SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to the approximately $675,000,000 California Health Facilities Financing Authority revenue (series 2016A; $275 million) and refunding revenue bonds (series 2016B; $400 million) issued on behalf of Cedars-Sinai Medical Center (CSMC). In addition, Fitch affirms the 'AA-' rating on CSMC's outstanding debt, which is listed at the end of the press release.
The Rating Outlook is Stable.
The series 2016A&B bonds will be fixed rate. Proceeds of the series 2016A bonds will be used to finance or reimburse for the cost of acquiring an administrative office building where CSMC currently leases approximately 85% of the space. Proceeds of the series 2016B bonds will be used to advance refund the majority of the outstanding series 2009 bonds. Pro forma maximum annual debt service (MADS) of $80.1 million will increase from the current $70.6 million. The series 2016A&B bonds are expected to price the week of Oct. 24.
SECURITY
The bonds are secured by a gross revenue pledge of CSMC, which is the only member of the obligated group (OG).
KEY RATING DRIVERS
SUSTAINED STRONG PROFITABILITY: CSMC's operating performance continues to be consistently strong and, despite the issuance of additional debt, the debt burden remains manageable. CSMC ended fiscal 2016 (June 30 year-end) with operating income of $334.5 million, equal to respective operating and operating EBITDA margins of 9.1% and 14.6%, both exceeding Fitch's 'AA' medians.
GOOD MARKET POSITION: CSMC benefits from its position as an academic medical center, which provides quaternary services and has a focus on translational research that has led to a strong philanthropic track record. The organization also has a growing outpatient and physician network and acquired a community hospital - Marina Del Rey Hospital (MDRH; not part of the OG) as of September 2015.
MODERATE LEVERAGE: Even with the additional debt, leverage metrics remain manageable. MADS accounted for 2.2% of total revenue and pro forma debt service coverage is strong at 7x in fiscal 2016. The debt profile is conservative with 100% fixed rate and no swaps. There are no major capital needs.
GROWING LIQUIDITY: While liquidity has historically been lower than Fitch's 'AA' category, unrestricted cash and investments have grown significantly and totaled $1.9 billion at June 30, 2016, translating to days cash on hand (DCOH) and cash-to-debt of 218.8 and 193.9%, respectively, compared to 185.1 and 101.6%, at fiscal year-end 2012.
COMPETITIVE MARKET: CSMC operates in the highly competitive and fragmented Los Angeles market with a number of providers competing for the high-end tertiary and quaternary services. CSMC has various payor arrangements to align goals in improving quality and reducing costs.
RATING SENSITIVITIES
CONTINUED STRONG PERFORMANCE: Fitch expects Cedars-Sinai Medical Center to maintain its current operating performance and continue to capitalize on the qualitative strengths of the organization. With modest future capital needs and strong cash flow from operations, liquidity is expected to improve further.
CREDIT PROFILE
CSMC is an academic medical center with 886 licensed beds located in Los Angeles. CSMC is affiliated with a medical foundation with approximately 1,200 physicians that manages approximately 42,800 commercial and senior managed care capitated lives.
Effective Sept. 1, 2015, CSMC acquired the 145-licensed bed Marina Del Rey Hospital (MDRH) and adjacent medical office building located in Marina Del Rey from a for-profit owner. The hospital was converted to not-for-profit status and is operated as a division of CSMC. Through the 10 months ended June 30, 2016, performance has been in line with management's expectations.
Total revenue for the consolidated entity was $3.68 billion in fiscal 2016. CSMC is the only member of the OG, which accounted for 96% of total assets and 89% of total revenue of the consolidated entity in fiscal 2016. Fitch's analysis is based on the consolidated entity.
Series 2016 Plan of Finance
The series 2016A bonds are expected to generate $320 million (including bond premium) of new money to fund or reimburse the cost of acquiring an administrative office building. The additional debt issuance was not expected, but the opportunity to purchase the building arose and there should be expense savings, as CSMC currently pays annual rent expense of approximately $14 million. CSMC currently leases approximately 85% of the building and will be able to consolidate other support functions while gaining additional clinical capacity, as those administrative functions can move to the administrative office building when CSMC occupies the remainder of the building.
The series 2016B bonds will advance refund the majority of the series 2009 bonds. The remaining par amount of the series 2009 bonds is expected to be $25.3 million. The net present value savings is estimated at 11% of refunded par.
