LOS ANGELES - PeaceHealth, a healthcare system with hospitals in Oregon, Washington, and Alaska, has been downgraded by both Standard & Poor's and Fitch Ratings ahead of a $108 million refunding deal.
On Monday Standard & Poor's downgraded the system's revenue refunding bonds, which were issued on behalf of PeaceHealth by the Washington Health Care Facilities Authority and the Oregon Facilities Authority, to A from A-plus.
"The downgrade reflects the additional debt that has been added since our last review, a high debt burden for the rating, sharply increased capital expenditures plans for the coming years, and weak operational performance in fiscal 2013," Standard & Poor's credit analyst Martin Arrick said.
In addition, despite improvement in operating performance and cash flow in the first half of fiscal 2014, following implementation of management's sizable sustainability plan, maximum annual debt service coverage and lease adjusted MADS coverage remain below levels that are adequate for the prior rating, Arrick said.
Standard & Poor's expects that further improvement in coverage is unlikely over the near to medium term.
The agency assigned a stable outlook, reflecting its view of the system's adequate operations, soft volumes, and sound balance sheet.
Fitch Ratings downgraded the bonds on Feb. 14 to A-plus from AA-minus. The outlook was revised to stable from negative.
Analysts said the rating downgrade was also driven largely by PeaceHealth's increased leverage as $176 million of additional debt was issued through a direct bank loan in fall 2013. Fitch analysts also noted the system's light profitability and sizeable capital plans.
Credit strengths of the system include a dominant market position, good liquidity, and strategic initiatives underway.
PeaceHealth's refunding deal will be issued by the Washington Health Care Facilities Authority and the Oregon Facilities Authority. The WHCFA plans to issue $41 million of refunding bonds, and the OFA plans to issue $67 million.
Proceeds from the WHCFA portion will be used to refund and redeem the authority's revenue bonds, series 1999 issued for PeaceHealth. Proceeds from the OFA's bond sale will go toward refunding all of the outstanding Oregon Health, Housing, Education and Cultural Facilities Authority Revenue bonds issued for PeaceHealth.
Both portions will be structured as serial and term bonds with a final maturity in 2032. The bonds will be secured by a gross revenue pledge of PeaceHealth and PeaceHealth Networks.
Goldman, Sachs & Co. is the lead underwriter on both issuances. Hillis Clark Martin & Peterson is bond counsel and Melio & Company, LLC is financial advisor for WHCFA. Orrick, Herrington & Sutcliffe LLP is bond counsel and Western Financial Group, LLC is financial advisor for OFA.
