Fitch Rts Providence Health Sys, WA $284MM Bds 'AA-'; Positive Outlook.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 23, 2003

Fitch Ratings has assigned an underlying rating of 'AA-' to Providence Health System's $284 million, series 2003 bonds. The bonds will be issued as $23,595,000 Washington Health Care Facilities Authority revenue bonds, series 2003A (Providence Health System), $22,480,000 Washington Health Care Facilities Authority revenue bonds, series 2003B (Providence Health System), Municipality of Anchorage, Alaska hospital revenue bonds, series 2003C (Providence Health System), and $213,370,000 Hospital Facility Authority of Clackamas County, Oregon revenue bonds, series 2003D-G (Providence Health System). Fitch has also affirmed the 'AA-' rating (in some cases, underlying) for the bond issues listed at the end of the release. Additionally, the Rating Outlook is Positive. Proceeds from the 2003 bonds, as well as other funds, will be used to fund $200 million of future capital expenditures, refinance $84 million of existing debt, and pay costs of issuance. The series 2003B-G bonds are expected to sell the week of May 1 through negotiation by Merrill Lynch & Co. The series 2003A bonds will be sold the week of July 8. After this bond issuance Providence will have total outstanding debt of $940 million of which approximately 55% will be variable-rate debt.

The 'AA-' affirmation is supported by Providence Health System's (Providence) consistent operating profitability and excellent cash flow, strong debt service coverage, proactive management team, and geographic diversity. Revenue growth trends combined with system-wide cost controls have produced significant improvements in profitability over the past five years. In fiscal 2002, Providence reported operating income of $102.4 million (2.9% operating margin) compared to negative $11 million (negative 0.4%) in fiscal 1998. Providence's steady growth has led to strong maximum annual debt service coverage that has averaged 4.3 times (x) since 1999. However, due to investment losses and impairment write downs, MADS coverage in 2002 was below their historical average at 3.9x, but still exceeded Fitch 'AA' medians.

Providence's other leverage indicators are favorable with pro forma MADS as a percent of revenue of 1.9%, debt to EBITDA of 3.3x, and debt to capitalization of 32%. Fitch views Providence's management team as positive credit factor, particularly for their ability to make proactive strategic decisions. Through strategic joint ventures, acquisitions, and divestitures, Providence has been able to achieve and maintain a significant presence in each of its primary market areas.

Fitch's concerns include the system's light liquidity compared to other 'AA' category credits, competition in some of its markets, and rising labor and insurance expenses. Management has historically funded a majority of its capital expenditures through unrestricted cash and cash flow and, thus, has not built liquidity consistent with a 'AA' credit. Moreover, realized and unrealized investment losses over the past 3 years have hindered liquidity growth.

This debt issuance will infuse $200 million to Providence's balance sheet, which would result in pro forma days cash on hand of 126 days, a cushion ratio of 15.8x, and cash to debt of 124%. With exception of days cash on hand, Providence's other liquidity ratios are just slightly below Fitch's 'AA' medians. Providence's personnel costs are comparable to national averages, but have sharply increased from 44% of revenues in 1998 to 52% in 2002. In addition, Providence still faces tough competition in some of its markets, most notably Oregon and California.

Fitch's positive outlook is based on Providence's solid operating improvements and opportunities to increase market share through volume growth. Additionally, recent divestitures of unprofitable service lines should lead to further improvements in the bottom line. Providence's core operations are sound and through the three months ended March 31, 2003, Providence had an excess margin of 4.3% and MADS coverage of 5.6x. As long as current trends continue, Providence should be able to considerably build its liquidity over the next 2-4 years.

Headquartered in Seattle, Washington, Providence is a fully integrated health care system with 19 acute care hospitals, eight long-term care facilities, one health plan, and other related entities located throughout Washington, Oregon, Alaska, and California. In fiscal 2002, Providence reported total operating revenues of $3.53 billion. Providence only covenants to provide bondholders with annual financial disclosure, which Fitch views negatively, and weak security provisions for this bond issuance present a credit risk. However, management's financial disclosure to Fitch for surveillance purposes has been excellent in terms or timeliness and content.

Outstanding Issues:

--$105,200,000 Washington Health Care Facilities Authority revenue bonds, series 2001A;

--$52,000,000 Washington Health Care Facilities Authority revenue bonds, series 2001B;

--$160,000,000 California Health Facilities Financing Authority revenue bonds, series 2001;

--$100,000,000 Sisters of Providence Obligated Group taxable insured variable rate demand bond, series 1999A & 1999B;

--$29,985,000 Sisters of Providence Obligated Group direct obligation notes, series 1997.