Partners HealthCare System's series 2009J fixed-rate revenue bonds rated 'AA'

Fitch Ratings has assigned an 'AA' to Partners HealthCare System's approximately $475 million Massachusetts Health and Educational Facilities Authority revenue bonds (Partners HealthCare System), fixed-rate revenue bonds, series 2009J, which are expected to be sold as two sub series. Fitch also affirms its 'AA' long-term rating on all of Partners' outstanding debt and affirms its 'F1+' rating on approximately $485 million of Partners HealthCare System's debt that is backed by self-liquidity. For certain issues, the ratings are underlying ratings given without consideration of credit enhancement. The Rating Outlook is Stable.

Proceeds from the series 2009 bonds will be used to refund approximately $75 million of series G auction-rate debt and approximately $150 million of series 1997A and 1999B bonds. The final par of the refunding issuance will depend on market conditions at the time of sale. The remaining bond proceeds will fund various capital projects within the Partners system, including partial support for B3C, Partners' large capital project at the General Hospital, which involves the construction of an approximately 500,000 gross square foot building to house a relocated and expanded radiation oncology department, an expanded emergency department, three levels of operating and procedure suites, 150 neurosciences and medical oncology intensive care unit and acute patient rooms, a new sterile processing department and a new central receiving dock.

The 'F1+' rating is supported by Partners' long-term rating and same-day liquidity as of Sept. 30, 2009 which exceeds Fitch's criteria of 1.25 times (x) to cover the maximum one-day exposure on all of Partners' variable-rate debt backed by self-liquidity in the event of an un-remarketed put. The total amount of debt that Partners supports with self-liquidity is approximately $484.7 million, with a maximum one-day exposure of $250 million.

The long-term ratings are supported by Partners' leading market position, excellent clinical reputation, solid liquidity, improved operating profitability, and good management practices related to revenue cycle, expense control and quality outcomes. At Sept. 30, 2009, Partners had approximately $4.1 billion in unrestricted cash and investments equating to 214.9 days cash on hand, which compares favorably with Fitch's 2008 'AA' median of 209.9 days. Partners had a strong operating year, with 2009 audited results (Sept. 30 year end) showing an operating margin of 2.2% ($164.5 million) up from fiscal 2008's 1.7% operating margin ($119.5 million). The operating margin was Partner's strongest since fiscal 2006, when it also finished the year with a 2.2% operating margin ($132.9 million).

Coverage of pro forma maximum annual debt service (MADS) ($177.4 million) was a solid 2.7x (net of impairments) and 3.2x (including impairments); coverage based on Operating EBITDA was also strong at 3.2x. With this debt issuance MADS will increase to $177.4 million from $163.7 million. Partners' debt burden remains manageable with pro forma MADS as a percentage of revenue at 2.3%.

Fitch's prime credit concerns remain Partners' high Medicaid mix and increased charity care at certain facilities, the concentration of three large managed care organizations that control a significant 80% of the managed care payer market, the competitive Boston market, and future capital needs. Partners has incurred significant losses in Medicare and Medicaid and uncompensated care, which has hindered overall profitability.

The Stable Rating Outlook is based on Fitch's expectation that Partners will continue to record solid profitability from operations and maintain a strong liquidity position and modest leverage.

SOURCE Partners HealthCare System