Fitch Ratings affirmed at 'A+' the Issuer Default Rating and Long-Term rating on the series 2020A and 2020B revenue bonds issued by The Hospital Facilities Authority of the city of Medford, OR on behalf of Asante Health (Asante).
The Rating Outlook is revised to Negative from Stable.
RATING ACTIONS
Entity / Debt
Rating
Prior
Asante Health System (OR)
LT IDR
A+
Affirmed
A+
Asante Health System (OR) /General Revenues/1 LT
LT
A+
Affirmed
A+
Page
of 1
VIEW ADDITIONAL RATING DETAILS
SECURITY
The debt payments are secured by a security interest in the gross receivables of the obligated group (OG).
ANALYTICAL CONCLUSION
The Negative Outlook reflects Asante's weakened operations and moderately more constrained balance sheet consistent with inflationary pressures on labor and supplies, recent market volatility, and post-pandemic operating challenges associated with capacity, throughput and average length of stay (ALOS). While the rating is affirmed, Fitch believes Asante has limited flexibility at the current rating level to manage unexpected volatility in operations or construction-related issues related to the major capital expansion project currently underway.
Fitch is of the opinion that once construction risk for the sizable Pavilion project has been eliminated, and once the system is able to demonstrate successful implementation of its operating performance improvement goals, the return to a Stable Outlook is possible.
The affirmation of the 'A+' ratings continues to reflect Asante's strong market position as the single largest provider of acute care services in its primary service area (PSA) and Fitch's view that the system will continue to generate sufficient cash flow in support of operating initiatives, routine capital investment, and moderate liquidity growth over the outlook period.
KEY RATING DRIVERS
Revenue Defensibility: 'bbb'
Leading Market Position in a Favorable Service Area
Asante's delivery network is the largest single provider of services in its two-county PSA. Although there is competition in the area, the system consistently maintains the leading market share for acute care services, at 76% for FY 2022, with approximately 89% of admissions originating from the PSA. The system's market areas are considered favorable with low unemployment, and above average population growth especially those in the 65 years and over age group.
Asante remains concentrated in governmental payors, with moderate exposure to Medicaid and self-pay at 21.7% as of fiscal 2022, but Medicaid funding has improved to 85% of Medicare reimbursement rates in Oregon. Notably, voters in Oregon approved Measure 111 in November, effectively making healthcare a right under the State's constitution and setting the stage for Oregon to establish a single payer system in the future.
Operating Risk: 'bbb'
Weakened Operating Risk Profile but Financial Recovery Plan Underway
Fitch's midrange operating risk assessment reflects Asante's weaker operating performance in fiscal 2022 due to elevated labor and supplies expenses resulting from current inflationary pressures. The system generated operating EBITDA margins of -1.1% and EBITDA margins of 2.3% in fiscal 2022 which was materially lower than the preceding four-year average of 8.6% and 11.9% respectively; however, but Fitch views fiscal 2022 results as consistent with sector-wide post-pandemic challenges facing hospitals with high labor expenses and staffing challenges, along with inflationary pressures affecting pharmaceuticals and supplies.
Fitch expects labor inflation to moderate over time and that operating and Asante's cash flow margins will return to levels more in line with historical results, although Fitch does not expect margins to reach pre-pandemic levels for a few years, particularly given the absence of any new fiscal stimulus-other than $10MM-$20MM of additional FEMA funding Asante has applied for and expects in fiscal 2023. The system received and recorded $0.9 million of FEMA funds and $9.9 million of CARES Act provider relief funding in FY 2022.
To help put Asante on the path to operating performance more consistent with historical performance, management has developed a $100 million financial recovery plan comprised of five focus areas including recruitment and retention; labor use management, capacity, throughput and ALOS; supply costs/purchased services, and enhancement of key services. Through the first two months of fiscal 2023, the system is closely tracking to meet its budgeted 2.9% operating margin (7.2% operating EBITDA margin) for FY 2023.
