���������ֳ�

���������ֳ� - San Francisco - 29 Apr 2025: ���������ֳ� has assigned a 'AA-' long-term rating to the taxable series 2025A bonds issued by Sutter Health (CA). ���������ֳ� has additionally upgraded Sutter Health's Long-Term Issuer Default Rating (IDR) and revenue rating to 'AA-' from 'A+' for outstanding bonds previously issued by or on behalf of Sutter Health (Sutter).

���������ֳ� has also assigned an 'F1+' short-term rating to Sutter Health's Series A taxable commercial paper (CP) notes supported by self-liquidity. The 'F1+' short-term self-liquidity rating is based on mapping to Sutter's 'AA-' long-term rating, along with sufficient liquidity and procedural requirements necessary to manage risk associated with variable rate debt.

The Rating Outlook is Stable.

The rating upgrade to 'AA-' is supported by Sutter's consistently strong growth across the organization, resulting in an expanded and strengthened care delivery network with solid market positions across all markets. This growth has contributed to continued robust operating performance, which ���������ֳ� considers notable, especially considering the macro labor and inflationary challenges still affecting the sector. Despite increased capital spending during the fiscal year and ongoing expense headwinds, capital ratios and balance sheet resources have improved to levels that support the positive rating movement to the 'AA-' level, as reflected by ���������ֳ�'s 'aa' financial profile assessment.

FY 2024 marks the fourth consecutive year the system has posted operating EBITDA performance above $1 billion, which ���������ֳ� views positively and as a primary contributor to the upgrade to 'AA-'. Health systems with health plans tend to also have comparatively lower operating EBITDA margins than similar systems without health plans, making Sutter's operating EBITDA margins even more impressive.

The system remains focused on creating more operational capacity and efficiency by reducing the average length of stay, focusing on throughput initiatives, hiring more staff, nurses, and physicians, and centralizing key business functions. These efforts have helped drive down certain expenses and support solid revenue growth. Management has successfully grown the system's care delivery network in its larger market, highlighted by year-over-year revenue growth of approximately 12.3%. This growth is partially driven by positive volumes, effective cost controls, capacity creation, and sustained system efficiencies.

SECURITY

The bonds are secured by a gross receivables pledge of the obligated group (OG).

KEY RATING DRIVERS

Revenue Defensibility - bbb

Strong Presence in Competitive Northern California Market

Sutter Health's gross payor mix in 2024 included a Medicaid (Medi-Cal) and self-pay percentage of around 20%, which has remained stable over the past two years. Medicare has also shown historical stability at 44% in 2024. Sutter Health receives supplemental Medi-Cal payments from California's provider fee program through its Medicaid business It has recorded $261 million in net operating income from the hospital fee program in 2024, consistent with the previous year's provider fee net operating income.

Sutter Health is a well-recognized provider offering a comprehensive range of health care services primarily in Northern and Central California. As the industry moves toward integrated delivery models and value-based care lives, Sutter Health remains one of the largest systems in this broad market, alongside Kaiser Permanente (AA-/Stable) and other notable providers.

���������ֳ� believes that Sutter Health possesses both revenue and geographic diversification, as each of its core markets maintains distinctive characteristics that can provide economic support and/or insulation from acute adverse events in any specific market. ���������ֳ� views favorably management's focus on not only maintaining but also expanding the system's care delivery presence in each of its markets, which should be financially beneficial over time, especially with ongoing efforts to drive efficiency.

Sutter Health operates in a broad service area encompassing Northern California, where demographics are generally favorable, and population growth is solid. Sutter served approximately 3.5 million patients in 2024 across its geographic reach, which includes the Central Valley, Central Coast, East Bay, Sacramento, San Francisco, and Silicon Valley markets, covering a total approximate population of 13 million.

Sutter's stable Medicare payor position, reflected in 44% of gross receivables, underscores the presence of a somewhat younger, commercially insured population in parts of this wide and economically diverse market.

Operating Risk - a

Strong 2024 Performance; Positive Operations Expected Despite Large Capital Plan

���������ֳ� views Sutter Health's current operating risk expectations as 'Strong,' reflecting the expectation for continued strong cost management and operating EBITDA margins likely ranging from approximately 7% to near 9% over the next few years. In fiscal 2024 (ended December 31; audited), Sutter generated $142 million in operating income, which includes an approximate $228.5 million legal settlement accrued at the end of the fiscal year (related to the legal case, Sidibe et al). On an adjusted basis, Sutter recorded $370 million from operations, resulting in a 2% operating margin and a 6.9% operating EBITDA margin (inclusive of the organization's health plan). Fiscal 2024's adjusted income marked an increase from the prior year's strong gain of $320 million and 7.3% operating EBITDA margin.

