NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded to 'A' from 'BBB' the underlying rating on the $17,300,000 California Municipal Finance Authority revenue bonds, series 2006, issued on behalf of the Cancer Foundation of Santa Barbara (CFSB), formerly the Cancer Center of Santa Barbara.
The bonds are insured by Radian Asset Assurance, Inc., which Fitch does not rate.
The Rating Outlook is Stable.
The series 2006 bonds are secured by a gross revenue pledge of CFSB. A fully funded debt service reserve fund and a supplemental bond reserve fund established in 2012 provide additional security for bondholders.
KEY RATING DRIVERS
STRONG BALANCE SHEET: The rating upgrade to 'A' is driven by CFSB's significantly improved overall balance sheet position compared to its limited exposure to operating risk as a foundation, producing a healthy level of funds available for debt service and other expenditures. In addition, $10 million of additional funds are set aside in a trustee-held account as supplemental funds to support payment of debt service on the series 2006 bonds.
SOUND OPERATING PROFILE: Operating risk was significantly reduced as CFSB transferred all of its clinical activities to Sansum Clinic. Total operating expenses declined from $12.9 million in 2012 to $5.5 million in 2013, 75.9% of which were attributable to grants, interest payments, and depreciation and amortization.
SUCCESSFUL TRANSITION TO A FOUNDATION: CFSB kicked off its first full year operating as a foundation with one of its biggest fundraising years yet. While management projects contributions levels to normalize, CFSB's initial success is viewed favorably.
STABILITY EXPECTED: Based on CFSB's historically stable balance sheet and fundraising history, as well as limited demand for capital in the near term, Fitch believes there is stability at the 'A' rating. While unanticipated, material decline in investment market performance may pressure the rating.
The Cancer Foundation of Santa Barbara was established in September 2012 following the affiliation agreement between the Cancer Center of Santa Barbara (Cancer Center) and Sansum Clinic. As part of the agreement, the clinical operations of the Cancer Center moved under Sansum Clinic as the 'Cancer Center of Santa Barbara with Sansum Clinic', and the organization changed its name to the Cancer Foundation of Santa Barbara.
Post-reorganization, CFSB primarily operates an endowment to support the Cancer Center of Santa Barbara at Sansum Clinic, funding certain expenses for services rendered at the Cancer Center including social services, community health programs, wellness programs, charity care, and research. Given recent changes, fiscal 2013 will be the first year with audited financial statements reflecting a full year of full foundation operations. Fitch's review is based on unaudited financial statements ended Dec. 31, 2013.
Robust Balance Sheet Resources Available to Support Debt Burden
The primary credit factor supporting the 'A' rating reflects CFSB's liquidity metrics, which strengthened from significantly reduced exposure to operating risk. Available funds (defined as cash and investments not permanently restricted) of $47.6 million at Dec. 31, 2013 equated to 830% of operating expenses and 278.1% of long-term debt. Furthermore, net income available for debt service covered maximum annual debt service by 2.9x.
In addition, as a condition of Radian's consent to the terms of the affiliation, CFSB deposited $10 million with the bond trustee, to be used exclusively to make up any deficiencies in the debt service accounts. Permitted investments in this account are limited to fixed income mutual funds of high liquidity and credit quality. The supplemental reserve fund alone compares favorably to the total debt outstanding of $17.1 million (approximately 58% of outstanding debt).
CFSB's debt portfolio is modest and conservative, and consists of $17.1 in million fixed rate bonds with a level debt service of $1.3 million. While there is some capital planning underway, management has indicated that the 2006 bonds not covered by the reserve fund will be funded by additional allocations of unrestricted funds prior to the initiation of any building project. In addition, transfers to support the Cancer Center are limited based on CFSB's ability to meet debt service covenants.
Stable Financial and Operating Profiles
CFSB kicked off its first full year operating as a foundation with its best fundraising year in a decade. Contributions totaled $4.6 million in fiscal 2013 compared to an average of $1.9 million in four prior fiscal years. In 2014, management is budgeting a fundraising target of $2.6 million and expects to provide $2.8 million in support to the Cancer Center.
As an additional condition to Radian's consent, Sansum Clinic makes lease payments (which approximate debt service requirements) to the bond trustee. While debt service is secured by the gross revenues of CFSB, the lease payments alone are sufficient to cover debt service. For fiscal 2013, Sansum Clinic posted an operating margin of 1.2% on total operating revenues of $223.2 million.
Cancer Foundation of Santa Barbara has covenanted to provide annual disclosure within five months of fiscal year end.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 3, 2013;
--'U.S. Nonprofit Institutions Rating Criteria', dated June 7, 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Institutions Rating Criteria