Fitch Affirms Eisenhower Medical Center (CA) Revs at 'BBB'; Outlook Remains Negative

NEW YORK--()--Fitch Ratings has affirmed its 'BBB' rating on the following Eisenhower Medical Center, CA (Eisenhower) outstanding debt:

--$110,675,000 California Municipal Finance Authority revenue bonds, series 2010A;

--$262,495,000 Rancho Mirage Joint Powers Financing Authority revenue bonds, series 2007A;

--$27,590,000 Rancho Mirage Joint Powers Financing Authority certificates of participation (COPs), series 1997B.

The Rating Outlook is Negative.

SECURITY

Gross revenue pledge

KEY RATING DRIVERS

ECONOMIC CONDITIONS PRESSURING STABILIZATION: The economic environment has impeded a return to historical inpatient volume levels, which Fitch believes is necessary given Eisenhower's high debt burden. Despite improved financial performance in fiscal 2012, the Rating Outlook remains Negative given Fitch's concern of sustained improvement.

IMPROVED CASH FLOW: Operating cash flow rebounded in fiscal 2012 due mainly to labor saving measures and increased commercial and Medicare rates. Profitability was also aided by the growth of non-acute inpatient programs that are a part of Eisenhower's regional growth strategy. Consequently, Eisenhower posted an improved operating EBITDA margin of 10.5% for fiscal 2012 (draft audit, June 30 year-end), compared to 6.7% in the prior year.

FINANCIAL PROFILE REMAINS WEAK: Despite an improvement in financial performance in fiscal 2012, many of Eisenhower's financial ratios lag Fitch's 'BBB' category medians. For fiscal 2012, Eisenhower had 134 days cash on hand, 37.2% cash to debt, and 2.1x debt service coverage, compared to Fitch's respective 'BBB' category medians of 138.9 days, 82.7%, and 2.8x.

REGIONAL GROWTH STRATEGY: Eisenhower has completed a major expansion and renovation project at its medical center and has also been investing in its regional growth strategy through increased outpatient clinic sites with employed primary care physicians. Eisenhower maintains the leading market position in its service area and Fitch expects these investments to result in benefits over the long-term.

WHAT COULD TRIGGER A RATING ACTION

SUSTAINED IMPROVEMENT IN CASH FLOW: If Eisenhower can sustain its improvement in cash flow and liquidity, a return to Stable Outlook is likely.

CREDIT PROFILE

Improving Cash Flow and Profitability

Profitability and cash flow rebounded in fiscal 2012 as Eisenhower reported an operating EBITDA of $49.5 million, up from $30.3 million in the prior year, but lower than the budgeted $58.5 million. The improvement reflects revenue growth related to newly-introduced non-acute inpatient programs and commercial and Medicare rate increases, and to sizable savings associated with two rounds of labor force reductions. However, profitability was suppressed by declining inpatient revenue due to lower inpatient volumes and by $13.3 million in one-time expenses which included the write-off of a construction project for $6.9 million that has been abandoned and the remaining balance related to net reserves for potential unfavorable settlements.

Flagging Inpatient Volumes Pressure Profitability

For the second year in a row, inpatient volumes were lower than budgeted, which blunted inpatient revenue growth and pressured profitability. With the 2011 opening of several outpatient clinics, management had projected inpatient volumes to surge upward and for profitability to return to more historical levels. Management indicated that the volume decline is due to the economic environment and that average daily census in fiscal 2012 was at the lowest level in the last five years. Given Eisenhower's significant capital investment in the expansion and renovation of its inpatient facilities, a return of inpatient volume will be necessary to generate cash flow to cover its high debt burden.

Fiscal 2013 Budget

The fiscal 2013 budget projects an operating EBITDA of $55.5 million. The budget reflects higher revenue growth due to management's regional growth strategy and increased commercial and Medicare rate increases and assumes no growth in inpatient volumes. Not included in the budget are management's ongoing initiatives to enhance profitability. These initiatives include improvements to coding, billing, and revenue cycle management; productivity and through-put enhancements; and evaluating financial benefit of expanding new programs and service lines.

Weak Financial Profile

Eisenhower's balance sheet grew in fiscal 2012 as a result of improved cash flow as unrestricted cash and investments of $155.2 million at June 30, 2012 equated to 134 days cash on hand, up from 105.7 at prior year end. Cash to debt of 37.2% remains thin and is significantly below 'BBB' category median ratio of 82.7%. Further growth in liquidity is expected due to continued improvement in cash flow, limited capital needs, and approximately $40 million of outstanding pledges that should be received over the next five years.

Eisenhower's debt burden is high with maximum annual debt service (MADS) comprising 5.4% of total revenue in fiscal 2012. MADS coverage of 2.1x by 2012 EBITDA is weak and is below Fitch's 'BBB' category median of 2.8x. Eisenhower has $418 million of debt outstanding, which is 100% fixed rate.

Minimal Capital Needs

Capital spending ebbed significantly in fiscal 2012 after a period of heavy capital investments that were driven primarily by the state's seismic safety requirements and the desire for added inpatient bed capacity. Total capital spending fell to $16.4 million in fiscal 2012 (24% of depreciation expense) from $95.4 million in fiscal 2011 (190% of depreciation expense). Capital spending in fiscal 2013 is projected at $25.5 million. Fitch believes that much lower capital spending levels should help replenish the balance sheet strength.

Strong Philanthropy

Eisenhower has enjoyed a history of strong philanthropic support, which has funded approximately half of its capital plan. There is $39.7 million of pledges outstanding, which should also replenish the balance sheet.

Negative Outlook

The maintenance of the Negative Outlook reflects Fitch's concerns over Eisenhower's ability to sustain improved operating cash flow especially with pressure on inpatient volume. The ability to sustain its improved operating cash flow trend would likely return the Outlook to Stable.

About the Organization

Eisenhower is a 542 licensed bed community hospital located in Rancho Mirage, CA (near Palm Springs), approximately 120 miles east of Los Angeles and 120 miles northeast of San Diego. Total operating revenue in fiscal 2012 was $473 million. Fitch's analysis is based on the consolidated system. The obligated group is made up of the hospital and Eisenhower Health Services. The obligated group comprised 95% of total consolidated assets and 98.2% of total consolidated revenues in fiscal 2012. Eisenhower covenants to provide audited and quarterly unaudited financial and operating statements through the Municipal Securities Rulemaking Board's EMMA system.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 12, 2012;

--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418

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Contacts

Fitch Ratings
Primary Analyst
Michael Borgani, +1 415-732-5620
Director
Fitch, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Emily Wong, +1 212-908-0651
Senior Director
or
Committee Chairperson
Jim LeBuhn, +1 312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Michael Borgani, +1 415-732-5620
Director
Fitch, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Emily Wong, +1 212-908-0651
Senior Director
or
Committee Chairperson
Jim LeBuhn, +1 312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com