This level of operating performance, alongside consistently generating operating EBITDA well above $1 billion annually, should be sufficient to fund Sutter Health's sizeable capital needs. Over the next decade, Sutter intends to fund its large capital plan through a combination of operational cash flow, philanthropy, equity, and debt. Despite the large spending program, ���������ֳ� views the system's ability to successfully fund its capital improvement plan (CIP), while growing margins and the organization's resource base, as achievable. Sutter has several notable projects covered under the CIP, including its Emery Yards and Santa Clara projects located in its East Bay and South Bay regions, respectively.

Financial Profile - aa

Improved Capital Ratios and Liquidity Metrics Support Upward Rating Movement

Sutter Health's improved leverage and liquidity metrics also support the rationale for its rating upgrade and are reflected in ���������ֳ�'s very strong 'aa' assessment of Sutter's financial profile. This is despite the new 2025 debt issuance, larger capital spending plans over the medium term, and the applied stress in ���������ֳ�'s forward-looking scenario analysis. Sutter Health's adjusted debt totaled approximately $6.1 billion in 2024 after incorporating operating leases. The system's defined benefit pension plans were over 100% funded as of Dec. 31, 2024, and did not contribute to ���������ֳ�'s adjusted debt metrics as they exceeded the 80% funding threshold.

Sutter's balance sheet has improved over the past several fiscal years, with absolute unrestricted cash and investments totaling approximately $10.1 billion at the end of fiscal year 2024. This is a significant increase from $7.4 billion at the end of fiscal year 2022. Sutter's liquidity metrics in 2024 equated to approximately 214 days cash on hand and 165% cash-to-adjusted long-term debt, providing the organization with substantial financial flexibility. ���������ֳ� believes Sutter's positive and robust operational cash flow generation will support further improvement in as the system's cash-to-adjusted debt over time.

Despite the assumed investment and operational pressures in ���������ֳ�'s stress case, Sutter is able to maintain key financial metrics, such as cash-to-adjusted debt and net adjusted debt to adjusted EBITDA, that are consistent with the 'AA' rating category. ���������ֳ�'s scenario serves as a sensitivity tool to analytically gauge the level of recovery after a plausible stress, and Sutter Health demonstrates sufficient financial viability, especially towards the later years of the scenario.

Asymmetric Additional Risk Considerations

There are no asymmetric risks associated with the rating.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

--Although unexpected, cash flow margins that are materially below 7% for a sustained period of time, which begin to inhibit funding of the organization's sizeable capital needs;

--A significant drop in unrestricted resources that noticeably pressure Sutter's liquidity metrics;

--A substantial increase in long-term debt that's not met with commensurate revenue to support additional debt service.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

--Additional positive rating action is unlikely during the Outlook period. Over time, further improvement in operating cash flow generation such that operating EBITDA margins are sustained in the 10%-11% range, which enables the system to fund its large capital plan while building up unrestricted balance sheet resources could give the rating positive momentum.

PROFILE

Headquartered in Sacramento, CA, Sutter Health is the parent of a large, integrated health care provider with 27 acute care campuses, eight aligned medical groups with about 5,750 clinicians, in addition to Sutter Health Network which consisted of 6,600 physicians in 2024. Sutter is the largest ambulatory surgery center manager in California serving a population of approximately 3.5 million. The system operates a health plan with about 120,000 members and has more than 57,000 employees (including 15,000 nurses). On a consolidated basis, the Sutter Health system reported nearly $18.2 billion in total system revenues in fiscal 2024 (Dec. 31. 2024; audited), which is up from $16.1 billion in fiscal 2023.

Sources of Information

In addition to the sources of information identified in ���������ֳ�'s applicable criteria specified below, this action was informed by data 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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. ���������ֳ�'s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ���������ֳ�'s ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.

Additional information is available on

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Portfolio Analysis Model (PAM), v2.0.1 (1)

ADDITIONAL DISCLOSURES

• Dodd-Frank Rating Information Disclosure Form
• Solicitation Status
• Endorsement Policy

ENDORSEMENT STATUS