CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the expected issuance of the following California Health Facilities Financing Authority (CHFFA) revenue bonds on behalf of Stanford Health Care (SHC):
--$100 million series 2015A.
In addition, Fitch affirms the 'AA' ratings on approximately $927.3 million of bonds issued through the CHFFA on behalf of SHC and affirms the 'AA/F1+' ratings on approximately $228.2 million of CHFFA revenue bonds based on the self-liquidity provided by SHC.
The Rating Outlook is Stable.
The series 2015A issue will be issued as fixed rate bonds. Proceeds will be used to fund a portion of the construction costs related to the replacement hospital project and to pay costs of issuance. The bonds are expected to price the week of June 22 through negotiated sale. As part of the 2015 plan of finance, SHC expects to issue approximately $75 million series 2015B variable rate bonds that will be directly placed with US Bank, N.A. Fitch was not asked to rate the series 2015B bonds.
Debt payments are secured by a gross revenue pledge of the obligated group.
KEY RATING DRIVERS
CONSISTENT FINANCIAL STRENGTHENING: The 'AA' rating reflects SHC's robust operating profitability, solid debt service coverage, improving liquidity and strong philanthropic support on their hospital replacement project. SHC generated operating margins of 9.3% and 9.8% in fiscal 2014 and through the six months ended Feb. 28 2015, respectively, which is more than double the 'AA' category median of 3.9%. In each of the last four fiscal years (2011-2014), SHC has generated operating EBITDA margins in excess of 14% which well exceeds the 2014 'AA' category median of 11.0%. Historical coverage of pro forma maximum annual debt service (MADS) by EBITDA was 5.5x in fiscal 2014 and 6.4x through the six month interim period.
RELATIONSHIP WITH STANFORD UNIVERSITY: Fitch views SHC's close and collaborative relationship with Stanford University (rated 'AAA'; Stable Outlook) and Lucile Packard Children's Hospital (rated 'AA'; Stable Outlook) 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 is realizing the benefits of its focus on enhancing the patient experience through very high patient satisfaction and Medicare HCAHPS score. Fitch believes these efforts have helped to drive strong clinical volume growth.
GROWTH STRATEGY: SHC is investing in near-term growth in certain strategic clinical services in which it has demonstrated distinction. The strategic plan also calls for strengthening local market presence and promoting growth in higher acuity inpatient and outpatient procedures. On May 18, 2015, SHC became the sole corporate member of 242-bed ValleyCare Health System. Fitch views the merger positively as it will expand SHC's outreach to the Tri-Valley service area east of San Francisco.
CONSTRUCTION PROGRESS: SHC's progress on its $2.0 billion master facility plan is on-time and on budget. The hospital framing is nearly complete and the exterior is expected to be enclosed by January 2016. The new facility is expected to be completed by 1Q 2017 and transition to the new Stanford Hospital by 2018.
CONTINUED SOLID FINANCIAL PERFORMANCE: Stanford Health Care's overall financial profile is strong 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 that Fitch expects to be temporary and would not impact the current rating.
Stanford Health Care (aka 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.
SHC has embarked on a six-year, $2.5 billion capital plan to replace, expand, and renovate major portions of the main hospital campus in order to address California's seismic mandates. Through April 15, SHC has committed $1.2 billion of the $1.8 billion new hospital project costs and spent roughly $650 million. The series 2015A&B bonds will complete the debt financed source of funding which totals $675 million. The balance of project funding will come from operating cash flow, investment income and philanthropy. Construction of the new hospital began in 2012 and is scheduled to be completed in 2017, with transition to the new hospital anticipated to occur through 2018. Currently, construction is on time and on budget. Fitch believes the development risk has been mitigated by a signed guaranteed maximum price contract ($807.6 million) 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. In fiscal 2014, SHC had $3.0 billion in total operating revenue.
SOLID FINANCIAL PROFILE
The 'AA' rating is supported by continued robust operating performance, growing liquidity position and solid debt service coverage metrics.
Due to standardization, adherence to LEAN methodology and strong clinical volume growth, SHC has been able to sustain robust operating profitability with metrics that well exceed 'AA' category medians. In fiscal 2014, SHC generated operating income of $278.2 million on total revenues of $3 billion or a 9.3% operating margin. Operating EBITDA of $422.5 million equates to an operating EBITDA margin of 14.1%. Clinical volume growth has been strong over the last three years with inpatient and outpatient surgeries up 7.8% and 21.5%, respectively from 2011 through 2014. Similarly, emergency room and outpatient visits are up 21.7% and 32.7%, respectively, over the same period. SHC's strong performance has continued through the six months ended Feb. 28, 2015, with a 9.8% operating and a 13.9% operating EBITDA margin. All key volume measures (inpatient and outpatient) are ahead of the prior year period. SHC's casemix index of 2.24 through Feb. 28 reflects its delivery of complex tertiary and quaternary inpatient care.
SHC's strong revenue growth and robust cash flow generation results in strong historical coverage of pro forma MADS. Pro forma MADS of $79.9 million was supplied by management and equates to a modest 2.3% of annualized 2015 revenues. Historical coverage of pro forma MADS by EBITDA is a very solid 5.5x and 5.1x in fiscal 2014 and 2013, respectively. Coverage improved further through the six month interim period at 6.4x, exceeding the 'AA' category median of 5.4x.
SHC's key liquidity metrics have improved over the last three and are consistent with Fitch's 'AA' category medians. At Feb. 28, 2015, SHC's unrestricted cash and investments totaled $2.15 billion translating to 264.7 days cash on hand, 165.1% cash to debt and 26.9x cushion ratio compared to the 'AA' respective category medians of 277.1 days, 178.5% and 26.5x.
Fitch believes SHC's strategic plan is a strong base for sustained profitability and market share growth over the long term. The strategy builds on SHC's strength and excellence in five strategic clinical service lines: cardiac, cancer, transplantation, orthopedics, and neurosciences. The plan's goals are to strengthen SHC's outpatient subspecialty presence in selected local markets and to simultaneously increase its share of patient care volume and revenue derived from higher-complexity tertiary and quaternary cases in regional, state, and national markets. SHC continues to focus on providing the premier patient experience, developing virtual care and providing an innovative and service-oriented approach to care. In January 2011, and in support of regional growth strategy, SHC and Stanford University, acting on behalf of its School of Medicine, formed United Healthcare Alliance (UHA) to operate clinics staffed by a network of community-based physicians complementing the faculty practice clinics operated by SHC and staffed by members of the faculty of the School of Medicine. UHA continues to expand its membership of community physicians throughout the Bay Area.
On May 18, 2015 SHC became the sole corporate member of ValleyCare Health System, a two hospital system with facilities in Pleasanton and Livermore. In fiscal 2014, ValleyCare reported a $24.3 million loss from operations on total revenues of $270.4 million or negative 9.0% operating margin. However, through the nine months ended Mar31, 2015, ValleyCare improved operating performance with $3.6 million of income from operations on total revenues of $218.6 million or a 1.6% operating margin. At March 31, ValleyCare had total assets of $196 million, total long-term debt of $77.3 million and net assets of $56 million. Fitch views this affiliation positively as it would increase SHC's footprint in the east Bay/ Tri-Valley service area.
The assignment and 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. Based on Fitch's rating criteria related to self-liquidity, SHC'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. 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.
Additional information is available at 'www.fitchratings.com'.
Rating U.S. Public Finance Short-Term Debt (pub. 07 Jan 2015)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
Dodd-Frank Rating Information Disclosure Form