SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the respective ratings on the following revenue bonds issued by or on behalf of Memorial Health Services (MemorialCare), California:
--$100,000,000, Memorial Health Services, Taxable Bonds, Series 2012 at 'AA-'
--$184,093,000 California Health Facilities Financing Authority, Memorial Health Services, Revenue Bonds, Series 2012A at 'AA-';
--$64,800,000 California Health Facilities Financing Authority variable-rate health facility revenue refunding bonds, series 1994 at 'AA-/F1+';
--$65,000,000 City of Long Beach, California, variable-rate health facility revenue bonds, series 1991 at 'AA-/F1+'.
The F1+ rating is based on MemorialCare's self-liquidity.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a gross revenue pledge of the obligated group.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: MemorialCare's profile shows excellent liquidity, very good profitability, and a manageable debt burden.
EXCELLENT MANAGEMENT PRACTICES: Fitch believes MemorialCare's history of consistently strong financial performance is a reflection of the team's strong management practices and successful initiatives in a highly competitive environment.
STRIDENT MOVES TOWARD HEALTHCARE REFORM READINESS: Having grown its market share through strategic physician acquisitions and affiliations, MemorialCare is acquiring a Knox-Keene license and is partnering with commercial payors and other providers in order to participate in the insurance exchange markets and compete in the managed care arena.
COMPETITIVE MARKET: MemorialCare operates in the highly competitive Los Angeles and Orange County market with a number of health systems as well as independent providers as competitors.
RATING SENSITIVITIES
UNCERTAIN ENVIRONMENT: Despite MemorialCare's very strong financial profile, upward rating movement is limited at this time given the expectation of a more difficult operating environment. However, Fitch believes that MemorialCare's current financial position provides flexibility at the current rating level to absorb any negative impact related to healthcare reform and to react to uncertainties surrounding a reduced reimbursement environment.
CREDIT PROFILE
STRONG OVERALL FINANCIAL PROFILE
MemorialCare's profitability over the last four fiscal years has been consistently strong and remains above Fitch's medians for the 'AA' category. MemorialCare's robust profitability reflects favorable commercial contracts, good patient volume growth, and strong cost control vigilance. Liquidity is excellent as the balance sheet has benefited from strong cash flow generation. Fitch continues to believe that MemorialCare's success is a result of strong management practices that leverage MemorialCare's operating platform to enhance efficiency and lower the overall cost of providing healthcare at its facilities, all while improving outcomes and quality.
Financial results for fiscal 2012 show a very good 4.0% operating and 8.8% operating EBITDA margin, compared to Fitch's 'AA' medians of 4.0% and 10.6%, respectively. However, Fitch notes that similar to many California hospitals, MemorialCare was a net beneficiary under the California provider fee program, receiving a net benefit of $15.1 million in FY 2012. Absent receipt of these revenues, MemorialCare's operating and operating EBITDA margins would have been 3.4% and 8.5%, respectively.
Good operating performance continued through the interim period (six months ended Dec. 30, 2012) with a 5.3% operating margin and 9.9% operating EBITDA margin. Interim results are for the obligated group only compared to audited fiscal year results, which are for the system. MemorialCare's fiscal 2013 budget is conservative with an operating margin of 2.6% for the obligated group.
MemorialCare's balance sheet has benefited from strong cash flow generation, growing profitability, and receipt of $15.1 and $77.1 million in net California provider fee revenues in fiscals 2012 and 2011, respectively. Total unrestricted cash and investments for the obligated group was $1.1 billion at Dec. 31, 2012, which resulted in 271.9 days cash on hand, 32.1x cushion ratio, and 217.1% cash to debt, compared to Fitch's respective 'AA' category medians of 241.1 days, 24.1x, and 169.4%.
HEALTHCARE REFORM READINESS
Fitch views management's actions to date positively as MemorialCare has invested heavily on strategic physician acquisitions, is building its IT infrastructure, and is growing key service lines in its market area. In preparation for entry into the healthcare exchange markets, MemorialCare is acquiring a Knox Keene license and is also in discussions with other providers and commercial payors as it aims to strengthen its competitive edge in the managed care arena and manage population health.
Having made strong investments in its physician alignment strategy, MemorialCare has a strong base of affiliated physicians, which should allow it to better coordinate care and deliver care in the most cost effective setting. Fitch believes that the organization's strategic moves to date bode well for its competitive position and should position MemorialCare well in a lower and pressured reimbursement environment.
COMPETITIVE SERVICE AREA
MemorialCare operates five acute-care hospitals in the densely populated Los Angeles and Orange counties. Long Beach Memorial Medical Center expanded its leading market share in its service area to 12.1% in 2011 from 10.2% in 2010 compared to its closest competitor Torrance Memorial which remained relatively flat at 10.1%. Orange Coast Memorial Medical Center had the third market position in its service area with 9.2% compared to Hoag Memorial with 15.3%. Saddleback Memorial Medical Center had the second market position in its service area with 24.7% compared to Mission Hospital (part of St. Joseph Health System rated AA-) with 27%. The market has been consolidating and the impact of the St. Joseph Health System and Hoag merger will be monitored.
MANAGEABLE CAPITAL PLAN
Capital spending on MemorialCare's 10-year (2013 - 2022) capital plan totals $1.2 billion, having been revised downward considerably due to revised seismic regulations. The capital plan funds several expansion projects at MemorialCare's various campuses, IT needs, seismic compliance projects, and routine maintenance. Fitch believes MemorialCare's strong cash flow generation allows it to fund its capital plan from operations while maintaining a strong balance sheet.
CONSERVATIVE DEBT PROFILE
Total outstanding debt is $507.4 million and Memorial's debt burden is manageable. MemorialCare's debt portfolio is 75% fixed rate and 25% variable rate and its debt structure has three bullet maturities ($65 million series 1991 variable rate demand bonds (VRDBs) in fiscal 2017, $100 million direct bank loan in fiscal 2019 and $100 million taxable bonds in fiscal 2022). Fitch believes MemorialCare has good market access and excellent liquidity to handle the bullet maturities.
Debt ratios are moderate with MADS comprising 2.2% of total revenue compared to Fitch's AA category median of 2.5%. MADS coverage is solid due to strong cash flow at 5.3x through the interim period and 3.6x in fiscal 2012 (without the provider fee benefit).
F1+ RATING
The affirmation of the 'F1+' short-term rating is supported by the adequacy of MemorialCare's highly liquid resources available to fund any unremarketed puts on the $129.8 million series 1991 and series 1994 weekly VRDBs. Based on Fitch's rating criteria related to self-liquidity, MemorialCare's position of eligible cash and investments available for same-day settlement easily exceeds Fitch's 1.25x requirement to cover the maximum tender exposure on any given date. MemorialCare has liquidation procedures in place detailing the process by which internal funds would be liquidated to meet the tender obligations.
STABLE OUTLOOK
The Stable Outlook reflects Fitch's expectation that MemorialCare's strong financial profile provides flexibility and cushion as the industry moves toward a more uncertain reimbursement environment.
ABOUT THE ORGANIZATION
MemorialCare is comprised of Long Beach Memorial Medical Center (includes Miller Children's Hospital Long Beach and Community Hospital Long Beach), Orange Coast Memorial Medical Center, and Saddleback Memorial Medical Center, as well as other healthcare related entities. Total revenue in fiscal 2012 (June 30 year end) was $1.8 billion. MemorialCare covenants to provide annual and quarterly financial statements through EMMA.
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);
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 15, 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
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681822
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