Capital spending is expected to be in excess of depreciation over the next four years consistent with projects such as the new cancer facilities in Medford and Grants Pass which opened in January 2022 and the system's expansion project at Asante Rogue Regional Medical Center (ARRMC) which was partly funded by series 2020 bonds and partly funded from philanthropy and Asante's reserves. The $420 million ARRMC project includes a new 323,600 square-feet patient pavilion that will be connected to the existing inpatient tower.
The pavilion project is expected to be completed by December 2023 and remains on time and on budget. Beyond this core project, near term capital spending plans are largely routine and equipment-related and Asante's average age of plant, at 13 years, remains manageable. Asante is evaluating future capital investments in Asante Ashland Community Hospital and various medical office building projects, but those projects remain in the discussion stage and are likely at least two years out.
Financial Profile: 'a'
Adequate Balance Sheet
Unrestricted cash and investments at FYE 2022 were $661 million, resulting in an adequate days' cash on hand (DCOH) of 201 days. Compared with previous years, market volatility reduced Asante's liquidity in fiscal 2022, but liquidity remains adequate for the rating level and has rebounded with the market post fiscal year end. Cash to adjusted debt for FY 2022 declined to a still adequate 122%, while net adjusted debt to adjusted EBITDA (NADAE) remained favorably negative 4.3x.
Asante had $531 million of long-term debt and financing lease obligations at FY 2022. Debt obligations are fixed rate and Asante is not a party to any swap agreements. Maximum annual debt service (MADS) is approximately $29.1 million and MADS coverage, as per the MTI calculation (for the OG), was 1.9x which exceeds the minimum debt service coverage ratio of 1.1x.
With the majority of capex to be funded through already issued bond proceeds, the scenario analysis supports Fitch's expectation that the system will proceed on a trajectory of cash flow generation and strengthening of leverage metrics over the next several years. Fitch is of the opinion that Asante has adequate but limited flexibility at the current rating to manage through a modest amount of operational and market stress. However, should Asante face an unexpected surge of new COVID-19 cases or should the financial recovery plan stall, Fitch could lower the financial profile to mid-range from strong.
Asymmetric Additional Risk Considerations
There are no asymmetric risk factors associated with Asante's rating.
Currently, Scott Kelly, president and CEO, is on a leave of absence. Former president and CEO Roy Vinyard is acting CEO while Mr. Kelly is away from his duties.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Construction and execution risk: if Asante's expansion project experiences significant cost overruns or project delays that begin to materially erode on the system's liquidity metrics;
Inability to achieve and sustain operating EBITDA margins of 8% or better over time;
Deterioration of liquidity or increased leverage such that cash/adjusted debt falls to and is sustained below 120% over time.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Once construction risk for the sizable Pavilion project has been eliminated, and once the system is able to demonstrate successful implementation of its operating performance improvement goals, the return to a Stable Outlook is possible;
Over time a rating upgrade will be possible provided Asante is able to achieve a successful completion and opening of the new pavilion (on-time and on budget) coupled with maintenance of an overall strong financial profile and improving levels of profitability consistent with its financial recovery plan.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Asante provides health care services to its two-county PSA and five-county SSA in southern OR and northern CA. Asante's obligated group includes three hospitals: Asante Rogue Regional Medical Center (ARRMC), Asante Ashland Community Hospital (AACH), and Asante Three Rivers Medical Center (ATRMC). Non-obligated entities include Asante Physician Partners, Asante Foundation, Southern Oregon Insurance, Inc., Southern Oregon Trauma and Emergency Services, LLC, and Asante Health Network. Asante Physician Partners has approximately 300 employed physicians and advance practice providers and operates 36 community-based clinics throughout its two-county PSA.
In fiscal 2022 (FYE September 30), Asante generated total consolidated operating revenues of about $1.2 billion. Fitch's analysis is based on Asante's consolidated financial statements. The Obligated Group accounts for 93% of consolidated revenues and 90% of system assets.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com
ASANTE INCORPORATED 
