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

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'BBB' rating on Eisenhower Medical Center, CA's (EMC) outstanding debt, which is listed at the end of the press release.

The Rating Outlook is revised to Stable from Negative.

SECURITY

Gross revenue pledge of the obligated group (OG).

KEY RATING DRIVERS

IMPROVED CASH FLOW: The revision of the Outlook to Stable from Negative reflects EMC's continued improvement in financial performance, and fiscal 2013 (June 30 year end) performance was in line with budget. Cash flow has improved due to volume growth driven by its physician alignment initiatives as well as investment in its outpatient network.

NEW PHYSICAL PLANT: EMC has invested significantly in its plant with the construction of two patient pavilions that not only addressed the state's seismic retrofit requirements but also the hospital's capacity issue during its peak months as volume is seasonal. Major capital needs are limited to the renovation of the oldest part of its facility, the Ike Wing, and this project is expected to be fully funded by philanthropic support, which has been historically solid. EMC's projected capital spending is manageable.

REGIONAL GROWTH STRATEGY: EMC has also invested significantly in its regional growth strategy by aligning with physicians and growing its outpatient network. EMC has over 100 employed physicians with a focus on expanding its primary care base. In addition, EMC is affiliated with major specialty groups including Desert Orthopedics and Desert Cardiology. Volume increased in fiscal 2013 from the prior year with discharges up 3.6%, surgeries up 4.6% and clinic visits up by 45%. EMC has a leading market position in its service area and market share is expected to further increase given the volume trends.

WEAK FINANCIAL PROFILE: Despite the improved performance in fiscal 2013, EMC's overall financial profile is still weak for its rating level with low liquidity, negative margins, and high debt burden. EMC's fiscal 2014 budget is fairly aggressive and relies on revenue growth to further improve cash flow. The ability to meet these targets will be key to maintaining the current rating.

RATING SENSITIVITIES

CONTINUED IMPROVEMENT IN CASH FLOW: The inability to maintain the trajectory of improved cash flow would likely lead to negative rating pressure as there is little cushion at its current rating level for a deviation in performance.

CREDIT PROFILE

EMC is a 476 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 2013 (June 30 year end; unaudited) was $482 million. Fitch's analysis is based on the consolidated system. The OG includes the hospital and Eisenhower Health Services. The OG comprised 94.7% of total consolidated assets and 98.3% of total consolidated revenues in fiscal 2013.

Improving Cash Flow But Still Negative Margins

EMC met its budget in fiscal 2013 and ended the year with an operating income of negative $22.4 million (negative 4.6% operating margin) and an 11.6% operating EBITDA margin compared to the prior year with negative $38.9 million operating income (negative 8.6% operating margin) and 9.4% operating EBITDA margin. This was the second year of continued improvement in cash flow after the drop off in performance in fiscal 2011 due to its heavy investment in plant and regional growth strategy. Fiscal 2013's performance improvement is encouraging as the benefits from its strategic initiatives are beginning to be realized through increased volume and a continuation of this trend is key to maintaining the current rating.

Fiscal 2014 Budget

The fiscal 2014 budget (OG) has an aggressive revenue target with an expected 13.5% increase in net patient revenue. Growth is expected from its Desert Cancer Care acquisition, managed care rate increases, new physician clinics, and graduate medical education funding from its new residency program. The fiscal 2014 operating income budget (OG) is negative $8.5 million, which results in a negative 1.5% operating margin and 11.2% operating EBITDA margin.

Weak Liquidity But No Significant Demands on Liquidity

Total unrestricted cash and investments at June 30, 2013 was $150 million, which equated to 121.9 days cash on hand and 36% cash to debt compared to 131.8 days and 37.2% the prior year. The consolidated interim statements do not include the provider fee (zero net benefit) so audited system results will likely result in a slightly lower days cash on hand. Liquidity has dropped from prior year levels due to an increase in accounts receivable as the organization decided to bring revenue cycle in house versus outsourcing. Fitch expects accounts receivable to drop to more normal levels by the end of fiscal 2014. Liquidity measures compare unfavorably to the BBB category medians; however, there are no major demands on liquidity with 100% fixed rate debt and manageable capital needs going forward.

Manageable Capital Plans and Historically Strong Philanthropy

With a virtually new plant, capital spending has eased significantly over the last two years with total capital expenditures of $28.9 million in fiscal 2013 (52% of depreciation) and $16.4 million in fiscal 2012 compared to $95.3 million in fiscal 2011 and $165.9 million in fiscal 2010. EMC's three-year capital plan includes the Ike Wing seismic retrofit, continued investments in the clinic division and information technology as well as routine capital needs. The projected capital spend is $30.5 million in fiscal 2014, $26.8 million in fiscal 2015, and $32.5 million in fiscal 2016, with some of the capital funded from philanthropy. EMC has enjoyed a history of strong philanthropic support, which has funded approximately half of its major building project.

High Debt Burden But Conservative Debt Profile

Total outstanding debt at June 30, 2013 was $417 million and is 100% fixed rate. EMC's debt burden is high with maximum annual debt service (MADS) comprising 5.3% of total revenue in fiscal 2013 but has steadily declined from 7% in fiscal 2009. MADS coverage by EBITDA in fiscal 2013 is improved at 2.3x compared to 1.9x the prior year but still below Fitch's 'BBB' category median of 3.1x.

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.

Outstanding Debt:

--$110,675,000 California Municipal Finance Authority (CA) (Eisenhower Medical Center) revenue bonds series 2010A;

--$262,495,000 Rancho Mirage Joint Powers Financing Authority (CA) (Eisenhower Medical Center) revenue bonds series 2007A;

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

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=805057

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Contacts

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

Sharing

Contacts

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