SAN FRANCISCO – Standard & Poor's Ratings Services raised its long-term rating and underlying rating (SPUR) to 'BBB+' from 'BBB' on the Washington Health Care Facilities Authority's $82.4 million series 2005A and B hospital revenue bonds issued for Overlake Hospital Association (Overlake). The outlook is stable.

"The rating reflects Overlake's very strong operating performance since the onset of its relationship with Group Health Cooperative of Puget Sound (Group Health) and the overall strength of its balance sheet," said Standard & Poor's credit analyst Kenneth Gacka.

In November 2004, Overlake and Group Health entered into an agreement whereby Overlake would become the provider of inpatient and emergency services for Group Health's members located to the east of Lake Washington.

Fiscal 2009 marked the first full year in which Group Health patients were admitted under the new agreement at Overlake. Both inpatient admissions and total surgeries increased dramatically in 2009 largely as a result of the Group Health patients and, to a lesser extent, population growth. Fiscal 2009's admissions increased by an impressive 28 percent to 20,812 in fiscal 2009 from 16,294 in fiscal 2007 (the last full fiscal year without the impact of Group Health volumes).

Similarly, total surgeries increased by 18 percent to 15,713 in fiscal 2009 from fiscal 2007's 13,282. Emergency visits also rose during that period, but at a more modest 4.6 percent. Group Health now accounts for approximately 24 percent of Overlake's total discharges. Volumes for the first quarter of fiscal 2010 are mixed: Year-to-date volumes on inpatient and surgical activity are slightly lower, while outpatient and emergency volumes are slightly higher as compared to the same quarter of fiscal 2009.

As a result of the substantial volume increase and Overlake's prudent management of expenses during this period of extensive growth, Overlake's operations have improved significantly. For fiscal 2009, operating income rose impressively to $36.2 million (9.1 percent operating margin) from fiscal 2008's $11.1 million (3.4 percent operating margin). A large $34.5 million other-than-temporary impairment of investments reduced fiscal 2009 excess income to $10.7 million (a 2.9 percent profit margin), still generating good coverage of maximum annual debt service (MADS) of 2.7x. Interim results through the three months ended Sept. 30, 2009, show continued strong operating performance, with a 7.0 percent operating margin, 9.0 percent excess margin, and MADS coverage of 4.0x.

Overlake's balance sheet strength continues to improve with respect to several key metrics due to its enhanced operations and the amortization of its significant 2005 debt issuance. At the end of fiscal 2009, Overlake had $159.5 million in unrestricted cash, equal to a strong 173 days' cash on hand. The interim fiscal 2010 financials at Sept. 30, 2009 (unaudited), show $177.6 million in unrestricted cash, equal to 189 days' cash on hand. Unrestricted cash as a percent of long-term debt has steadily improved over the last several years, with 86.3 percent and 75.4 percent percent cash to debt for the interim period of fiscal 2010 and fiscal 2009, respectively. Leverage remains relatively high, at 49.4 percent, at the end of the first quarter of 2010, but this number has steadily trended downward since the 2005 debt issue.

Overlake Hospital Medical Center is located in Bellevue, Wash., an affluent suburb of Seattle.