SOX News

Fitch Affirms Adventist Health System Sunbelt (Florida) Debt at 'AA-'

(June 27, 2008)-- Fitch Ratings has affirmed its 'AA-/F1+' rating on Adventist Health System/Sunbelt's (Adventist) outstanding debt. In addition, Fitch affirms its 'F1+' short-term rating on Adventist's $184.5 million of variable rate bonds backed by self-liquidity. The 'F1+' rating is based on Adventist's strong internal liquidity position and management's procedures in place to access funds in case of an un-remarketed put. Adventist has solid liquidity with $2.478 billion as of March 31, 2008, net of short-term debt. Of this amount, $1.57 billion was invested in short-duration high-grade fixed income and money market funds, which Fitch views as highly liquid. Fitch believes Adventist's treasury function is sophisticated, with a dedicated staff of nine full-time professionals and a trading desk in the company's headquarters.

The 'AA-' rating is based on Adventist's continued improvement in financial performance, increased revenue diversity, and strong management practices. Since Fitch's initial rating in September 2003, Adventist has demonstrated continued improvement in profitability and cash flow that has led to an improved liquidity position and strong operating profile that meets or exceeds Fitch's medians for 'AA' hospitals. Total revenue continues to increase over the prior year although at a slower rate as overall volume has been relatively flat. Operating margin in 2007 fell to 4.6% from 4.7% in 2006 but remained better than Fitch's 'AA' median of 4.1%. In addition, EBITDA and cash flow margins continue to be strong at 15.2% and 11.1%, respectively, above the 'AA' medians of 14.1% and 10%.

In addition to Adventist's solid operating profitability, Fitch views its geographic diversity (36 hospitals in 10 states), outstanding management practices, large revenue base and modern physical plant (average age of plant of only 7.5 years) as key credit strengths. These qualitative factors, in conjunction with the continued improvement in financial performance, form the basis of Fitch's 'AA-' rating. Financial disclosure and reporting capabilities are also one of the best in Fitch's portfolio. Other best management practices include asset liability management, managing the investment portfolio as a business unit, implementing a formal capital allocation model, and focus on quality initiatives.

Credit concerns remain Adventist's above-average debt burden and future capital needs. Adventist's debt burden is high with pro forma maximum annual debt service (MADS) at approximately 4.4% of total revenue and debt to capitalization of 47.9%. However, debt ratios have improved since 1999. Most of Adventist's facilities are located in fast-growing service areas, most notably the Orlando area. Management will be challenged with balancing the need for additional capacity due to increased demand and maintaining solid liquidity and debt ratios. The Orlando region anticipates adding 500 beds over the next five years.

Fitch believes that formal implementation of all relevant provisions of Sarbanes Oxley (SOX) is a best management practice. Adventist has not formerly implemented the provisions of SOX at this time. However, Fitch believes that management has taken action to standardize internal controls in financial reporting particularly in revenue recognition. Fitch views this positively.

Adventist Health System has utilized numerous derivative instruments totaling a notional amount of approximately $2.578 billion as of Dec. 31, 2007. As of Dec. 31, 2007, the mark-to-market value of Adventist's derivative portfolio was negative 63.5 million. Adventist utilizes multiple counterparties, which Fitch views favorably. In addition, management informed Fitch that all swaps have been shortened so not to exceed 10 years. Adventist's derivative strategy is based on attaining a lower cost of capital while in a rising interest rate environment. Fitch believes Adventist has the balance sheet strength and management expertise to employ an aggressive derivative strategy.

The Rating Outlook is Stable. Fitch believes Adventist's financial performance will continue to remain strong over the near term. Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com.

Share or bookmarklet this web page at: