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���������ֳ� - Austin - 31 May 2023: ���������ֳ� has assigned a long-term (LT) 'AA-' rating to the $298.795 million Industrial Development Authority of the County of Maricopa Revenue Bonds (Banner Health), Series 2023A1, A2 and A3 bonds issued on behalf of Banner Health.

In addition, ���������ֳ� has assigned a 'AA-' LT rating and a 'F1+' short-term rating to the $86.870 million Industrial Development Authority of the County of Maricopa Revenue Bonds (Banner Health), Series 2023B bonds issued on behalf of Banner Health.

The 2023A bonds are fixed rate put bonds and the 2023B bonds are variable rate demand bonds (VRDBs), initially to be issued as variable rate weekly securities, and will be backed by Banner Health's 'F1+' self-liquidity.

In addition, ���������ֳ� has affirmed Banner's 'AA-' Issuer Default Rating and the 'AA-' Long-Term revenue bond ratings (various issuers and series) on approximately $4.1 billion of bonds issued by Banner or on its behalf.

���������ֳ� also affirmed the 'F1+' short-term rating supported by Banner Health's self-liquidity, which is mapped to Banner Health's long-term 'AA-' rating and supported by the system's sufficient liquidity reserves.

The Rating Outlook is Stable.

Bond proceeds of approximately $325 million will be used to reimburse the balance sheet for capex incurred during construction at Banner Gateway and Banner Desert. In addition, a smaller portion, $86.87 million, will be used to repay draw on bilateral revolving line of credit for series 2017B put bonds mandatory tender in October of 2022.

SECURITY

The bonds are secured by a gross revenue pledge of the obligated group.

ANALYTICAL CONCLUSION

Banner Health's 'AA-' ratings highlight the system's consistently strong financial profile assessment, the strength of its core hospital delivery system and growth of its insurance division, which combine to make Banner one of a handful of successful integrated delivery systems in ���������ֳ�'s rated portfolio.

Banner Health has operations concentrated in Arizona and is the largest provider in the state and in the Phoenix market by a significant margin. It also maintains a presence in five other western states, particularly in Wyoming and Colorado. Banner remained profitable, albeit just slightly above break-even, in fiscal 2022; however, year-to-date results are solidly positive (operating margin of 3.7%). Fiscal 2022 softness is largely attributed to added labor expense, and recent results indicate that Banner appears well positioned to resume its operational footing, and to continue contributing to higher levels of capital spending in their growth markets, while still allowing for incremental liquidity growth.

Longer-term, ���������ֳ� expects Banner to continue to produce consistent operating levels, with operating EBITDA margins of approximately 8%.

Banner's 'F1+' short-term ratings reflect its long-term credit quality and 'AA-' rating, as well as very strong self-liquidity.

KEY RATING DRIVERS

Revenue Defensibility: 'bbb'

Foremost Market Share in Primary Service Area

Banner's delivery and insurance network combine to provide a broad statewide presence in Arizona; it is the largest single provider in the state and in the primary service area of Phoenix. It also has a substantial presence in the Northern Colorado region and a growing presence in Wyoming. Banner's markets all show above-average population growth.

Operating Risk: 'a'

Strong Operating Profile During Pandemic; Healthy Average Age of Plant; Capital Spending Ongoing

Banner's operating risk profile is strong, based on the system's long-term operating EBITDA margins, although fiscal 2022 results were less consistent (audited results through Dec. 31, 2022). Operational challenges clearly surfaced in fiscal 2022, although to a much lesser extent than many other providers in the sector, and year to date results (unaudited three-month results through March 31, 2023), show a definitive rebound to Banner Health's historic operating performance level.

���������ֳ� expects that Banner will maintain operating EBITDA levels of approximately 8% to 9% on an annual basis, potentially higher, over the longer term, reflecting the growing revenues generated by Banner Health's insurance division (and large employed physician base), which does tend to mute the spread between operating margins and operating EBITDA margins due to lower levels of depreciation and interest expense compared with its provider division.

Capital spending needs remain on track, with spending consistent for their growth markets. Banner operates in growth states and is very focused on optimization of information systems, opportunistic and strategic growth opportunities and in particular increased ambulatory and care access points. ���������ֳ� anticipates Banner will continue spending on capex in excess of annual depreciation of approximately 150% over the longer term, but as seen before, Banner Health appears to be keeping annual spending in generally smaller, discrete projects, providing it with additional flexibility should reducing capital expenditures become necessary.

Financial Profile: 'aa'

Stable and Improving in ���������ֳ�'s Forward-Looking Analysis

Banner Health's financial profile is strong, with management able to maintain financial stability through the significant revenue dislocation from the coronavirus pandemic's impact and now the impact of staffing challenges on operating income levels. Over time, ���������ֳ� expects Banner to improve upon existing operating EBITDA margins and attain more historically normal levels of sustained profitability.

