CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the expected issuance of
approximately $766,135,000 Maricopa County Industrial Development
Authority (AZ) revenue bonds series 2016A issued on behalf Banner Health
(Banner). In addition, Fitch affirms the 'AA-' on Banner's outstanding
debt (listed at the end of the press release) and the 'F1+' rating on
approximately $100 million taxable commercial paper notes series 2015
based on self liquidity.
The Rating Outlook is Stable.
People are also reading…
The series 2016A bonds will be fixed rate and will refund a portion of
outstanding series 2008A&D bonds. The bonds are expected to price the
week of Oct. 3.
SECURITY
The bonds are secured by a gross revenue pledge of the obligated group.
The obligated group accounted for 79% of total revenue of the
consolidated entity in fiscal 2015 (Dec. 31 year-end).
KEY RATING DRIVERS
STRONG OPERATING PERFORMANCE: The affirmation of the 'AA-' reflects
Banner's strong operating performance through the six months ended June
30, 2016, with core operations performing very well, which has given
Banner some cushion as it absorbs losses related to the Tucson
operations (University of Arizona Health Network [UAHN]) acquisition as
of Feb. 28, 2015) as well as ongoing challenges in its insurance
division. Strong performance is attributable to continued volume growth
as well as increased graduate medical education funding. Operating
margin was 5.2% through the six months ended June 30, 2016, compared to
1.8% in fiscal 2015 (year-end Dec. 30) and 4.9% in 2014.
EXPANDED GEOGRAPHIC FOOTPRINT: One of Banner's main credit strengths is
its strong market position in the Phoenix metropolitan area and its
expanded geographic footprint in the state. Historically, Banner's
operations have been primarily concentrated in the Phoenix, AZ
metropolitan area. The acquisition of UAHN expands Banner's presence
into the Tucson metropolitan market and has turned Banner into a
statewide network with 82% of Arizona's population having access to
Banner physicians and facilities. Banner continues to expand its network
and recently announced a planned acquisition of an existing urgent care
business that has 32 sites in Arizona.
NEAR TERM STRESS FROM STRATEGIC INITIATIVES: There are two main stresses
on the organization - the Tucson operations and performance of the
insurance division. The Tucson operations have had larger operating
losses and a slower turnaround timetable than originally projected.
Issues that have hampered results include replacement of key physician
leadership in key clinical programs, adjustments in clinical
compensation and a poorly functioning IT system. The insurance division
continues to operate at a slight loss but is key to Banner's strategy
and move to value based reimbursement.
WEAKENED LIQUIDITY: At June 30, 2016, Banner had $4 billion in
unrestricted cash and investments, which equated to 213.8 days cash on
hand (DCOH) and 138.6% cash to debt compared to the 'AA' category
medians of 277.4 and 197.9%, respectively. This has dropped from 300.9
DCOH and 156.6% cash to debt at Dec. 31, 2014 due primarily to the cost
of the UAHN acquisition, which was funded by debt and cash as well as
collateral posting requirements under its swap contracts.
ELEVATED CAPITAL SPENDING: Banner's five year capital plan is high at $3
billion reflecting Banner's growing service area population in Phoenix
as well as capital commitments that are part of the UAHN merger. Fitch
believes that additional debt capacity will be dependent on Banner's
ability to maintain operating margins around 3%-4%.
RATING SENSITIVITIES
EXECUTION OF STRATEGIC IMPERATIVES: There is less flexibility at the
current rating level for negative variance relative to plan. A sustained
deterioration in financial performance, although not expected, could
lead to negative rating pressure.
CREDIT PROFILE
Banner Health is a large, integrated health care provider headquartered
in Phoenix, AZ with operations in seven states that include 28
hospitals, three large multi-specialty medical groups with 1,275
employed physicians, outpatient and post-acute facilities and insurance
products. In 2015, Banner generated $7 billion in total revenue. Fitch's
analysis is based on the consolidated financial results of Banner which
includes various non-obligated entities.
