Fitch Rates Scripps Health (CA) Series 2012 Revs 'AA-/F1+'; Outlook Stable.
--$175 million California Health Facilities Financing Authority (CHFFA) revenue bonds (Scripps Health) series 2012A;
--$60 million California Health Facilities Financing Authority (CHFFA) variable rate revenue bonds (Scripps Health) series 2012B;
--$40 million California Health Facilities Financing Authority (CHFFA) variable rate revenue bonds (Scripps Health) series 2012C.
In addition, Fitch has affirmed its 'AA-' ratings on approximately $608.8 million in outstanding revenue bonds (listed below) and its 'AA-' bank bond rating on the series 2010C revenue bonds.
Aside from $21 million of reimbursement for prior capital expenditures, bond proceeds will finance Scripps Health's ongoing and sizable capital plan. The series 2012A are expected to be priced the week of Jan. 16 while the series 2012B&C are expected to be sold the week of Jan. 30 through negotiated sales.
The Rating Outlook is Stable.
The bonds are secured by a gross receivables pledge of Scripps Health.
KEY RATING DRIVERS:
STRONG FINANCIAL PROFILE: Scripps Health's financial profile exhibits exceptional profitability and very good liquidity metrics that compare favorably against Fitch's portfolio of 'AA' rated credits.
EXPANDING OPERATING FOOTPRINT: Despite operating in the highly competitive San Diego County area, Scripps Health's market footprint has grown as Scripps Health continues to leverage its physician relationships to enhance patient referrals and expand its geographic presence.
SIZEABLE CAPITAL PLAN: Scripps Health's multi-year capital plan is sizable and continuation of its robust cash flow generation will be necessary to support the funding, which includes additional debt.
HEALTHCARE REFORM PREPAREDENESS: Fitch believes that ongoing management's operating initiatives will position the organization to maintain profitability consistent with the rating category in an era of healthcare reform and a tighter reimbursement environment.
Scripps Health is a nonprofit health system located in San Diego County, CA, comprising four hospitals on five campuses (1,409 licensed beds), the Scripps Clinic and Scripps Coastal Medical Centers, and various outpatient facilities. Total revenue was approximately $2.5 billion in fiscal year 2011 ($2.4 billion, excluding provider fee revenues).
Strong Financial Profile
Scripps Health operations have yielded very strong profitability margins that have exceeded Fitch's 'AA' category medians. Over the last four fiscal years, Scripps Health averaged a 6.2% operating margin, culminating with an exceptional 8.6% margin at fiscal year (FY) end 2011, doubling Fitch's 4.3% median. Along with vigilant cost control measures, profitability has benefited from Scripps Health's strategic acquisitions of physician groups and its expansion of its outpatient clinic delivery model.
Similar to many California hospitals, Scripps Health was a net beneficiary under the California provider fee program, receiving a net benefit of $22.6 million in FY 2011. Excluding the benefit of the provider fees, operating margin remains a very strong 8%.
Balance sheet metrics have steadily improved over the last four years due to Scripps Health's aforementioned profitability and its strong cash flow generation. As of Sept. 30, 2011, Scripps Health had $1.4 billion in unrestricted cash and investments, equating to 241 days cash on hand (DCOH) and a 237% cash-to-debt-position. These ratios exceed Fitch's respective 'AA' medians and the 163 DCOH and 198% cash to debt position Scripps Health posted at FY-end 2008. However, pro forma cash-to-debt is projected to fall to approximately 165%, just above Fitch's 159% median.
Expanding Market Footprint
Fitch believes that the strengthening financial profile reflects Scripps Health's growing market footprint. Scripps Health's operating footprint continues to expand in the north San Diego County, aided by recent acquisitions of several medical groups that are now part of the Scripps Medical Foundation. Further, Scripps Health continues to execute on strategic physician alignment strategies that strengthen its physician relationships and bolster its market share.
However, the area remains highly competitive with Sharp Healthcare, Kaiser Permanente (rated 'A+' by Fitch), University of California San Diego Medical Center, Palomar Pomerado (rated 'BB+' by Fitch), and several other independent community hospitals as competitors. Scripps Health's market share has increased slightly to 25.4% and second to Sharp Healthcare (27.7%).
