Standard & Poor’s Upgrades Catholic Healthcare West

SAN FRANCISCO — Citing strong financial results, Standard & Poor’s yesterday upgraded Catholic Healthcare West to A-minus from BBB-plus.

The action affects the underlying ratings on $2.6 billion in debt issued for the San Francisco-based non-profit, which operates 40 acute-care hospitals in California, Arizona and Nevada.

The organization has seen improved operating results for four years running and surpassed its mid-year targets for 2005, said Standard & Poor’s analyst Lisa Zuckerman.

“One of the key things we see is the strength of the management team,” she said.

While the organization stumbled during the years around the turn of the decade, as it struggled to digest a series of mergers, Zuckerman said it has convincingly turned itself around.

The organization has demonstrated success in improving the performance of its weaker hospitals, she said. “There’s a tremendous amount of rigor in assessing how they are doing,” Zuckerman said.

CHW’s credit ratings have been on an upward trajectory since issuing $1.17 billion in bonds in the first half of 2004, in transactions spread over three states.

Yesterday’s upgrade came after Standard & Poor’s revised its outlook to positive from stable in December. Following yesterday’s upgrade, the outlook is now stable.

Fitch Ratings upgraded the credit to A-minus from BBB-plus in October, and Moody’s Investors Service in October revised the outlook for its Baa1 rating to positive from stable.

While CHW has been able to get a solid share of health insurance premiums that are rising generally, such success doesn’t echo across the hospital industry.

While CHW and other large operators like Kaiser Permanente have posted solid results, many smaller and stand-alone hospital operations have struggled with poor financial performance.

In 2004, nine California hospitals closed, according to the California Hospital Association trade group.

“We see a tremendous amount of bifurcation in the industry in general,” Zuckerman said. “Large organizations have just had a little more flexibility in terms of the resources they have available.”

CHW’s commitment to investing in information technology is viewed as a credit strength, Zuckerman said.

“The people that are going to be able to show quality and value are those that have their systems in place and have the data to prove that,” she said.

CHW gets 79% of its revenue in California, where the state has significantly raised the earthquake-safety requirements for hospitals, adding another capital burden.

But CHW hospitals are well dispersed around California and its expansion strategy in the fast-growing Reno, Nev. and Phoenix areas is a credit plus, according to Zuckerman, further improving its geographical diversity.

The organization is expecting to issue about $300 million in new debt during fiscal year 2006.