Good Market Footprint
Banner has had a long standing strong market position in the greater
Phoenix metropolitan area and maintains the leading market share at 44%
for the first six months of 2015 compared to the next closest
competitor, Dignity Health with 17%. Banner continues to pursue
strategic acquisitions and expects to close on the acquisition of Urgent
Care Extra by Oct. 1, 2016, which will be funded from cash ($85
million). Urgent Care Extra has 32 facilities throughout Arizona with
plans to add 12 more. Very strong operations of the core Phoenix
facilities led by physician recruitment and growth of its academic
medicine brand and development of its institutes model has led to solid
volume growth. There are significant capital needs at the main campus,
Banner - University Medical Center - Phoenix (BUMCP; fka Good Samaritan
Medical Center).
Strong Operating Performance
With the exception of 2015 when the dilutive effects of the UAHN
acquisition impacted overall profitability, Banner's historical
financial performance has been very solid. Through the six months ended
June 30, 2016, operating performance for the consolidated entity has
rebounded even with the losses of Tucson and the insurance division.
Operating margin was 5.2% ($200 million operating income) compared to
1.8% in 2015, 4.9% in 2014 and 5% in 2013. Banner also benefited from
increased graduate medical education funding through the six months
ended June 30, 2016, which totaled $38.6 million. Banner is projecting
to maintain 3%-4% operating margin going forward.
Not included in the projections are expected benefits from the 'The
Imagine Project', which started in July 2016. The project is in
partnership with McKinsey and Company and will evaluate new capabilities
to transform the organization with a focus on consumer experience and
support the continued transition to value-based revenue models.
UAHN Transaction
As of Feb. 28, 2015, Banner acquired two medical centers in Tucson, the
faculty practice plan of University of Arizona Colleges of Medicine, and
three health plans. Banner and the University of Arizona, Colleges of
Medicine have a 30-year Academic Affiliation Agreement in place with two
15-year terms. The acquisition has solidified Banner's role in academic
medicine and the entities have been rebranded as Banner - University
Medicine and include BUMCP and Banner - University Medical Center -
Tucson (BUMCT; fka University of Arizona Medical Center - University
Campus).
Banner was aware of UAHN's financial challenges at the time of
acquisition and the need for a turnaround, however, losses are now
greater than expected and the expected timeframe for breakeven
performance is 2018. Larger than expected losses resulted from a need to
rebuild several key clinical programs as a result of loss of physician
leadership, a poorly functioning IT system, and readjusting salaries and
wages to market rates. The performance improvement plan includes
specific targets for the hospital and practice plan operations, with a
goal of breakeven performance by 2018. There have been some savings in
shared services but areas of focus include revenue cycle, acute care
efficiency, reducing length of stay, growing service lines, clinic
optimization, and contract increases.
Participation in Risk Based Contracts
Banner has been proactive in the move to risk based contracts and plans
to significantly grow its health plan operations. The Banner Health
Network (BHN) was created to enter into various risk based reimbursement
contracting including a Pioneer ACO and Medicare Advantage plans. In
addition, the UAHN acquisition included three health plans. Overall
health plan performance continues to miss targets driven by losses in
the BHN plans. Management will need to balance membership growth with
better clinical case management, changes in certain payer risk sharing
arrangements and investment in technology to improve efforts in
population health management.
Elevated Capital Spending
Banner has consistently invested in its facilities and its clinical IT
system to meet the growing population and demand for its clinical
services. The five year capital plan is high at $3 billion and includes
the $500 million capital commitment for the Tucson facilities as well as
investment in BUMCP. Major projects at BUMCP include a new and expanded
emergency room, a 40-bed observation unit, and four additional operating
rooms that should be complete by early 2018, as well as a new 16 story
bed tower with 280 beds, which should be complete by the end of 2018.
The project at BUMCT includes 670,000 square feet of new space and
renovation of 75,000 of existing space. The new facility will include
the main entry, diagnostic and treatment, cardiac catheterization, 17
operating rooms, and 204 private rooms. There will be shelled space for
five additional operating rooms and 24 beds. The new facility is
expected to be complete by the end of first quarter 2019 and the
renovation of the existing facility is expected to be complete by the
end of the first quarter 2020.
