SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA' rating on Stanford Health Care, CA's (SHC) outstanding debt and the 'AA/F1+' ratings on bonds supported by SHC's self-liquidity. The outstanding debt is listed at the end of this release.
The Rating Outlook is Stable.
Debt payments are secured by a gross revenue pledge of the obligated group.
KEY RATING DRIVERS
GOOD FINANCIAL PROFILE: SHC's financial performance has been consistent over the last four fiscal years (Aug. 31 year ended) with strong operating profitability, good liquidity, and solid debt service coverage. Operating performance is weaker through the nine months ended May 31, 2016 due to a slight deterioration in payor mix; however, profitability is still adequate for the rating level.
RELATIONSHIP WITH STANFORD UNIVERSITY: Fitch views SHC's close and collaborative relationship with Stanford University (rated 'AAA'; Outlook Stable) and Lucile Packard Children's Hospital (rated 'AA'; Outlook Stable) as positive credit factors. Stanford University is the sole corporate member of SHC and Lucile Packard Children's Hospital. Although the entities have separate boards and leadership teams, the coordination between the organizations in research, fundraising and clinical and educational activities are accretive to SHC's credit profile.
EXCELLENT CLINICAL AND RESEARCH REPUTATION: SHC's strong reputation and brand recognition for excellent tertiary and quaternary care and state of the art clinical research conducted by faculty physicians is a key credit strength as it increases its geographic footprint in the Bay Area and beyond. SHC maintains high patient experience scores.
CONSTRUCTION PROGRESS: SHC's progress on its $2 billion master facility plan is on-time and on budget. The new facility is expected to be completed by December 2017 with transition to the new Stanford Hospital by spring 2018.
STRONG PHILANTHROPIC TRACK RECORD: SHC's fundraising is coordinated with Stanford University and the philanthropic base is deep. To date, SHC has raised over $600 million for the new hospital and $437 million has been received in cash.
CONTINUED SOLID FINANCIAL PERFORMANCE: Stanford Health Care's overall financial profile is solid and financial performance is expected to remain in line with 'AA' category medians. There may be near-term softening of certain liquidity metrics due to the remaining funding of its master facility plan, but is expected to be temporary.
Stanford Health Care (fka Stanford Hospital and Clinics) is a principal teaching affiliate of the Stanford University's School of Medicine. SHC, together with Lucile Salter Packard Children's Hospital at Stanford operates clinical settings through which the School of Medicine educates medical and graduate students, trains residents and clinical fellows, supports faculty and community clinicians and conducts medical and biological sciences research. SHC's close relationship with Stanford University and its School of Medicine generates certain reputational and clinical benefits that are unique in the service area and are important for recruitment. SHC operates a 613 licensed bed tertiary, quaternary and specialty hospital, and the primary, specialty and sub-specialty clinics in which the medical faculty of the School of Medicine provide clinical services. The hospital and a majority of the clinics are located on the campus of Stanford University adjacent to the School of Medicine in Palo Alto, California. As of May 2015, SHC became the sole corporate member of Valley Care Health System (Valley Care) located in the East Bay, which added 242 beds. Total revenue in fiscal 2015 was $3.6 billion.
There is new leadership at SHC and the current CEO joined in July 2016 from Utah Hospitals & Clinics. The CFO position remains filled as an interim position. A national search is underway and is expected to be complete by the end of the calendar year.
NEW STANFORD HOSPITAL
SHC has a major construction project underway with the construction of a new adult inpatient facility to meet seismic requirements. The total budget of the New Stanford Hospital (NSH) is $2 billion and the project is on time and expected to be completed under budget. As of May 2016, $1 billion has been spent. Funding sources include $675 million of debt (already issued), approximately $500 million from philanthropy and the remainder from cash and cash flow. SHC still has approximately $375 million of project funds remaining from debt that has been issued.
Construction of the new hospital began in 2012 and is scheduled to be completed in December 2017, with transition to the new hospital anticipated to occur by spring of 2018. Fitch believes the development risk has been mitigated by a signed guaranteed maximum price contract and SHC's experienced construction team. Upon completion of the project, SHC's bed capacity, including both the new hospital and the renovated portions of the existing hospital, will be approximately 600 patient beds.