Asymmetric Additional Risk Considerations

There are no asymmetric risk factors associated with Banner Health's rating.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Banner could see positive rating action over the longer term, although a higher rating over the two-year Outlook period would likely be limited to more extremely positive impacts to Banner's unrestricted liquidity position given the growth nature of their markets and the need to continue to invest in capex.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Should Banner's operating EBITDA margins fall to consistently below 8% for an extended period of time, ���������ֳ�'s operating risk assessment could be reconsidered, which would likely have some negative rating action;

--Should Banner engage in significant additional capital spending or borrowing beyond what has been articulated, the resultant impact to key balance sheet metrics such that cash to adjusted debt falls below 120% could have negative rating implications.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579.

CREDIT PROFILE

Banner, headquartered in Phoenix, Arizona, is one of the larger nonprofit health care systems in the U.S. The system owns or operates 33 hospitals in six states, with a strong statewide concentration in Arizona, and a solid presence in Northern Colorado and Wyoming. It employs approximately 53,000 individuals (more than 3,000 of which are employed physicians) and its hospital base includes two Academic Medical Centers, two Children's Hospitals and three Inpatient Rehabilitation Hospitals. Banner also has additional assets in California, Nevada and Nebraska.

The system's geographic diversity remains a key credit strength as this helps insulate the system from adverse economic, demographic and operational challenges in any individual market. Banner also has a growing provider-sponsored health plan presence. It has over one million full or shared-risk lives and overall premium revenue of approximately $3.0 billion in revenues (approximately 24% of total system revenues). In fiscal 2022, Banner recorded total operating revenues of about $12.7 billion, making it one of ���������ֳ�'s largest rated credits.

Banner maintains two lines of credit via a bank credit syndicate and Bank of America (total draw ability is currently $600 million, soon to be reduced to $500 million), which provides Banner Health with significant short-term liquidity.

Revenue Defensibility

Banner operates as a statewide integrated delivery network (IDN) in Arizona, with a significant presence in five other states. Banner management reports that Medicaid and self-pay combined accounted for approximately 25% of Banner's gross revenues in fiscal 2022, which is slightly improved when compared with prior years. While anything 25% or above is slightly higher than is typical for mid-range revenue defensibility, Banner operates two children's facilities in both Phoenix (Cardon Children's Medical Center) and Tucson (Diamond Children's Medical Center), which tend to lead to higher Medicaid percentages. As such, and due to the recent addition of directed Medicaid payments, ���������ֳ� does not consider Banner's revenue sources a credit risk.

Banner is largely concentrated in the state of Arizona. It has a 36% inpatient market share of the entire state and a 44% inpatient market share of the Phoenix market, which is larger than the next three competitors combined. Demographics, most specifically projected population growth, are generally favorable in all markets. Additionally, median household income levels and poverty rates are generally above the national averages.

Phoenix is the fifth largest city in the U.S. and the capital of Arizona, with a 2020 population of 1.6 million. The Phoenix MSA is the tenth largest in the U.S. with an estimated population of 4.9 million, and recent population gains have placed the MSA among the fastest growing in the U.S. The broad and diverse regional economy is anchored by professional and business services, retail and wholesale trade, education and health services and government. Phoenix accounted for 75% of the state's GDP in 2020 and 75% of total state employment in 2021.

Operating Risk

The system's operating income level in fiscal 2022 was reduced, compared with prior year results, the result of significant, almost sector wide, increases of labor expense. Banner Health's operating EBITDA margin, save for this year, generally fluctuates only slightly year to year and has remained consistently strong, with an average of 7.7% over the previous five years, even when including this weaker fiscal 2022. EBITDA margins averaged greater than 9.1% over the last five years, demonstrating balance between operations and non-operating income sources.

Banner, like most providers, received financial assistance through stimulus funds during the initial and subsequent waves of coronavirus surges, both as direct enhancements to revenue, and as one-time relief funding. Banner received $654 million in total Medicare Advance and Accelerated Payments (MAAP), all of which have been repaid.

Banner began to receive supplemental payments, as federal match rate enhancement, through Arizona's Medicaid program (commonly referred to as AHCCCS, the Arizona Health Care Cost Containment System) beginning in October of 2020, which has notably aided in Banner's operational stability, particularly through the pandemic period. Through multiple waves of coronavirus surges and the inherent challenges in staffing, volumes and inflationary costs, Banner effectively managed through the pandemic's impact, and remains focused on annual cost savings and growth initiatives.

More recent and highly acute pressures in fiscal 2022 are the result of heighted salary/wage expenses. Despite this, Banner appears to be on the track to regain much of is normal trend of profitability over the next several years on their way to sustaining an operating margin upwards of 3%. Looking forward, ���������ֳ� expects Banner's operating EBITDA margins to be maintained around 8% or higher, and that Banner will continue expense reduction initiatives for the foreseeable future as it seeks ways to reduce excess costs and strengthen revenues.