Part of the Tucson capital commitment will be spent at BUMCT's North
Campus, which will include a new multispecialty health center that will
include various specialty clinics, imaging, lab, and radiation/oncology.
This project is expected to be complete by the end of 2017.
The entire capital plan is not committed and spending/additional debt
plans will depend on operating performance.
Debt Profile
Total debt outstanding as of August 2016 is $2.9 billion and includes
51% underlying fixed rate and 49% underlying variable rate. Including
its swaps, 97% of the debt is fixed rate. Banner's uncommitted capital
includes LOC backed VRDBs and direct bank loans. All of the covenants in
the bank/LOC agreements are standardized, but contain additional
covenants than what is in the MTI.
The series 2016A refinancing results in significant savings. Pro forma
maximum annual debt service (MADS) is projected to decline to $175
million from the current $188 million. Through the six months ended June
30, 2016, coverage of pro forma MADS by EBITDA was 5.4x compared to 4.5x
in 2015 and 2014, respectively, and is consistent with the 'AA' category
median of 6x.
Banner novated its fixed payer swaps in May 2015 and increased the
number of counterparties, which spread the collateral threshold among
six counterparties from four and reduced the amount of collateral
posting required. Banner's collateral posting as of Sept. 16, 2016 was
$180 million.
Self Liquidity Rating
The affirmation of the 'F1+' short-term rating is supported by the
adequacy of Banner's highly liquid resources available to fund any
unremarketed puts on the $100 million commercial paper (series 2015F).
Based on Fitch's rating criteria related to self-liquidity, Banner's
position of eligible cash and investments available for same-day
settlement easily exceeds Fitch's 1.25x requirement to cover the maximum
tender exposure on any given date.
Disclosure
Banner covenants to provide audits within 150 days of fiscal year end
and quarterly disclosure within 60 days of quarter end for the first
three quarters. Banner's financial reporting is excellent. Furthermore,
Banner hosts periodic investor calls.
Debt rated by Fitch:
--$94,100,000 Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds, series 2015A;
--$100,630,000 Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2015B (LOC: Bank of Tokyo-Mitsubishi UFJ, Ltd.) &
bank bonds;
--100,630,000 Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2015C (LOC: Bank of America, N.A.) & bank bonds;
--$200,600,000 Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2014A;
--$67,840,000 Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2012B (taxable);
--$179,090,000 Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2012A;
--$63,550,000 Arizona Health Facilities Authority (AZ) (Banner Health)
variable-rate demand revenue bonds series 2008H (LOC: Northern Trust
Company (The)) & bank bonds;
--$81,325,000 Arizona Health Facilities Authority (AZ) (Banner Health)
variable-rate demand revenue bonds series 2008G (LOC: Wells Fargo Bank,
N.A.) & bank bonds;
--$86,185,000 Arizona Health Facilities Authority (AZ) (Banner Health)
variable-rate demand revenue bonds series 2008F (LOC: JPMorgan Chase
Bank, N.A.) & bank bonds;
--$105,060,000 Arizona Health Facilities Authority (AZ) (Banner Health)
variable-rate demand revenue bonds series 2008E (LOC: Bank of America,
N.A.) & bank bonds;
--$717,935,000 Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2008D;
--$204,440,000 Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2008A;
--$400,000,000 Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2007B;
--$11,110,000 Arizona Health Facilities Authority (AZ) (Banner Health)
revenue bonds series 2007A.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun
2015)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM.
PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone:
1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or
retransmission in whole or in part is prohibited except by permission.
All rights reserved. In issuing and maintaining its ratings and in
making other reports (including forecast information), Fitch relies on
factual information it receives from issuers and underwriters and from
other sources Fitch believes to be credible. Fitch conducts a reasonable
investigation of the factual information relied upon by it in accordance
with its ratings methodology, and obtains reasonable verification of
that information from independent sources, to the extent such sources
are available for a given security or in a given jurisdiction. The
manner of Fitch's factual investigation and the scope of the third-party
verification it obtains will vary depending on the nature of the rated
security and its issuer, the requirements and practices in the
jurisdiction in which the rated security is offered and sold and/or the
issuer is located, the availability and nature of relevant public
information, access to the management of the issuer and its advisers,
the availability of pre-existing third-party verifications such as audit
reports, agreed-upon procedures letters, appraisals, actuarial reports,
engineering reports, legal opinions and other reports provided by third
parties, the availability of independent and competent third- party
verification sources with respect to the particular security or in the
particular jurisdiction of the issuer, and a variety of other factors.