SOLID FINANCIAL PROFILE
SHC's operating performance has been consistently strong but dropped slightly through the nine months ended May 31, 2016 due to a slight deterioration in payor mix. Operating EBITDA margins were 12.1% in fiscal 2015 ($432 million), 14.1% in fiscal 2014 and 14.5% in fiscal 2013 compared to 9.2% through the nine months ended May 31, 2016. Management expects to end fiscal 2016 in line with performance through the nine months.
Volume growth has been strong and case mix index has also increased. However, the percentage of commercial payors declined by 1% from the fiscal 2015 period. It is necessary for SHC to maintain solid operating cash flow due to the remaining spend on NSH.
The debt burden is manageable and MADS accounted for 2.2% of total revenue in fiscal 2015. Debt service coverage was 4.9x through the nine months ended May 31, 2016, 5.6x in fiscal 2015, 5.5x in fiscal 2014 and 5.1x in fiscal 2013.
At May 31, 2016, SHC had $2.1 billion in unrestricted cash and investments, which equated to 204.4 days cash on hand and 143.4% cash to debt, which are below the 'AA' category medians. There have been weaker investment returns and SHC's liquidity could be pressured as it completes the NSH. However, Fitch expects this impact to be temporary. Through the nine months ended May 31, 2016, capital spending totaled $456.6 million (4.5x depreciation expense). Total capital spending is projected to be $728 million in fiscal 2017 and $498 million in fiscal 2018.
Total debt outstanding at May 31, 2016 was $1.4 billion and is 72% underlying fixed rate and 18% underlying variable rate. The variable rate exposure includes direct purchase and variable rate demand bonds supported by self-liquidity. SHC has several fixed payor swaps outstanding and is currently posting $28 million of collateral.
The affirmation of the 'F1+' short-term ratings are supported by the adequacy of SHC's highly liquid resources available to fund any un-remarketed puts on the $228.2 million series 2012C, 2008B1, and 2008B-2 VRDBs. The VRDBs are in weekly, CP, and Windows mode. Based on Fitch's rating criteria related to self-liquidity, SHC's position of eligible cash and investments available exceeds Fitch's 1.25x requirement to cover the maximum tender exposure on any given date. SHC has liquidation procedures in place detailing the process by which internal funds would be liquidated to meet the tender obligations.
SHC covenants to provide annual audited financial and utilization data within 150 days of each fiscal year-end, quarterly un-audited financial and utilization data within 60 days of each fiscal quarter-end and monthly liquidity disclosure by the 15th of each month. Quarterly disclosure includes balance sheet, income statement, and statement of cash flows.
Outstanding debt affirmed at 'AA':
--$100,000,000 California Health Facilities Financing Authority (CA) (Stanford Health Care) revenue bonds series 2015A
--$340,000,000 California Health Facilities Financing Authority (CA) (Stanford Hospital and Clinics) revenue bonds series 2012A
--$52,880,000 California Health Facilities Financing Authority (CA) (Stanford Hospital and Clinics) refunding revenue bonds series 2012B
--$130,220,000 California Health Facilities Financing Authority (CA) (Stanford Hospital and Clinics) refunding revenue bonds series 2010A
--$146,710,000 California Health Facilities Financing Authority (CA) (Stanford Hospital and Clinics) refunding revenue bonds series 2010B
--$81,940,000 California Health Facilities Financing Authority (CA) (Stanford Hospital and Clinics) hospital revenue bonds series 2008A-3
--$101,350,000 California Health Facilities Financing Authority (CA) (Stanford Hospital and Clinics) hospital revenue bonds series 2008A-2
--$68,510,000 California Health Facilities Financing Authority (CA) (Stanford Hospital and Clinics) refunding revenue bonds series 2008A-1
Outstanding debt affirmed at 'AA/F1+':
$60,000,000 California Health Facilities Financing Authority (CA) (Stanford Hospital and Clinics) variable rate revenue bonds series 2012C
$168,200,000 California Health Facilities Financing Authority (CA) (Stanford Hospital and Clinics) hospital revenue bonds series 2008B-1, 2008B-2 subseries 1 and 2008B-2 subseries 2
Additional information is available at 'www.fitchratings.com'.
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
Dodd-Frank Rating Information Disclosure Form
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