Banner management's ongoing focus on further developing their IDN capabilities, with a concerted effort in developing additional ambulatory surgery centers (ASCs -- on top of Banner's existing 25 ASC's) and other outpatient sites, which best suits individual consumer preferences, and also supports population health management initiatives. This focus, with Banner's growing insurance division, should enable Banner to continue shifting away from fee-for-service to increasingly larger percentages of at-risk or value-based reimbursement.

The current average age of plant is a healthy 9.9 years as Banner has spent well in excess of annual depreciation expense in four of the last five fiscal years. ���������ֳ� expects capital spending will be around 150% of annual depreciation for the several years, beginning in fiscal 2023. However, as previously mentioned, Banner is in high population growth markets and will necessarily ramp up capital spending as financial results allow and as community needs dictate.

Recently completed projects include additional adult capacity (beds) at Banner Desert Medical Center and increased capacity at Banner Gateway Medical Center. Future capital projects include likely expansion in Maricopa county (Scottsdale and West Valley) at Banner Scottsdale Medical Center.

���������ֳ� is estimating that Banner will spend around $4.0 billion in aggregate over the next five years (2023 through 2027), which translates into about $800 million in capital spending per year on average, which should keep the average age of plant at, or below, current levels. ���������ֳ� believes that Banner has considerable flexibility around the timing and development of capital spending since single large-scale projects have generally been replaced by multiple smaller scale capital needs, which are much easier to curtail should operational stress continue beyond what is expected.

Financial Profile

Given the system's mid-range revenue defensibility, strong operating risk profile and ���������ֳ�'s forward-looking scenario analysis, ���������ֳ� expects Banner's key balance sheet ratios to remain consistent with the 'AA' rating category, even if Banner sustains another stress-type event. Banner's management team successfully weathered the latest major impact to credit quality, the coronavirus pandemic, and continues to do so even as the sector still sees the residual impact on labor expenses.

Banner had just over $5.6 billion of total-debt outstanding as of fiscal 2022 and about $7.7 billion of unrestricted cash and investments, which translates to a 138% ratio of cash to total-debt outstanding. Included in total-debt is around $4.1 billion in long-term debt, current portions of approximately $0.8 billion, plus the additional impact of FASB guidelines around lease accounting where leases are now reflected directly on the balance sheet as long-term debt liabilities of approximately $0.7 billion. Banner completed the termination process for their defined benefit pension plan, and as such, has no additional pension debt equivalent liability in ���������ֳ�'s analysis. As a result, the system's net debt position (total debt minus unrestricted cash and investments) based on fiscal 2022 audit, is very favorably negative at $2.1 billion.

Through ���������ֳ�'s baseline scenario, or ���������ֳ�'s best estimate of the most likely scenario of financial performance over the next five years given the current economic conditions and expectations for operational performance, ���������ֳ� expects that Banner will see modest improvement in key debt/leverage metrics. In a forward-looking analysis, all key metrics are expected to gradually improve given the past consistency of Banner's operating income levels and ���������ֳ�'s expectation of capital spending.

���������ֳ�'s forward-looking analysis shows cash to debt increasing to around 150% or better, even under a potential stress scenario where ���������ֳ� mimics both an issuer-specific revenue stress and a portfolio sensitivity stress analysis based on Banner's portfolio asset allocation. Banner's leverage metrics will all remain, and recover to current, or better, levels in the outer years of a potential stress scenario, demonstrating limited sensitivity to a stress event at the current rating.

Short-Term 'F1+' Self-Liquidity Rating

Banner maintains sufficient internal liquid resources (composed of cash, investments and dedicated bank credit facilities) and has implemented written procedures to fund any un-remarketed put and/or CP amounts of debt supported by self-liquidity as per ���������ֳ� criteria.

Asymmetric Additional Risk Considerations

There are no asymmetric risk factors identified with Banner Health's rating. Banner's senior management team is seasoned and stable, with a track-record of delivering highly consistent operating results and gradual balance sheet accretion over an extended period of time. Of note, Staci Dickerson, from Sharp HealthCare in San Diego, CA, will join Banner on July 16 as executive vice president and chief financial officer, filling this open position.

Banner has approximately $5.6 billion of long-term debt and debt equivalents outstanding. Maximum pro-forma annual debt service of around $292.3 million on a smoothed basis (excluding bullet payments), does not pose an asymmetric risk. Banner's liquidity position is sound and also does not pose additional risk. As of fiscal 2022 (audited full year results through Dec. 31, 2022), the system had around $7.7 billion of unrestricted cash and investments, which translated to about 231 days cash on hand.

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on ���������ֳ�'s ESG Relevance Scores, visit .

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), v2.0.0 (1)

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