Fitch Affirms Ascension Health's Sr Bonds at 'AA+' and 'AA+/F1+'; Outlook Stable

Business Wire, Feb 11, 2008

NEW YORK -- Fitch Ratings affirms the 'AA ' and 'AA /F1 ' rating on Ascension Health's (Ascension) $3.7 billion outstanding senior revenue bonds. The 'AA' on Ascension's $602 million outstanding subordinated bonds is also affirmed. The ratings are underlying ratings, given without consideration of credit enhancement in place for certain issues. The Rating Outlook is Stable.

Ascension's financial profile continues to reflect a strong array of positive credit factors, including highly effective operational management, broad geographic diversification, and a provider portfolio heavily weighted with local market leaders. Supporting the system's operations is management's ability to effectively formulate and implement broad strategic initiatives in furtherance of its mission while maintaining responsible stewardship of its financial and physical assets. As the largest U.S. nonprofit healthcare system, Ascension demonstrates 'best practices' on a national scale and is an influential voice in developing the agenda for healthcare reform.

Ascension's record of operating profitability, coupled with strong investment portfolio returns and moderate leverage, has produced a high degree of financial flexibility. Volume growth, revenue cycle management, effective payer contracting, supply chain initiatives, and strategic capital investments have led to a stable operating margin of approximately 4.5% for the past three fiscal years, after improving from fiscal 1999's breakeven results. Fiscal 2007's excess margin was 9.6%, benefiting from an exceptional 13.3% total return on Ascension's investment portfolio. The system's 2007 net revenues were $12.3 billion, up from $11.4 billion the prior year. As of June 30, 2007, unrestricted cash stood at $6.3 billion, or 219 days of expenses, up from 209 days at the end of 2005. For fiscal 2007, coverage of maximum annual debt service (MADS) at 7.4 times (x) and debt service as a percent of revenues at 2.1% compare favorably to Fitch's 'AA' category financial ratio medians (5.6x and 2.7%, respectively), although Ascension's 35.0% debt-to-capitalization ratio is slightly above the 32.8% median value. For senior debt only, fiscal 2007 MADS coverage was 9.2x.

Ascension's geographic diversity, balance sheet strength and its success in achieving profitability and cash flow targets mitigate risks associated with a planned step up in capital spending, increasing bad debt expense, local market volatility, and potential reimbursement cutbacks. A fundamental and consistent positive credit factor is the strength of Ascension's management practices, which are directly responsible for the improvement and stability of the credit's financial profile. Recent and ongoing initiatives in the areas of quality and safety, bad debt management, supply chain, payer contracting, and risk management have yielded favorable results and demonstrate the system's ability to pilot programs in local ministries and then leverage expertise across its spectrum of providers. As Ascension has evolved over the past decade, strong system oversight and resources have been augmented with an accountable regional leadership structure that acknowledges the local nature of the healthcare industry while at the same time providing for economies of scale, encouraging network growth and facilitating management development.

For those bonds supported by Ascension's internal liquidity, the short term rating is based on solid liquidity and cash flow and strong asset/liability management practices. As of Dec. 31, 2007, Ascension's put debt consisted solely of approximately $723 million in unenhanced weekly variable-rate demand obligations. To meet a failed remarketing, Ascension identifies $773 million (short-term fund) and $5.6 billion (long-term fund) of unrestricted cash and investments, a $250 million commercial paper program, and reverse repurchase agreements in place. Sufficient procedures exist to use one or more of these liquidity sources if necessary.

Ascension's disclosure practices have been excellent, with quarterly reporting made to the NRMSRs and available at www.ascensionhealth.org, consisting of full financial statements, utilization statistics, and management's discussion and analysis of results. The system operates 73 hospitals in 20 states and the District of Columbia, recording 666,000 discharges and 15.2 million outpatient visits in fiscal 2007.

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