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���������ֳ� - Austin - 18 Feb 2025: ���������ֳ� has assigned an 'F1+' short-term (ST) rating to the Banner Health, AZ (Banner) series 2025 tax-exempt commercial paper (CP) notes supported by self-liquidity. The 'F1+' ST self-liquidity rating is based on mapping to Banner's 'AA-' long-term (LT) rating, along with sufficient liquidity and procedural requirements necessary to manage risk associated with variable rate debt.

���������ֳ� has also affirmed the 'AA-' LT and 'F1+' ST ratings on Banner's various series of outstanding debt (ST ratings based on self-liquidity where applicable).

In addition, ���������ֳ� has affirmed the 'AA-' Issuer Default Rating (IDR). The Rating Outlook is Stable.

Banner is planning to add a CP program of approximately $400 million tax-exempt notes and plans to issue the notes in mid-March with U.S. Bank Trust Company, NA serving as the issuing and paying agent. The proceeds will be used for corporate purposes, and Banner has immediate plans to refinance its current $200.6 million taxable CP program and use a $154.6 million line of credit draw for 2017C and 2019C mandatory tenders. The two CP programs combined will total $600.6 million.

In addition, Banner intends to terminate an existing $100 million bilateral line of credit. The notes will be secured under Banner's Master Trust Indenture (MTI) on parity with the organization's outstanding debt. Liquidity for the CP notes will be provided by Banner's internal liquidity reserves.

Banner Health's 'AA-' rating highlights the system's steady financial profile assessment, which is consistent with a rating in the lower end of the 'AA' category. This assessment considers the strength of Banner's core hospital delivery system and diversification of its insurance division, which together make it one of a handful of successful integrated delivery systems in ���������ֳ�'s rated portfolio.

Banner Health's operations are concentrated in Arizona, and it is the largest provider in the state and the Phoenix market by a significant margin. It also maintains a presence in five other Western states, particularly in Wyoming and Colorado. Banner's 2024 YTD results (unaudited third quarter through Sept. 30, 2024) align consistently with fiscal 2023 full-year results, with an operating margin of 1.8% and an operating EBITDA margin of 6.1%.

Fiscal 2024 operating results are largely attributed to ongoing operational efficiency initiatives and Banner's robust volumes. The system's most recent financial results indicate that Banner still appears well positioned to continue along its growth trajectory and continue contributing to solid levels of capital spending in its growth markets, while allowing for incremental liquidity growth. Long term, ���������ֳ� expects Banner to continue to produce consistent operating levels, with operating EBITDA margins of approximately 7% to 8%.

No additional debt has been factored into this rating affirmation.

SECURITY

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

KEY RATING DRIVERS

Revenue Defensibility - 'bbb'

Foremost Market Share in Primary Service Area

Banner operates as a state-wide integrated delivery network (IDN) in Arizona, with a significant presence in five other states. Banner management reports that Medicaid and self-pay combine to be approximately just under 25% of Banner's gross revenues in fiscal 2024 YTD (unaudited results through the third quarter, Sept. 30, 2024), which is very similar to prior years when this percentage has been both slightly higher and lower than 25%.

While anything above 25% is marginally higher than typical for mid-range revenue defensibility, Banner operates three children's facilities in both Phoenix (Banner Children's at Thunderbird [Glendale], Banner Children's at Desert [Mesa]) 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 Arizona, holding a 36.2% inpatient market share of the entire state and a 44.3% inpatient market share of the Phoenix market, which is larger than the next three competitors combined. 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. The demographics, particularly projected population growth, are generally favorable across all markets. In addition, 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 population of 1.7 million. The greater Maricopa County area is around three times larger, at 4.6 million, and demonstrates strong population growth. The Phoenix MSA is the 10th largest in the U.S. and recent population gains have placed it among the fastest growing MSAs 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 accounts for the majority of the state's GDP and total employment.

