SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the respective 'AA-' and 'AA-/F1+' ratings on Scripps Health's outstanding debt, which is listed at the end of the press release.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a gross revenue pledge of Scripps Health, the obligated group (OG). The OG accounted for 99% of total assets and 97% of total revenue of the consolidated entity in fiscal 2013 (Sept. 30 year end). Fitch's analysis is based on the consolidated entity.
KEY RATING DRIVERS
CONSISTENT STRONG FINANCIAL PERFORMANCE: Scripps Health's operating performance is characterized by a very strong track record of meeting targets and producing strong profitability. This has led to improved liquidity despite robust capital spending that has been moderately financed by debt. All financial metrics compare favorably to Fitch's AA category median ratios.
EXCELLENT MANAGEMENT PRACTICES: Fitch believes Scripps Health's history of consistently strong financial performance is a reflection of a strong management team that has focused on enhancing productivity, investing in infrastructure, expanding operations, and maintaining cost control vigilance. Scripps Health has also been proactive in changing the care design model and plans to move to more risk adjusted reimbursement beginning in 2014.
GOOD MARKET FOOTPRINT: In addition to its four hospitals in San Diego County, Scripps Health has an extensive ambulatory network, aligned physician base, as well as a growing health plan division. Fitch views this favorably especially due to the competitive service area. Key competitors include Sharp HealthCare, Kaiser, and University of California San Diego Medical Center.
HEALTHY CAPITAL PLAN: Scripps Health's capital spending has been robust and major capital projects include the Prebys Cardiovascular Institute, electronic medical record, and continued ambulatory expansion. Current projects are under budget and ahead of schedule. Scripps Health's six-year capital plan is still healthy at $1.83 billion. However, management indicated that only $796 million is committed to date and capital spending is always balanced against financial performance and available cash flow for capital investments.
STRONG INTERNAL LIQUIDITY: The 'F1+' rating on the series 2012B and C variable-rate demand bonds (VRDBs) is based on internal liquidity, and reflects both the Scripps Health long-term credit quality, as well as its strong position of eligible cash and investments.
RATING SENSITIVITIES
AMPLE FINANCIAL CUSHION: Fitch believes that Scripps Health's strong financial position provides significant flexibility at its current rating level as it implements its initiatives to move to a medical management model from a utilization management model. The goals of its medical management model are to improve quality, reduce costs, minimize variation, eliminate waste, and improve access. Fitch believes that there could be upward rating movement if Scripps Health successfully executes its strategic plan and maintains its strong financial profile.
CREDIT PROFILE
Scripps Health is a regional health system located in San Diego County, CA. The system is comprised of four hospitals on five campuses (1,397 licensed beds), the medical foundation with various medical groups that have almost 700 physicians including Scripps Clinic Medical Group, an extensive ambulatory network, as well as a health plan. Total operating revenue in fiscal 2013 was $2.6 billion.
Consistently Strong Operating Performance
Profitability remains very strong, exceeding Fitch's 'AA' category medians. Scripps Health reported $192 million in operating income for fiscal 2013, translating into an exceptional 7.3% operating margin compared to Fitch's 'AA' category median (4.2%). Operating margin for fiscal 2012 was also very strong at 9.1%.
Scripps Health's management team has consistently exceeded budgeted targets due to strong financial discipline with the identification of performance improvement initiatives annually that are necessary to achieve targeted operating performance. These areas of focus include labor productivity and supply cost savings. Scripps Health did benefit from the receipt of meaningful use funds in fiscal 2013 that totaled $21 million as well as the ongoing net benefit from the California provider fee program, which began in January 2010 (retroactive to April 1, 2009). The program has been recently extended through December 2016, but is still awaiting CMS approval. The net benefit from the provider fee totaled $22.6 million in fiscal 2011, $43.2 million in fiscal 2012, and $8.7 million in fiscal 2013.
Scripps Health's fiscal 2014 budget is for a 5.3% operating margin ($131.8 million operating income) and 10% operating EBITDA margin. Through the three months ended Dec. 31, 2013, Scripps Health is ahead of budget with a 7.2% operating margin and 11.4% operating EBITDA margin.
Good Market Footprint
Fitch views Scripps Health's market footprint favorably especially given the competitive service area. Scripps Health has continued to make investments in physician groups and ambulatory clinics in its service area. Market share did decline slightly to 24.5% in 2012 from 25.1% in 2010 due to the shift of interventional cardiology volume from inpatient to outpatient. However, Scripps Health maintains the second leading market share in the service area.
Scripps Health competes against Sharp HealthCare (28.6% market share), Kaiser Permanente (10.2% market share; rated 'A+' by Fitch), University of California San Diego Medical Center (9.6% market share), Palomar Health (8.9% market share; rated 'BB+' by Fitch), and several other independent community hospitals.
Healthcare Reform Preparedness
Fitch views management's actions to date positively as Scripps Health has launched several initiatives to transform its healthcare delivery platform. These efforts leverage the organization's strategic infrastructure and investments to bend the cost curve, standardize care and medical management, improve quality outcomes, and manage population health.
