NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned its 'AA-' rating to the following series of bonds being issued by California Health Facilities Financing Authority on behalf of Cedars Sinai Medical Center (CSMC or Cedars). Concurrently, Fitch affirms CSMC's outstanding debt listed at the end of the press release at 'AA-'.
The Rating Outlook is Stable.
The series 2015 bonds are expected to be issued as fixed-rate bonds and sold via negotiation the week of Nov. 5, 2015. Proceeds of the 2015 bonds will be used, together with an equity contribution of approximately $3.7 million, to refund the series 2005 bonds currently outstanding in the amount of $459.5 million. CSMC is also planning to use its own funds to redeem approximately $14 million of the series 2005 bonds concurrently with the refunding. The series 2015 bonds will have a November 2034 final maturity, and pro-forma maximum annual debt service (MADS) of $71.6 million on all outstanding indebtedness, provided by the underwriters, occurs in 2040. The debt service reserve fund will not be funded in connection with the 2015 bonds. The refunding is expected to generate significant net present value savings, estimated at approximately $62 million.
The bonds are secured by a gross revenue pledge of the CSMC, which accounted for 97% of total assets and 92.1% of total revenue of the consolidated entity in fiscal 2015 (June 30 year-end). Fitch's analysis is based on the consolidated entity.
KEY RATING DRIVERS
SUSTAINED STRONG FINANCIAL RESULTS: The rating of 'AA-' and Stable Outlook is supported by continued strong performance in fiscal 2015, exceeding budget. CSMC ended 2015 with operating income of $338 million, equal to operating and operating EBITDA margins of 10.1% and 16.2%, both exceeding Fitch's 'AA' medians, and the first quarter ended Sept. 30, 2015 (the interim period), with $60 million operating income, is slightly ahead of budget.
ACQUISITION OF MARINA DEL REY HOSPITAL: Effective Sept. 1, 2015, CSMC acquired the 145-licensed bed Marina Del Rey Hospital (MDRH) hospital and adjacent medical office building located in Marina Del Rey from a for-profit owner. The hospital was converted to a not-for-profit status and will be operated as a division of CSMC. Fitch views the acquisition as financially credit neutral but with a potential to increase CSMC's market presence in the South Coastal Region, which is home to a number of high-tech companies and seeing an increase in a younger and well-insured population. MDRH will not be a member of the obligated group.
MODERATE LEVERAGE: CSMC completed one of its largest capital projects, the Advanced Health Sciences Pavilion (AHSP), in 2013 and does not have any significant capital needs in the foreseeable future and no plans for debt issuance. Coverage of pro-forma MADS by EBITDA was a strong 8.4x in fiscal 2015, better than the 'AA' median of 5.7x.
GROWING LIQUIDITY: While liquidity has historically been lower than Fitch's 'AA' category, unrestricted cash and investments have grown significantly - by $684 million since 2012 and were reported at $1.87 billion at June 30, 2015, translating to 239.5 days cash on hand (DCOH) and cash equal to 179.2% of long-term debt - a marked improvement over 185 DCOH and 102% cash-to-debt four years ago.
COMPETITIVE MARKET: CSMC operates in the highly competitive and fragmented Los Angeles market with a number of providers competing for the high-end tertiary and quaternary services. CSMC is one of seven hospitals in the Los Angeles area that are part of Vivity - a joint venture with Anthem Blue Cross which offers a health maintenance organization plan intended to align care delivery and in which the providers and the insurer will share financial risk and gain.
CONTINUED STRONG PERFORMANCE: Fitch expects Cedars Sinai Medical Center to continue to produce solid operating performance by leveraging Cedars Sinai Medical Center's qualitative strengths and strategic initiatives, aided by the recent Marina Del Rey Hospital acquisition. With modest future capital needs and strong cash flow from operations, liquidity is expected to further improve.
CSMC is an academic medical center with 886 licensed beds located in Los Angeles. CSMC has a medical foundation that includes 290 employed physicians with an additional 636 physicians in the IPA. Total revenue in fiscal 2015 was $3.57 billion.
Marina Del Rey Hospital Acquisition
While Cedars does not have plans to expand its acute care provider base, the opportunity to acquire MDRH fit well into the strategy to capture market share from the South Coastal Region, which has strong and improving demographics. The area is being referred to as 'Silicon Beach' due to its high concentration of high-tech companies and has been experiencing population growth and increasing property values. MDRH has a small but loyal medical staff and has a strong reputation in several specialty areas, such as spine, and bariatric surgery and was ranked No.4 in spine surgery in Los Angeles County. Concurrent with the MDRH acquisition Cedars also acquired a primary care group that admits to MDRH and is housed in an adjacent medical office building. MDRH will be operated as a community hospital; there are no plans at this time to include it under the CSMC license. The facility is seismically compliant to 2030 and does not have any significant capital needs in the foreseeable future.