Operating Risk - 'a'

Strong Operating Profile

The system's operating income level in fiscal 2024 YTD was consistent and generally in line with fiscal 2023 results (operating EBITDA margins of 6.1% and 6.6%, respectively), despite stubbornly persistent industry headwinds in the sector around labor and inflation expenses. Banner Health's operating EBITDA margin fluctuates slightly year to year but remains consistently strong, averaging 7.0% over the previous four audited fiscal years. EBITDA margins averaged around 8.2% over the last four audited fiscal years, demonstrating balance between operations and non-operating income sources.

Through multiple waves of coronavirus surges and the inherent challenges in staffing, volumes, and inflationary costs, Banner effectively managed the sector's challenges by remaining focused on annual cost savings and growth initiatives, avoiding operational losses for the last several years. Banner appears to be maintaining its normal trajectory of profitability over the next several years, with plans to sustain an operating margin upward of 3% (operating EBITDA margin of approximately 7% to 8%) given the size of their at-risk lives and overall premium revenue.

Looking ahead, ���������ֳ� expects Banner's operating EBITDA margins to remain around 7% to 8%, or possibly 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 its IDN capabilities, with a concentrated effort in developing additional ambulatory surgery centers (ASCs) and other outpatient sites, is best suited to individual consumer preferences and supportive of population health management initiatives.

Healthy Average Age of Plant; Capital Spending Remains Robust

The current average age of the plant is a healthy 12.3 years as of fiscal 2023, as Banner has spent on average in excess of annual depreciation expense over the last four audited fiscal years. ���������ֳ� expects capital spending will ramp up in 2024 (full year) and beyond, as Banner facilities are in high population growth markets and will necessarily dictate elevated capital spending as financial results allow and as community needs increase.

���������ֳ� anticipates that Banner will continue to spend on capital consistently in excess of annual depreciation levels in fiscal 2025 through 2029, resulting in annual capital spending per year that will keep the average age of the plant at or below current levels. ���������ֳ� believes that Banner has flexibility around the timing and development of capital spending since prior large-scale projects have generally been replaced by multiple smaller-scale capital needs, which are much easier to curtail should operational stress occur.

Financial Profile - 'aa'

Stable to Improving in ���������ֳ�'s Forward-Looking Scenario Analysis

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 a stress-type event.

Banner had just over $5.68 billion of total debt outstanding as of fiscal 2024 YTD and about $9.71 billion of unrestricted cash and investments, which translates to a 171% ratio of cash to total debt outstanding. Included in total debt is around $4.2 billion in LT debt, current portions of approximately $847.5 million, plus leases liabilities reflected directly on the balance sheet as long-term liabilities of approximately $622.7 million.

Banner terminated its 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 2024 YTD is very favorably negative at $4.0 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 continue to gradually improve given the expectation of consistency in Banner's operating income levels and ���������ֳ�'s expectation of planned capital spending.

���������ֳ�'s forward-looking analysis shows cash to debt, without including any future new money debt issuances, improving to around 180%, 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 consistently remain at 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 associated 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.

Banner has approximately $5.68 billion of LT debt outstanding. Maximum annual debt service of around $275 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 2024 (unaudited full-year results through Sept. 30, 2024), the system had around $9.71 billion of unrestricted cash and investments which translates to about 246.7 days cash on hand.

RATING SENSITIVITIES

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

--Should Banner's operating EBITDA margins remain below 7% for an extended period of time, ���������ֳ�'s operating risk assessment may be reconsidered, which could have negative rating implications;

--Should Banner engage in significant additional capital spending or borrowing beyond what has been articulated the resultant impact to key balance sheet metrics could have negative rating implications.

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 notably positive impacts on Banner's unrestricted liquidity position given the growth nature of its markets and continuing need to invest in capex.

PROFILE

Banner, headquartered in Phoenix, AZ, is one of the larger nonprofit healthcare 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 57,000 individuals (more than 3,000 of which are physicians) and its hospital base includes three academic medical centers, three children's hospitals, one behavioral hospital 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 more than 1.2 million full- or shared-risk lives and overall premium revenue of approximately $3.6 billion (about 25% of total system revenues). In fiscal 2023, Banner recorded about $14.1 billion in total revenues.

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.

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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)

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