The organization has transitioned its commercial HMO contracts from fee for service to risk adjusted global capitation beginning in 2014, which currently total 67,000 commercial lives. In addition to its Medicare Advantage plans, covered lives total 96,000. Fitch believes Scripps Health should be successful under this payment methodology given its experience to date with capitation as well as the level of physician engagement in the organization.
Strong Cash Flow Generation Builds Balance Sheet
Scripps Health's liquidity continues to grow due to strong cash flow, good investment returns, and monitoring of capital spending within available cash flow. Unrestricted cash and investments totaled approximately $2.2 billion at Dec. 31, 2013. This equates to 338.6 days cash in hand, a 46.9x cushion ratio, and 248.1% cash to debt, compared to Fitch's respective 'AA' category medians of 254.3 days, 23.4x, and 173.6%.
Scripps Health recently revised its asset allocation policy to 27.5% domestic equities, 17.5% international equities, 27.5% fixed income, 22.5% hedge funds, and 5% real assets. The investment portfolio is liquid with 61% available daily and 75% available weekly.
Healthy Capital Plan
Scripps Health has several major capital projects under construction, including Scripps Prebys Cardiovascular Institute and Scripps Clinic Medical Pavilion in La Jolla and Scripps Encinitas Critical Care Building. The Prebys building is expected to open in March 2015 and the adjoining medical office building will open April 2016. The critical care building in Encinitas is expected to open in June 2014. Philanthropy has continued to be a source of funds for capital and these three projects have raised $156 million to date.
Scripps Health's fiscal 2014-2019 capital plan totals $1.8 billion and includes the remaining spend of the major capital projects, IT, and ambulatory expansion. Projected capital spending by year is $399 million in fiscal 2014, $395 million in fiscal 2015, $288 million in fiscal 2016, and $250 million a year in fiscal 2017-2019. Management reiterated that capital spending will be flexed according to available funding sources. There are no additional debt plans.
Manageable Debt Burden
Scripps Health's debt burden remains manageable. Debt service is level and MADS is approximately $46 million. MADS comprised only 1.8% of total revenue in fiscal 2013 compared to Fitch's AA category median of 2.6%. MADS coverage is very strong at 8.7x in fiscal 2013 and 8x in fiscal 2012 and was 12x through the three months ended Dec. 31, 2013.
Scripps Health has $847 million in outstanding revenue bonds and the capital structure remains somewhat aggressive with 54% ($459 million) in underlying VRDBs, which exposes Scripps Health to renewal, remarketing and put risks. The letter of credit (LOC) banks are diversified and the expiration dates are staggered. In addition, Fitch believes Scripps Health's good liquidity position mitigates some of the capital structure risk.
Including its fixed payer swaps, Scripps Health's debt mix is 64% fixed rate and 36% variable rate. The collateral posting threshold is $60 million and the current negative mark to market valuation was $19.1 million as of Sept. 30, 2013.
The affirmation of the 'F1+' short-term rating is supported by the adequacy of Scripps Health's highly liquid resources available to fund any unremarketed puts on the $100 million series 2012B&C weekly VRDBs. Based on Fitch's rating criteria related to self-liquidity, Scripps Health'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.
Disclosure
Scripps Health has covenanted to provide annual and quarterly disclosure through the Municipal Rule Making Board's EMMA system.
Fitch has affirmed the following outstanding debt for Scripps Health listed below:
California Health Facilities Financing Authority (CA)
--$40,000,000 hospital revenue variable-rate bonds series 2012C at 'AA-/F1+';
--$60,000,000 hospital revenue variable-rate bonds series 2012B at 'AA-/F1+';
--$175,000,000 hospital revenue bonds series 2012A at 'AA-';
--Hospital revenue variable-rate bonds series 2010C (Bank Bonds) at 'AA-';
--$40,000,000 hospital revenue variable-rate bonds series 2010C (LOC: Northern Trust Company (The)) at 'AA-';
--$60,000,000 hospital revenue variable-rate bonds series 2010B (LOC: JPMorgan Chase Bank, N.A.) at 'AA-';
--$117,360,000 hospital revenue bonds series 2010A at 'AA-';
--$28,850,000 hospital revenue variable-rate bonds series 2008G (LOC: Bank of America, N.A.) at 'AA-';
--$33,840,000 hospital revenue variable-rate bonds series 2008F (LOC: Northern Trust Company (The)) at 'AA-';
--$33,670,000 hospital revenue variable-rate bonds series 2008E (LOC: Bank of America, N.A.) at 'AA-';
--$33,645,000 hospital revenue variable-rate bonds series 2008D (LOC: Bank of America, N.A.) at 'AA-';
--$33,670,000 hospital revenue variable-rate bonds series 2008C (LOC: Union Bank, N.A.) at 'AA-';
--$33,670,000 hospital revenue variable-rate bonds series 2008B (LOC: Wells Fargo Bank, N.A.) at 'AA-';
--$95,865,000 hospital revenue bonds series 2008A at 'AA-';
--$11,100,000 hospital revenue variable-rate bonds series 2001A (LOC: JPMorgan Chase Bank, N.A.) at 'AA-'.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--U.S. Nonprofit Hospitals and Health Systems Rating Criteria (May 20, 2013);
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 13, 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=826329
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