Fitch Rates Sutter Health (CA) Series 2011C&D Rev Bonds ‘AA-‘; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has assigned its 'AA-' rating to the approximately $355 million series 2011C&D revenue bonds issued on behalf of Sutter Health, California (Sutter) as follows:

--$37 millionCalifornia Statewide Communities Development Authority (CSCDA) revenue bonds (Sutter Health) series 2011C;

--$318 millionCalifornia Health Facilities Financing Authority (CHFFA) revenue bonds (Sutter Health) series 2011D.

The series 2011C&D bonds will be issued as fixed-rate bonds and sold via negotiation the week of Dec. 5, 2011. Approximately $135.9 million in bond proceeds is planned to finance Sutter's ongoing and sizable capital plan. Remaining bond proceeds of $219 million is planned to refund a portion of the CHFFA 1997C, CHFFA 1998A, CHFFA 1999A, CSCDA 1999 certificates of participation (COPs), and CHFFA 2000A bonds. The series 2011 will have an Aug. 15, 2035 final maturity, and aggregate maximum annual debt service (MADS) of $212 million (provided by the underwriter) occurs in 2028.

Following the issuance of the series 2011C&D bonds, Sutter will maintain its 100% fixed-rate debt portfolio. Management has no plans to issue any additional debt over the medium term.

In addition, Fitch has affirmed its 'AA-' rating on $3.14 billion in revenue bonds outstanding issued on behalf of Sutter.

The Rating Outlook is Stable.

SECURITY

Gross revenue pledge.

KEY RATING DRIVERS

SOLID OPERATING PLATFORM: Sutter Health's (Sutter) large regional presence and strong physician alignment platform serve as key characteristics supporting an overall operating profile commensurate with Fitch's 'AA' rating category.

STRONG OVERALL FINANCIAL PROFILE: Sutter's robust operating profitability and moderate leverage position result in strong debt service coverage, which, when coupled with a conservative balance sheet structure, mitigate lighter than median liquidity metrics.

MANAGEABLE CAPITAL PLAN: While Sutter's three-year capital budget is sizable, Fitch believes that the corporation's strong and consistent cash flow generation will allow the system to fund a majority of the expenditures through operations and afford Sutter incremental room for additional debt capacity at the current rating level.

STABLE HORIZON: Fitch believes Sutter's aforementioned operational and financial profiles portend stability in an era of healthcare reform and within the broader context of a lower reimbursement environment going forward.

CREDIT PROFILE

Headquartered in Sacramento, California, Sutter Health is a large, integrated healthcare provider that owns, leases, and/or operates 31 hospitals and several other related healthcare entities. Sutter had total revenues of $9.1 billion in fiscal 2010.

Sutter Health's operating platform is designed to leverage its large regional market presence together with a strong physician alignment strategy to yield a robust and diverse revenue source. Financial results show strong profitability and cash flow generation across the system.

FINANCIAL PROFILE

Sutter Health's overall financial profile merits its inclusion in Fitch's 'AA' category, despite lower than median liquidity metrics.

ROBUST PROFITABILITY

Sutter Health's profitability metrics have exceeded Fitch's medians in each of the last four fiscal years and through the nine-month interim period. Operating margin in each of the last four fiscal years has exceeded 5.0% while operating EBITDA margins have ranged between 11.4% and 12.8% over the same period.

Sutter's strong historical profitability stems from favorable commercial contracts, good patient volume growth, and Sutter's ability to realize economies of scale in managing its expenses. Through the nine-month interim period, ending Sept. 30, 2011, Sutter generated $543 million in operating income (7.8%) and $921 million in operating EBITDA (13.2%) - well in excess of Fitch's respective medians of 4.3% and 10.6%.

STRONG DEBT SERVICE COVERAGE

Sutter's robust earnings growth led to very strong capital ratios. With the planned sale of the series 2011 bonds, Sutter's estimated debt outstanding will increase to $3.28 billion; yet, Sutter's pro forma MADS is estimated at $216 million and accounts for a low 2.3% of annualized fiscal year (FY) 2011 revenues. Furthermore, historical coverage of pro forma MADS by operating EBITDA has averaged a strong 4.6 times (x) over the last five fiscal years (6.0x at FYE 2010).

LOW, BUT SOUND, LIQUIDITY

Fitch believes that Sutter's strong profitability, low leverage position, solid debt service coverage, and a conservative capital structure mitigate its low liquidity position. As of Sept. 30, 2011, Sutter Health had $3.3 billion in unrestricted cash and investments, translating into 155.7 days cash on hand, a pro forma 15.3x cushion ratio and pro forma cash to debt of 100.7%, compared to Fitch's 'AA' medians of 240, 22.4x, and 159%, respectively.

While Sutter's liquidity metrics are among the lowest for the 'AA' rating category, Fitch views Sutter's liquidity as adequate due to lower its operating risk and debt profile. Fitch notes that Sutter's outstanding bonds are all in fixed-rate mode, eliminating risks associated with variable-rate debt such as put risk, bank risk, renewal risk, or interest rate risk. Furthermore, by committing its capital to long-lived assets, Sutter minimizes the need to maintain large cash reserves as a hedge against its liabilities.

MANAGEABLE CAPITAL PLAN

Fitch believes that Sutter's robust and diversified revenue growth and strong cash flow from operations should be sufficient to fund Sutter's sizable and expansive capital plan. Sutter's three-year capital plan addresses ongoing and upcoming large-scale hospital replacement projects, major information technology initiatives, and various capital initiatives.

Funding sources rely primarily on Sutter's robust revenue growth and its strong cash flow generation as Sutter has no plans to issue any additional debt in the near term. Fitch expects Sutter to continue to post strong EBITDA and cash flow results in support of its expansive capital plan. Demonstrative of its proven history of strong cash flow generation, Sutter reported $1.21 billion in cash flow from operations and $1.3 billion in EBITDA. Through the nine-month interim period, these figures totaled $1.17 billion and $1.06 billion, respectively.

STABLE RATING OUTLOOK

Fitch believes Sutter's aforementioned credit strengths portend stability given the prospects of health reform (likely encouraging higher levels of integration across the care continuum) and within the broader context of a lower reimbursement environment going forward. However, Fitch notes that deterioration of Sutter's balance sheet or additional debt without commensurate improvement in liquidity will likely exert negative rating pressure.

DISCLOSURE

Sutter covenants to provide annual and, at the request of a bondholder, quarterly financial statements through the Municipal Rule Making Board's EMMA system. The content of Sutter's disclosure includes utilization statistics, balance sheet, income statement, and statement of cash flows, which Fitch views positively.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated June 20, 2011;

'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

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Fitch Ratings
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Michael Borgani, +1-415-732-5620
Director
Fitch Ratings
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Source: Fitch Ratings