Fitch Affirms Loma Linda Univ Med Center's (California) Revs at 'BBB+'; Outlook to Negative.

SAN FRANCISCO -- Fitch Ratings has affirmed its 'BBB+' rating on approximately $397.1 million in revenue bonds outstanding issued on behalf of Loma Linda University Medical Center (LLUMC). The Rating Outlook is revised to Negative from Stable.

The Outlook Revision to Negative from Stable reflects LLUMC's weakened operations over the last 18 months, lower-than-budget financial results, and low liquidity metrics. While LLUMC continues to undertake a number of cost control measures and revenue enhancement measures, as well as strategic growth initiatives in an effort to enhance its market share and profitability, Fitch believes that management will be challenged to return to historical profitability over the short- to medium-term. A return to stability is predicated on LLUMC's ability to generate stronger profitability, strengthen its balance sheet, and meet its budget targets. Failure to achieve planned operational improvements and meeting budget targets over the near-term could result in a rating downgrade.

The rating reflects LLUMC's leading market share position, strategic growth initiatives, recent improvement to profitability, light liquidity metrics, and sizable capital needs. LLUMC is the market share leader in its primary service area in the Inland Empire. It offers quaternary and tertiary services and has the only level-I trauma center and level-III neonatal intensive care unit in the service area. Recently, LLUMC has embarked on a strategic growth strategy, employing a hub-and-spoke model in the neighboring communities of Beaumont and Murrieta. Its Beaumont facility, including a medical office building and an ambulatory surgery center, was recently opened and is operated jointly by LLUMC faculty staff and the Beaver Medical Group - the largest independent medical group in Beaumont. In Murrieta, LLUMC has a 45% equity stake in a joint venture to build a 107-bed hospital, slated to open in first quarter 2011, in partnership with 90 local physicians. Undoubtedly, these efforts will, over time, increase referral patterns to LLUMC's flagship hospital and capture additional market share, especially in higher-acuity level patient volume.

Despite several management initiatives aimed at restoring profitability during the second half of 2008, profitability fell dramatically as LLUMC posted a $3.4 million operating loss (-0.4% operating margin), compared to an operating income of $38.2 million (4.1%) in 2007. Through the first six months of 2009, profitability rebounded as LLUMC reported an operating income of $6 million (1.2% margin). While improving, the turnaround in profitability has been slower than anticipated due to lower utilization statistics, especially in LLUMC's heart and surgical hospital, increased labor costs, and lower revenue generation. While management is redoubling its efforts to strengthen profitability primarily through reduced labor and supply expenses, Fitch remains concerned at the slow pace of recovery.

As of FYE 2008, LLUMC had $180.7 million in unrestricted cash and investments, equating to 75.5 days-cash-on-hand (DCOH) - the lowest in four years. Though YTD unrestricted cash and investments rose to $217 million, or 86 days, LLUMC's DCOH remain well below Fitch's median of 113.7 days for the 'BBB' rating category. Cash-to-debt has weakened significantly at FYE 08 down to 37.7% from 72.4% at FYE 07; the increased debt load is the result of the purchase of LLUMC's heart and surgical hospital in 2008. Debt service coverage was impacted by softening revenue generation and was measured at 1.4x at FYE 08 (1.8x at the end of the interim period). Finally, LLUMC's capital needs remain extensive especially as LLUMC continues to re-evaluate its long-term capital plans to address seismic retrofitting needs.

LLUMC is an 850-licensed bed acute care teaching hospital in Loma Linda, California, 60 miles east of Los Angeles, with $957.1 million in total revenues in 2008. LLUMC covenants to provide annual audited and quarterly information to bondholders. Quarterly information, including a balance sheet, income statement, and statement of changes in net assets will be provided within 60 days after the end of each of the first three fiscal quarters.

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