OREANDA-NEWS. S&P Global Ratings assigned its 'AA-' long-term rating to California Health Facilities Financing Authority's $500 million series 2016A revenue bonds and $350 million series 2016B (B1-B4) revenue bonds issued for Providence St. Joseph Health (PSJH), Wash. At the same time S&P Global assigned its 'AA-' long-term rating to PSJH's $350 million taxable series 2016J. S&P Global Ratings also affirmed its outstanding ratings on the debt of various issuers, which were issued on behalf of the two organizations that came together to form PSJH on July 1, 2016--specifically Providence Health & Services (PH&S) and the St. Joseph Health System (SJHS). The outlook is stable.

Under the plan of finance, a single obligated group will be created with the closing of these bonds as well as an additional series of bonds at the end of September 2016. The additional series of bonds will be issued as variable rate and direct purchase issues that are factored into this rating, and the variable rate issues will be assigned a rating in September. S&P Global also affirmed its 'A-1+' rating on PSJH's $200 million commercial paper (CP) program even though under the plan of finance the amount outstanding will be fully refunded.

"The rating assignment reflects PSJH's very strong enterprise profile characterized by excellent geographic and financial dispersion, generally strong market positions in its eight natural regionally centered markets, and a strong, forward looking management team that has moved very quickly to create a unified management and board structure for the newly formed organization," said S&P Global Ratings analyst Martin Arrick. "The rating also reflects an adequate financial profile characterized by a general sound post-merger balance sheet combined with an operating profile that, while historically strong, is currently facing a broad array of industry challenges that has hurt operating performance in the current year to date, especially at PH&S' facilities in Washington." Our expectation is that management, who has a solid track record of addressing performance issues as they arise, will be able to successfully implement their current performance improvement plan, in part through merger-related operating synergies.

The 'AA-' rating is based on our view of PSJH's group credit profile (i. e., the system as a whole) and the obligated group's core status within the system. Accordingly, we rate the bonds at the same level as the group credit profile.

The stable outlook reflects a very favorable enterprise profile combined with a financial profile that has been historically consistent with the current rating. Recent year to date weakness reflects broader industry wide issues and the rating assumes management will be able to improve overall operating performance and cash flow to return metrics to levels more consistent with current medians.

A negative outlook or lower rating would be premised on a failure to improve operating margins and related cash flow from current weak year to date levels. An inability to sustain operating maximum annual debt service (MADS) coverage at least 3.5x over the next review cycle and over 4x over a longer period of time or a weakening of balance sheet metrics to fewer than 150 days' cash on hand and a drop in unrestricted reserves to debt to under 140% would be risks to the current rating or outlook.

A positive outlook or upgrade would be premised on improved financial profile such that overall MADS coverage was consistent above 5.5x and balance sheet strength improved to 200 days' cash on hand and unrestricted reserves to debt approached relevant medians.