Fitch Affirms Eisenhower Medical Center, CA Rev Bonds at 'BBB'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'BBB' rating on the following Eisenhower Medical Center, CA (EMC) revenue bonds:

--$103,465,000 California Municipal Finance Authority (CA) (Eisenhower Medical Center) revenue bonds series 2010A;

--$256,570,000 Rancho Mirage Joint Powers Financing Authority (CA) (Eisenhower Medical Center) revenue bonds series 2007A.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

CONSISTENT OPERATING CASH FLOW: The rating affirmation reflects EMC's sustained solid operating cash flow with an average operating EBITDA margin of 10.2% over the past five years. Fiscal 2016 (June 30 year-end) performance exceeded budget. Solid performance continues to be driven by good volume growth especially related to its clinic and physician growth strategy.

CAPITAL SPENDING: Capital spending is projected to increase in fiscal 2017 due to investment in Epic with a planned go live date of July 1, 2017. The total Epic cost is $48 million with the majority of the spending in fiscal 2017. Total capital spending is projected to be $77 million (1.6x depreciation expense) compared to capital spending below 1x depreciation expense in the prior two years.

PROJECTED DECLINE IN LIQUIDITY: Fitch is concerned about the projected impact of the Epic implementation on EMC's financial profile, which is expected to result in lower liquidity and is a concern since EMC's liquidity levels are already light for the rating level.

HIGH DEBT BURDEN: EMC has a high debt burden; however, a planned refinancing of its series 2007A and 2010A bonds expected later this year should result in meaningful debt service savings.

STRONG PHILANTHROPY: One of EMC's main credit strengths is its fundraising ability and demonstrated strong philanthropic support. A third of the cost of EMC's new inpatient facilities required due to compliance with seismic requirements (opened in 2010) was funded by philanthropy and almost $700 million has been raised between 2001-2016. Donations have averaged $40 million a year over the last three years.

RATING SENSITIVITIES

SUSTAINED OPERATING CASH FLOW: Fitch expects Eisenhower Medical Center to continue to meet budgeted expectations and realize benefits from its Epic implementation over the medium term with a rebound in liquidity. The rating could be downgraded if there is higher than projected stress on the financial profile and fiscal 2017 budgeted performance is not met.

CREDIT PROFILE

EMC is a 463-licensed bed community hospital located in Rancho Mirage, CA (near Palm Springs), and approximately 120 miles east of Los Angeles and 120 miles northeast of San Diego. Total operating revenue in fiscal 2016 (June 30 year end; unaudited) was $683 million. Fitch's analysis is based on the consolidated system. The OG includes the hospital and Eisenhower Health Services, and comprised 98% of total consolidated assets and 99% of total consolidated revenues in fiscal 2016.

SUSTAINED SOLID OPERATING CASH FLOW

EMC has consistently maintained solid operating cash flow and in fiscal 2016 performance exceeded budget with a 9.2% operating EBITDA margin. Performance was lower than the prior year, as expected, due to several one time items in fiscal 2015. Solid performance has been driven by continued volume growth especially from its regional growth strategy, which has resulted in the majority of revenue from outpatient versus inpatient activity (59%). Total clinic visits increased 10.3% from the prior year while outpatient surgeries increased 12.8%. Discharges also increased 3.7% from the prior year.

The fiscal 2017 budget (for the OG) is an operating EBITDA margin of 8.1% and is lower than fiscal 2016 due to additional costs related to Epic.

EMC's payor mix is heavily concentrated in Medicare (64.1% of gross patient revenue) in fiscal 2016; however, this has been beneficial related to graduate medical education funding. The residency program (started in July 2013) has been successful and EMC has retained several of the graduates. EMC has programs in internal medicine and family practice and is adding emergency medicine.

CAPITAL SPENDING

Capital spending was very high from fiscal 2007-2011 as the inpatient pavilion was built, and after a period of scaled-back capital, projected capital expenditures for fiscal 2017 is expected to be $77 million (1.6x depreciation expense) due mainly to the investment in Epic. Although the near-term impact of the Epic implementation is expected to be negative, there should be returns over the medium term due to greater operating efficiency especially related to revenue cycle management.

LIGHT LIQUIDITY

Total unrestricted cash and investments at June 30, 2016 was $219.7 million, which equated to 125.2 days cash on hand, 8.1x cushion ratio, and 55.1% cash-to-debt compared to the 'BBB' category medians of 161.2 days, 11.7x, and 90.8%, respectively. Fitch notes that EMC does not benefit from the provider fee program and the provider fee expense depresses the days cash on hand calculation. The provider fee expense has been volatile and totaled $17.5 million in fiscal 2016 compared to $38.9 million in fiscal 2015 and $6.8 million in fiscal 2014.

Days cash on hand for the OG was projected to decline to 91 days at year-end 2016 due to higher than normal capital expenditures, but actual results were 110.3 days. Fitch believes management's fiscal 2017 budgeted unrestricted cash and investments is conservative (90.5 days cash on hand). In addition, management stated that other capital spending can also be scaled back if there are operating pressures.

CONSERVATIVE DEBT PROFILE

Total outstanding debt of the consolidated entity at June 30, 2016 was $399 million and is 100% fixed rate. Fitch used maximum annual debt service of $27.2 million which includes $25.6 million of bonded debt and $1.5 million related to a note payable. Debt service coverage was 2.8x in fiscal 2016, 3.2x in fiscal 2015, and 2.4x in fiscal 2014 compared to the BBB category median of 3x. The proposed refinancing is expected to lower overall MADS to approximately $25.8 million and would improve MADS coverage to 3x in fiscal 2016.

The MTI has a rate covenant of 1.1x and the bond covenant calculation was 2.9x for fiscal 2016.

EMC refinanced its series 1997B bonds with a direct purchase financing with Siemens Public in June 2016. The total par amount is $19.3 million and the final maturity of the fully amortizing loan is 2022. The direct financing documents include non-financial related covenants (i.e. failure to meet reporting requirements) as an event of default (EOD), which Fitch views negatively as the bank would have the right to accelerate the debt as a remedy of an EOD. However, Fitch views the potential acceleration of debt from a financial reporting covenant violation as a remote situation.

DISCLOSURE

EMC covenants to provide annual audits within 150 days of fiscal year end and unaudited quarterly financial statements within 45 days of quarter end for all four quarters to the Municipal Securities Rulemaking Board's EMMA system.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)

https://www.fitchratings.com/site/re/866807

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012766

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012766

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Emily Wong
Senior Director
+1-415-732-5620
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Emily Wong
Senior Director
+1-415-732-5620
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com