Fitch Rates $102MM Eisenhower Med Center (CA) Ser 2010A Rev Bnds 'A-'; Downgrades Outstanding Debt

Mon Jul 19, 2010 4:28pm EDT

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NEW YORK--(Business Wire)--
Fitch Ratings assigns an 'A-' long-term rating to the approximately $102 million
California Municipal Finance Authority revenue bonds, Eisenhower Medical Center,
series 2010A, and downgrades the long-term ratings on Eisenhower Medical
Center's (EMC) outstanding debt to 'A-' from 'A'. The series 2010A bonds will be
fixed rate and are expected to price the week of July 26 through negotiated
sale. 

Proceeds will be used to refinance a bank loan ($51.7 million), reimburse for
prior capital expenditures ($21.6 million), fund future capital expenditures
($26.7 million) and pay costs of issuance. After this issuance, EMC will have
approximately $392 million of debt outstanding, which is all fixed rate. The
Rating Outlook is Stable. 

RATING RATIONALE: 

--Good market position with the leading market share of 48% in 2008 in its
primary service area, which has increased from 45% in 2005 and compares
favorably with the next closest competitor with 28% market share. 

--History of strong philanthropic support with the success of two capital
campaigns that raised over $300 million and the expected launch in 2011 of
another capital campaign with a goal of $150 million. 

--Reduced liquidity due to significant capital spending, which is expected to
improve due to reimbursement for prior capital expenditures, reduced capital
spending in fiscal 2012-2014, and ongoing cash receipts from fundraising. Days
cash on hand (obligated group only) was 138 days as of April 30, 2010, compared
to 189 days at June 30, 2009 and is expected to increase to 161 days with the
reimbursement of prior capital expenditures. 

--Recent improvement in operating performance driven by increased labor
productivity and focus on cost controls with an operating margin of 1.5% in
fiscal 2009 compared to operating losses the prior three years. Operating EBITDA
margins have been very strong at 12.0% for fiscal 2009 and 15.6% for the interim
period and exceeded the 'A' category median of 9.2%. 

--Significant capital spending over the last four years totaling over $500
million that has increased capacity, which should drive future revenue and
market share growth. 

--High debt burden, with maximum annual debt service (MADS) of 6.5% of revenue
for fiscal 2009 compared to the 'A' category median of 3.1%. With this issuance,
cash to debt falls to a weak 38.1% as of April 30, 2010 (including reimbursement
of prior capital expenditures) compared to the 'A' category median of 113%. 

KEY RATING DRIVERS: 

--Ability to maintain operating profitability with a significant increase in
depreciation and interest expense starting in fiscal 2011. 

--Continued fundraising success and ability to rebuild its financial cushion
over the next several years as capital spending winds down. 

--Success of driving revenue growth through increased market share and expanded
outpatient geographic footprint, which should allow EMC to grow into its high
debt burden. 

SECURITY: The bonds are secured by a gross revenue pledge. 

CREDIT SUMMARY: 

The downgrade of the rating to 'A-' from 'A' is due to EMC's high debt burden
and weakened liquidity position, which has been driven by the significant
investment in its plant. All of EMC's debt measures compare unfavorably to the
'A' category medians with adequate MADS coverage by operating EBITDA of 2.6
times (x) through the interim period ('A' category median = 3.1x), debt to
operating EBITDA of 6.0x ('A' category median = 4.1x) and MADS equal to 6% of
total revenue ('A' category median = 3.1%). EMC's liquidity has declined to 138
days cash on hand and 38% pro forma cash to debt as of April 30, 2010 from 186
days and 52% cash to debt as of June 30, 2009 (obligated group only). Although
Fitch views the strategic capital investments favorably, the additional debt
could not be supported at the 'A' rating level due to the weakened balance
sheet. 

Approximately half of EMC's capital spending of $505 million in fiscal 2007-2010
has been funded through debt and cash flow, with the other half funded by
philanthropy. 

Major recent capital projects include the construction of a 248-bed semi-private
hospital pavilion (Annenberg Pavilion), construction of a 24-bed
medical/surgical suite (Renker Pavilion), the expansion of the emergency
department to 38 beds, and the construction of an outpatient facility (Argyros
Center) located in La Quinta. Management expects to increase its market share
due to the increased capacity at the main hospital and to further drive revenue
growth with its outpatient facility expansion plans. EMC expects to add two more
primary care sites within the next year. Given the recent capital spending, EMC
is compliant under SB1953, which requires hospitals to retrofit their facilities
to certain seismic safety standards. 

Fitch views favorably EMC's leading market share, recent improvement in
operations, and history of strong philanthropic support. EMC has maintained the
leading market position in its service area and expects to further increase
market share due to additional capacity. The next closest competitor is Desert
Regional Medical Center, a Tenet facility. EMC is the only not-for-profit
provider in its service area. In fiscal 2009 despite lower volume, EMC achieved
operating profitability compared to operating losses the prior three years.
Operating improvement was driven by increasing labor productivity, decreasing
benefit costs, and lowering supply costs. Management estimates that annual cost
savings are between $7 million-$8 million. Additional opportunities include
documentation and coding and revenue cycle initiatives. Operating margin is
expected to remain weak due to increased depreciation and interest expense
beginning in fiscal 2011. However, operating EBITDA margins are expected to
continue to exceed the 'A' category median. EMC has a strong history of
philanthropic support and has raised $487 million from fiscal 2001 to May 31,
2010. The majority of the donations and pledges have been received on time and
$361 million has been received in cash to date. EMC will launch a $150 million
capital campaign in fiscal 2011 that is expected to raise funds for capital
expenditures and support its primary care growth strategy including becoming a
teaching hospital with 24 resident slots each for internal medicine and family
practice beginning in 2013. 

Capital spending after fiscal 2011 significantly drops off, which should aid
liquidity growth. Capital spending is projected to be approximately $109 million
in fiscal 2011, $33.5 million in fiscal 2012, $21.6 million in fiscal 2013, and
$17 million in fiscal 2014. 

The Stable Outlook reflects the expectation that EMC will be able to capitalize
on its recent strategic capital investments and maintain operating profitability
despite the increased capital costs, grow into its debt burden, and build its
liquidity. The failure to improve its liquidity and maintain strong operating
cash flow would likely result in further negative rating pressure. 

EMC is a 542 licensed bed community hospital located in Rancho Mirage, CA (near
Palm Springs), approximately 120 miles east of Los Angeles and 120 miles
northeast of San Diego. EMC's licensed bed capacity increased to 542 from 313 as
of June 29, 2010; however, due to the seasonality of EMC's volume, the
additional beds will not open until fall 2010. Total operating revenue in fiscal
2009 was $383 million. Audited numbers are based on the consolidated system and
the interim financials are obligated group only. The obligated group is made up
of the hospital and Eisenhower Health Services. The obligated group comprised
94% of total consolidated net assets and 98% of total consolidated revenues in
fiscal 2009. EMC covenants to provide audited and quarterly unaudited financial
and operating statements to the NRMSIRs. 

Applicable criteria available on Fitch's website at 'www.fitchratings.com': 

--'Revenue-Supported Rating Criteria', dated Dec. 29, 2009; 

--'Non-Profit Hospitals and Health Systems Rating Criteria', dated Dec. 29,
2009. 

Additional information is available at 'www.fitchratings.com'. 

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF
CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com
Emily Wong, +1-212-908-0651 (New York)
Michael Borgani, +1-415 732-5620 (San Francisco) 



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