Sustained Strong Financial Results
CSMC has continued to produce profitability metrics favorable to Fitch's 'AA' medians. Operating EBITDA margins were 14.6% in fiscal 2016, 16.2% in fiscal 2015, 16.3% in fiscal 2014 and 17.8% in fiscal 2013. Strong performance continues to be driven by good volume growth, increase in acuity, and increases in payer contracts. CSMC's Medicare case mix index is 2.2 in fiscal 2016 compared to 1.7 in fiscal 2012.
Growing Liquidity
Unrestricted cash and investments have grown despite unrealized losses in fiscals 2015 and 2016. Unrestricted cash investments totaled $1.9 billion at June 30, 2016, compared to $1.7 billion at June 30, 2014 and $1.2 billion at June 30, 2012.
At June 30, 2016, the funded status of CSMC's defined benefit plan dropped to 78% due to a decline in the discount rate. In September 2016, CSMC made an additional $55 million contribution to its defined benefit pension plan to bring the plan to 90% funded status, which Fitch views favorably.
CSMC's DCOH figure is depressed due to the hospital provider fee program. CSMC records roughly about an equal amount of hospital provider fee revenue as hospital provider fee expense. The provider fee expense totaled $78 million in fiscal 2016 and $148 million in fiscal 2015 and drives the expense base higher even though the program is essentially neutral.
CSMC has significant fundraising capabilities given its teaching and research mission as well as its reputation and community support. CSMC is currently in a capital campaign to raise $600 million by fiscal 2018 and has raised over $400 million to date. CSMC maintains restricted funds for research activities that totaled $219.3 million and program endowment funds of $252.8 million at June 30, 2016.
Manageable Capital Plans
CSMC completed its last major capital project, the Advanced Health Sciences Pavilion, in 2013, an 11-story building that houses specialty outpatient care as well as research. The organization has been making investments in the facility, which is seismically compliant to 2030, and there are no major future capital needs. The capital budget for fiscal 2017 totals $245 million, which is about 1.5x depreciation expense and is flexible.
MDRH does not have any significant capital needs in the near term and the facility is seismically compliant to 2030.
Market Leader in Competitive Environment
CSMC maintains a leading market share in its primary service area, despite facing strong competition from several highly regarded and reputable academic centers and healthcare systems in the greater Los Angeles area. CSMC's PSA accounts for 75% of discharges and has a population of 5.1 million in the LA area. There are seven hospitals that CSMC considers as key competitors - Ronald Reagan UCLA Medical Center, Santa Monica - UCLA Medical Center and Orthopedic Hospital, Children's Hospital of Los Angeles, Providence Saint John's Health Center, Los Angeles County USC Medical Center, Keck Medical Center of USC, and USC Kenneth Norris Jr. Cancer Hospital. CSMC has the leading market position compared to these competitors with 4.9% market share in 2015 compared to the next leading position of 2.9% held by Los Angeles County - USC Medical Center.
CSMC has several payer arrangements in place that have aligned goals to improve quality and reduce costs. Case and utilization management is supported by programs that improve clinical efficiency as well as by information technology. Results to date have been a reduction in length of stay, avoidable admissions, and costs.
CSMC is one of seven hospitals in the Los Angeles area that are part of Vivity - a joint venture with Anthem Blue Cross which offers a health maintenance organization plan intended to align care delivery and in which the providers and the insurer will share financial risk and gain. CSMC has a highly aligned physician-hospital platform facilitated through its foundation, which is affiliated with over 1,200 physicians who practice in CSMC's service area and CSMC operates the largest heart transplant program in the world.
Debt Profile
CSMC's debt profile is conservative and is 100% fixed rate with no swaps. Total outstanding debt after the series 2016 issuance is expected to be approximately $1.2 billion. The aggregate debt service schedule is fairly level and pro forma MADS increases to $80.1 million from the current $70.6 million.
Pro forma debt service coverage is strong at 7x in fiscal 2016, 7.5x in fiscal 2015, and 6.5x in fiscal 2014.
Disclosure
CSMC covenants to provide annual audited financial statements and other continuing disclosures within 150 days of fiscal year end, quarterly statements for the first three quarters within 45 days of quarter end, and quarterly statements for the fourth quarter within 90 days of quarter end, to EMMA.
Outstanding debt affirmed at 'AA-':
--$370,220,000 California Health Facilities Financing Authority (CA) (Cedars-Sinai Medical Center) refunding revenue bonds series 2015;
--$86,750,000 California Health Facilities Financing Authority (CA) (Cedars-Sinai Medical Center) refunding revenue bonds series 2011;
--$417,905,000 California Health Facilities Financing Authority (CA) (Cedars-Sinai Medical Center) revenue bonds series 2009
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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013298
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https://www.fitchratings.com/regulatory
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