weakening in profitability over a prolonged period could pressure the rating.

CREDIT PROFILE

Headquartered in Albuquerque, NM, PHS is a large, fully integrated health care delivery system including eight hospitals, a 600+ provider employed medical group and the 443,000 member Presbyterian Health Plan (PHP). On a consolidated basis, PHS had total revenues of $2.5 billion in 2014 (year ending Dec. 31). Fitch's analysis is based primarily on the results of the consolidated entity which includes the non-obligated PHP. For the year ended Dec. 31, 2014, the OG represented 62% of the combined total operating revenue of PHS and its affiliates and 76% of combined net assets.

VERTICALLY INTEGRATED DELIVERY MODEL

In light of its leading market position in the Albuquerque metropolitan area, Fitch believes the strategic, operational and financial benefits that accrue from its vertically integrated delivery network will allow the organization to maintain a strong financial profile as the sector transitions to an increasingly value based, consumer oriented market. PHS has the most hospitals, the largest employed physician network and, along with Blue Cross Blue Shield of New Mexico, the largest health plan in the state. With the hospitals, physicians and health plan as part of one organization, PHS, on a consolidated basis, can realize the full value from its initiatives to better coordinate care, manage chronic conditions and lower overall costs.

With the sale of Lovelace Health Plan to Blue Cross Blue Shield of New Mexico in 2013, PHS is the only vertically integrated health system (owned hospitals, physicians and health plan) in New Mexico. Further, PHS enjoys very strong name recognition and high consumer preference rankings relative to its competitors, which Fitch believes will be increasingly important in a growing consumer driven health care marketplace.

In 2013, PHP was selected as one of four providers to provide coverage under New Mexico's managed Medicaid program, Centennial Care. The program replaced the existing 'Salud!' program and added behavioral health and long-term care benefits. PHP's contract with Centennial Care runs for five years and is expected to add roughly $200 million of additional revenues annually. In 2014, PHP added roughly 30,000 new Medicaid enrollees with a total membership of 193,114 resulting in a $330 million increase in premium revenue. PHP 's Medicare Advantage plan has experienced solid growth over the last two years with membership growing 8.4% year over year (YoY) in 2013 and 5.3% in 2014. Commercial individual enrollment through the state-run health insurance exchange was below expectations due to price competition from the insurance cooperative created as part of the Affordable Care Act.

STRONG LIQUIDITY

Fitch views PHS' liquidity position as a primary credit strength that provides a substantial financial cushion against adverse changes in operations or reimbursement. On a consolidated basis, PHS' unrestricted cash and investments totaled $1.81 billion at Dec 31 which is improved from $1.58 billion and $1.36 billion at fiscal year ends 2013 and 2012, respectively. PHS' liquidity metrics at Dec. 31 are very strong with 294 days cash on hand, a 41.8x cushion ratio and 296.8% cash to debt, each of which exceed the respective 'AA' category median. Moreover, PHS' liquidity metrics exclude $103.7 million of cash and investments restricted for regulatory purpose by the New Mexico Human Service Department.

Consolidated days cash on hand is now weaker due to the expenses of the health plan. On an OG basis, days cash on hand improved to 353.4 at Dec. 31, 2014. Management reviewed its asset allocation strategy in early 2014, which resulted in no major changes and continuation of its hedge strategy to provide greater protection against market declines.

SOLID DEBT SERVICE COVERAGE

On a consolidated basis, PHS' profitability improved sharply in 2014 driven primarily by increased enrollment in Centennial Care. Total revenues increased 22% ($2.51 billion in 2014 vs. $2.05 billion in 2013) while expenses increased by 17.6% ($2.33 billion in 2014 vs. $1.98 billion in 2013). As a result income from operations increased to $171.1 million (6.8% operating margin) from $61.4 million in the prior year (3% operating margin). Fitch expects operating and operating EBITDA margins to move back to historical levels of around 3% and 8.5%, respectively, in the future. Management budgets to maintain 4% operating margins on a consolidated basis.

PHS' light debt burden results in strong historical pro forma debt service coverage. Pro forma MADS of $43.3 million equates to a very light 1.7% of 2014 total revenues. With the improved profitability in 2014 coverage of pro forma MADS by EBITDA was a strong 9.5x in 2014. In 2012 and 2013 PHS' generated historical pro forma debt service coverage by EBIDA of 5.4x and 6.0x, respectively, which exceeds the 2014 'AA' category median of 5.4x. Similarly, MADS coverage by operating EBIDA was 6.7x in 2014 and 4.0x in 2013, which is in line with the 'AA' category median of 4.4x.

DISCLOSURE

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 MSRB's EMMA system and DAC.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014);

--'Revenue-Supported Rating Criteria' (June 16, 2014).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983779

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Fitch Ratings

Primary Analyst

Jim LeBuhn
Senior Director

+1-312-368-2059

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

Jennifer Kim
Associate Director

+1-212-908-0740

or

Committee Chairperson

Emily Wong
Senior Director

+1-415-732-5620

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Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

[email protected]

Source: Fitch Ratings