Users of Fitch's ratings and reports should understand that neither an
enhanced factual investigation nor any third-party verification can
ensure that all of the information Fitch relies on in connection with a
rating or a report will be accurate and complete. Ultimately, the issuer
and its advisers are responsible for the accuracy of the information
they provide to Fitch and to the market in offering documents and other
reports. In issuing its ratings and its reports, Fitch must rely on the
work of experts, including independent auditors with respect to
financial statements and attorneys with respect to legal and tax
matters. Further, ratings and forecasts of financial and other
information are inherently forward-looking and embody assumptions and
predictions about future events that by their nature cannot be verified
as facts. As a result, despite any verification of current facts,
ratings and forecasts can be affected by future events or conditions
that were not anticipated at the time a rating or forecast was issued or
affirmed.
The information in this report is provided "as is" without any
representation or warranty of any kind, and Fitch does not represent or
warrant that the report or any of its contents will meet any of the
requirements of a recipient of the report. A Fitch rating is an opinion
as to the creditworthiness of a security. This opinion and reports made
by Fitch are based on established criteria and methodologies that Fitch
is continuously evaluating and updating. Therefore, ratings and reports
are the collective work product of Fitch and no individual, or group of
individuals, is solely responsible for a rating or a report. The rating
does not address the risk of loss due to risks other than credit risk,
unless such risk is specifically mentioned. Fitch is not engaged in the
offer or sale of any security. All Fitch reports have shared authorship.
Individuals identified in a Fitch report were involved in, but are not
solely responsible for, the opinions stated therein. The individuals are
named for contact purposes only. A report providing a Fitch rating is
neither a prospectus nor a substitute for the information assembled,
verified and presented to investors by the issuer and its agents in
connection with the sale of the securities. Ratings may be changed or
withdrawn at any time for any reason in the sole discretion of Fitch.
Fitch does not provide investment advice of any sort. Ratings are not a
recommendation to buy, sell, or hold any security. Ratings do not
comment on the adequacy of market price, the suitability of any security
for a particular investor, or the tax-exempt nature or taxability of
payments made in respect to any security. Fitch receives fees from
issuers, insurers, guarantors, other obligors, and underwriters for
rating securities. Such fees generally vary from US$1,000 to US$750,000
(or the applicable currency equivalent) per issue. In certain cases,
Fitch will rate all or a number of issues issued by a particular issuer,
or insured or guaranteed by a particular insurer or guarantor, for a
single annual fee. Such fees are expected to vary from US$10,000 to
US$1,500,000 (or the applicable currency equivalent). The assignment,
publication, or dissemination of a rating by Fitch shall not constitute
a consent by Fitch to use its name as an expert in connection with any
registration statement filed under the United States securities laws,
the Financial Services and Markets Act of 2000 of the United Kingdom, or
the securities laws of any particular jurisdiction. Due to the relative
efficiency of electronic publishing and distribution, Fitch research may
be available to electronic subscribers up to three days earlier than to
print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia
Pty Ltd holds an Australian financial services license (AFS license no.
337123) which authorizes it to provide credit ratings to wholesale
clients only. Credit ratings information published by Fitch is not
intended to be used by persons who are retail clients within the meaning
of the Corporations Act 2001.
Contacts
Fitch Ratings
Primary Analyst:
Jim LeBuhn, +1-312-368-2059
Senior
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago,
IL 60602
or
Secondary Analyst:
Emily Wong, +1-415-732-5620
Senior
Director
or
Committee Chairperson:
Eva Thein,
+1-212-908-0674
Senior Director
or
Media Relations:
Elizabeth
Fogerty, +1-212-908-0526
New York