Sustained Strong Financial Results
CSMC has continued to produce profitability metrics favorable to Fitch's 'AA' medians. After an exceptionally strong fiscal 2013 and 2014, profitability continued to be excellent in fiscal 2015. The year ended with operating income of $338 million, equal to an operating margin of 10.1%, exceeding the budgeted 6%, and operating EBITDA margin of 16.2%, both comparing well to the 'AA' category medians of 4.9% and 11.5%, respectively. The strong performance was driven by robust volumes - a 4.4% increase in admissions as well as a number of clinical and operational transformation initiatives launched in 2014 resulting in efficiency and productivity gains. CSMC's average length of stay (ALOS) adjusted for case mix declined from 3.5 days in 2010 to 2.7 days in 2015. Leveraging CSMC's strong clinical reputation, acuity continued to rise with Medicare case mix index increasing from 1.78 to 2.13 during the same five-year period.
Operating income through the first quarter of fiscal 2016 ended Sept. 30 2015 was reported at $60 million, meeting budget. Management has conservatively budgeted to end the 2016 fiscal year with operating income of $225.6 million, based on an assumption of flat admissions, which Fitch believes is achievable, especially given the robust 9.4% increase in admissions through the first quarter of fiscal 2016 compared to the prior year period.
Fitch had noted CSMC's liquidity as being relatively modest in the past, but, driven by robust cash flows and good returns, unrestricted cash and investments increased by $684 million since the close of fiscal 2012 to $1.87 billion at 2015 fiscal year end. Liquidity metrics at 239.5 DCOH, 23.8x cushion ratio and cash-to-debt at 179.2% are slightly lower than the 'AA' rating category medians of 289.4 DCOH, 27x and 201.7%, but are expected to continue to improve. Unrestricted cash and reserves are temporarily down slightly as of Sept. 30, 2015 due to the cash outlay for MDRH and the insistence of the Board that any pension shortfall be funded in the first quarter ($52 million).
CSMC also has significant fundraising capabilities given its teaching and research mission as well as its reputation and community support. CSMC is currently in a capital campaign to raise $600 million by fiscal 2018 and has raised $400 million to date.
Manageable Capital Plans and Moderating Debt Burden
CSMC completed its last major capital project, the AHSP, in 2013 and has been making continuous investments in its facility, which is seismically compliant. Capital budget for the current year is $220 million, equal to 140% of the organization's depreciation expense, but there are no major components and the capital plan is highly flexible. There are no plans for debt issuance in the near- to medium-term, other than the current refunding. CSMC's debt burden has been moderating over time and MADS as a percentage of revenue has declined to a moderate 2.1% in fiscal 2015 from 4.7% five years ago, consistent with the 'AA' category median of 2.4%. The combination of principal payments on existing debt and the savings from the proposed refunding results in a significant reduction of MADS to $71.6 million from $92.7 million with debt service coverage of the new MADS at a strong 8.4x, favorable to the 'AA' category median of 5.7x.
Market Leader in Competitive Environment
CSMC maintains a leading market share in its primary service area, despite facing strong competition from several highly regarded and reputable academic centers and healthcare systems in the greater Los Angeles area. A recently announced partnership between Anthem Blue Cross and seven area hospital systems - Vivity, including CSMC and UCLA Health, is an effort to provide a lower cost insurance product while providing high-quality care and should foster collaboration between the hospitals. One area of focus is reducing the outmigration of highly profitable tertiary and quaternary referrals, of which CSMC captures a fair percentage. Vivity Health Plan currently has approximately 13,000 enrollees. In addition, CSMC has over 40,000 in other commercial HMOs. CSMC has a highly aligned physician-hospital platform facilitated through its foundation, which is affiliated with over 900 physicians who practice in CSMC's service area and CSMC operates the largest heart transplant program in the world.
CSMC's total debt as of June 30, 2015 was $1.05 billion. Including the proposed series 2015 refunding, pro-forma debt is projected to be approximately $926 million and will be 100% fixed rate and Cedars does not have any swaps.
CSMC covenants to provide annual financial statements through EMMA.
--$100,105,000 California Health Facilities Financing Authority (CA) (Cedars-Sinai Medical Center) revenue refunding bonds series 2011;
--$425,860,000 California Health Facilities Financing Authority (CA) (Cedars-Sinai Medical Center) revenue bonds series 2009;
--$459,465,000 California Health Facilities Financing Authority (CA) (Cedars-Sinai Medical Center) refunding revenue bonds series 2005.
Additional information is available on www.fitchratings.com
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