Fitch Rates Kaiser Permanente's $1.6B Bonds 'A+/F1'; Affirms

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned the following ratings to the expected issuance of $1.6 billion California Statewide Communities Development Authority (CSCDA) revenue bonds issued on behalf of Kaiser Permanente (Kaiser):

-- Series 2009A 'A+';

-- Series 2009B-E 'A+/F1'.

In addition, Fitch affirms the 'A+' and 'A+/F1' ratings on Kaiser's approximately $4.1 billion in outstanding parity debt as well as the 'F1' on the Kaiser Foundation Hospitals Commercial Paper Program. Fitch also affirms the 'A+' Insurer Financial Strength (IFS) ratings on Kaiser's rated insurance affiliates (listed at the end of this release). The Rating Outlook is Stable.

The 2009 bond issue is expected to include roughly $750 million of uninsured fixed-rate bonds, $350 million tax-exempt commercial paper mode bonds, $350 million of weekly variable-rate demand bonds (VRDBs) and $150 million of multi-annual put bonds. Bond proceeds will be used to fund various capital projects at various Kaiser hospitals and medical office buildings throughout California, reimburse the corporation for prior equipment acquisitions and other capital expenditures and pay certain costs of issuance related to the bond issue. The series 2009 bonds are expected to price through negotiation during the weeks of May 18th and 25th.

The 'A+' rating reflect Kaiser's solid profitability, robust liquidity and capital related ratios and the underlying strength of Kaiser's integrated health care delivery system. For fiscal year (FY) 2008 (year ended Dec. 31), Kaiser maintained solid operating profitability with operating income of $1.36 billion as compared to $1.66 billion in the prior year period. As a result, operating margin and operating EBIDA margins declined slightly to 3.4% and 6.9%, respectively, from 4.4% and 7.8% in FY 2007. Lower operating profitability in FY 2008 reflects a lower rate of increase in membership and Medicare rates and higher expenses associated with the opening of new hospitals and capacity additions in California. Excess margin declined to 3.5% in FY 2008 from 6.7% in FY 2007 reflecting lower non-operating income resulting from lower investment returns.


Relative to Fitch's hospital medians, Kaiser's liquidity and capital related indicators are the strongest among all of Fitch's health care credits. However, due to Kaiser's insurance operations and attendant actuarial liabilities, a higher rating is precluded. Due to unrealized investment losses in FY 2008, Kaiser's position of unrestricted cash and investments at Dec. 31, 2008 declined to $13.6 billion from $15.9 billion at FY 2007. At March 31, 2009 total unrestricted cash and investments totaled $13.3 billion, which translates into 126 days cash on hand, a cushion ratio (based on average annual debt service) of 48.4 times (x) and 338% of total long-term debt. Capital related ratios reflect Kaiser's light debt burden. Although debt-to-capitalization increased to 25.6% from 23.6% in FY 2008 due to the decline in investment valuation and a $1.3 billion increase in pension liability, it remains modest relative to Fitch's health care portfolio. Debt-to-EBIDA of 1.4x in FY 2008 is further indicative of Kaiser's light debt burden. Kaiser's strong cash flow funded capital expenditures of approximately $2.8 billion, consisting of facility replacements and expansions and information systems investment. Kaiser's ability to fund a high level of capital investment without significantly weakening its balance sheet is a particular credit strength. Capital expenditures are expected to remain in the range of $3 billion to $3.5 billion over the next four years. Coverage of maximum annual debt service (which occurs in 2031) by EBITDA was a solid 4.5x in 2008. However, since Kaiser's debt structure incorporates the use of bullet maturities, debt service is not level and coverage of actual debt service in 2008 was a robust 17.6x.

Membership remained essentially flat in 2008, with 8.64 million plan members as of Dec. 31, 2008 as compared to 8.67 million members at Dec. 31, 2007. While Kaiser's commercial HMO products account for 85% of membership, modest growth in alternative plans and Medicare business is occurring, which, if continued, could mitigate some concern over the lack of diversification in Kaiser's product line. However, Fitch takes a cautious view of Medicare Advantage business, due to the persistent risk of future restrictions on government funding.

Kaiser's short-term 'F1' rating is supported by its strong liquidity position. Upon closing of the series 2009 issue, Kaiser will have approximately $2.46 billion of demand debt (not including multi-year mandatory tender bonds) of which $1.49 billion is expected to be in a weekly mode and $975 million is expected to be in a commercial paper mode. At Dec. 31, 2008, Kaiser had approximately $5.5 billion of same-day settlement funds, which would cover Kaiser's outstanding demand debt by over 2.0x. In addition, Kaiser's $800 million commercial paper program, $800 million line of credit, repurchase agreements and $8.2 billion of other investments provide ample liquidity support for other longer term demand debt.

Credit concerns also include the impact of the economic downturn in California on enrollment over the near term, the intense competition among health care and health insurance providers, the inherent construction risk associated with the large capital program, and a heavily unionized labor force. Fitch also believes the size and complexity of completing the implementation of KP HealthConnect, which will support system-wide scheduling, registration, and clinical functions, will present challenges that could affect Kaiser's profitability over the short to medium term. Despite this, Fitch continues to believe that this strategic systems investment should allow Kaiser to become more efficient and remain competitive in the commercial health care insurance sector.

Kaiser's Stable Outlook reflects the moderate growth in health plan enrollment over the past three years, as well as Kaiser's ability to preserve balance sheet strength while maintaining a high level of investment in facilities and systems. A reasonable debt load coupled with consistent bottom line profitability should provide the basis for a continuation of exceptionally strong debt service coverage, given Kaiser's manageable expected debt needs.


Kaiser Permanente is a large not-for-profit integrated health care delivery system headquartered in Oakland, California, operating a health plan and 32 hospitals. Physician services are rendered via eight independent medical groups, which employ more than 14,000 physicians. In FY 2008, Kaiser had total revenues of $40.3 billion. Kaiser covenants to disclose quarterly and annual disclosure to bondholders. Kaiser disseminates quarterly financial information through the Nationally Recognized Municipal Securities Information Repositories. Quarterly disclosure includes an earnings press release balance sheet, income statement, and cash flow statement.

Fitch affirms the following IFS ratings at 'A+':

-- Kaiser Foundation Health Plan, Inc.;

-- Kaiser Foundation Health Plan of the Northwest;

-- Kaiser Foundation Health Plan of Georgia, Inc.;

-- Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.;

-- Kaiser Foundation Health Plan of Colorado;

-- Kaiser Foundation Health Plan of Ohio;

-- Kaiser Permanente Insurance Company.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.





Fitch Ratings

James LeBuhn, +1-312-368-2059 (Chicago)

Bradley Ellis, CFA, +1-312-368-2089 (Chicago)

Jeff Schaub, +1-212-908-0680 (New York)

Cindy Stoller, +1-212-908-0526 (Media Relations, New York)

cindy.stoller@fitchratings.com



Source: Fitch Ratings