Sizable Capital Plan
Fitch believes that Scripps Health will need to maintain its strong cash flow generation to fund its sizable capital plan and preserve liquidity.
Scripps Health's six-year capital plan (2012-2017) totals $1.6 billion. The plan addresses a variety of renovations and/or expansion projects at all four of its hospitals and construction of the Scripps Cardiovascular Institute at the La Jolla campus. The capital plan will be funded through a combination of debt ($525 million, including the series 2012A-C), philanthropy ($55 million), and cash flow from operations.
Scripps Health's debt burden remains manageable and should allow for additional debt capacity at the current rating level. Indicative of its low debt burden, coverage of pro forma maximum annual debt service (MADS; $48.2 million in 2014) coverage by FY 2011 EBITDA is a very strong 7.7 times (x); additionally, pro forma MADS equates to a low 1.9% of 2011 total revenues.
With this issuance, Scripps Health is reducing the percentage of uncommitted funding within its debt portfolio to 55% from 64% currently. Pro forma outstanding debt totals $883.8 million with 55% ($480 million) in variable rate demand bonds (VRDBs), which exposes Scripps to renewal, remarketing and put risks. Management expects to reduce the amount of uncommitted funding to 50% of its debt portfolio by 2016.
Of the $480 million of VRDBs, $380 million are supported by letters of credit (LOC) and $100 million will be supported by self liquidity (see below). The LOCs are provided by seven different banks with the majority of the LOCs expiring in 2013 through 2015. Two LOCs are set to expire in first quarter 2012, but management indicates that it is in the process of replacing these LOCs with new five-year LOCs. Fitch believes that Scripps Health's balance sheet affords it certain financial flexibility and unrestricted cash and investments to putable debt is solid at 2.9x.
Scripps Health has entered into six interest rate swap agreements with Citibank, N.A., with an aggregate notional amount of $183.6 million. As of Sept. 30, 2011, the swaps had a mark-to-market value of negative $30.3 million, and collateral posting is required above a $20 million threshold.
The assignment of the 'F1+' short-term rating is supported by the adequacy of Scripps Health's highly liquid resources available to fund any un-remarketed puts on the $100 million series 2012B&C weekly VRDB bonds. At Oct. 31, 2011, Scripps Health had cash and cash equivalents available on a same-day basis of $354.5 million. 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.
Healthcare Reform Preparedness
Management is undertaking several initiatives that Fitch believes bode well for Scripps Health's future in a post healthcare reform era. Currently, Scripps Health is undergoing a system reorganization intended to yield a horizontal structure that exhibits consolidated management, enhanced efficiency, and improved outcomes and quality. Fitch believes that these actions should allow Scripps Health to achieve and sustain its targeted financial performance in an era of lower and pressurized reimbursement environment.
The Stable Rating Outlook reflects Fitch's expectation that Scripps Health will maintain its current operating profile over the medium term allowing for continued funding of its strategic capital projects while maintaining financial metrics sufficient to support the rating.
Scripps Health has covenanted to provide annual and quarterly disclosure through the Municipal Rule Making Board's EMMA system. The content of Scripps Health's disclosure includes utilization statistics, balance sheet, income statement, and statement of cash flows, which Fitch views positively.
Outstanding debt rated by Fitch
--$119.5 million California Health Facilities Financing Authority revenue bonds series 2010A (Scripps Health);
--$100 million California Health Facilities Financing Authority variable-rate revenue bonds series 2010B&C (Scripps Health);
--$97.6 million California Health Facilities Financing Authority revenue bonds, series 2008A (Scripps Health);
--$230 million California Health Facilities Financing Authority variable-rate revenue bonds series 2008B-G (Scripps Health);
--$11.7 million California Health Facilities Financing Authority variable-rate revenue bonds series 2001A (Scripps Health).
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.
For information on Build America Bonds, visit Fitch's website at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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|Date:||Jan 4, 2012|
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