(The following statement was released by the rating agency)
July 31 -
Summary analysis -- Assistance Publique - Hopitaux de Paris ------- 31-Jul-2012
CREDIT RATING: AA+/Negative/-- Country: France
Primary SIC: General medical &
Mult. CUSIP6: F48573
Credit Rating History:
Local currency Foreign currency
17-Jan-2012 AA+/-- AA+/--
09-Sep-1992 AAA/-- AAA/--
Standard & Poor’s Ratings Services equalizes its rating on French public hospital group, Assistance Publique - Hopitaux de Paris (AP-HP), with its long-term sovereign rating on the Republic of France (AA+/Negative/A-1+, unsolicited). This reflects our view that there is an “almost certain” likelihood that the French state would provide timely and sufficient extraordinary financial support to AP-HP in the event of financial distress.
We consider AP-HP to be a government-related entity (GRE). Under our criteria for rating GREs, we base our rating approach on our view of AP-HP‘s:
-- “Critical role” for the French state, given its unique position in the French health care system as the country’s (and Europe‘s) largest hospital and university medical center and its flagship center for medical research and publications. It accounts for about 10% of total hospital supply in France, 30% in the Ile-de-France region (which includes the country’s capital, Paris, where it is also the largest employer).
-- “Integral” link with the French state, since AP-HP is subject to close direct and indirect state supervision and controls (exceeding the usual controls over other French public hospitals). Since May 2010, AP-HP, along with other hospitals, has been under the tutelage of the Ile-de-France Regional Health Agency. But unlike other hospitals, AP-HP has a dual tutelage: Its budget, investment plan, and multiyear financial plan are approved by the Ministries of Health, Social Security, and the Budget. This provides the state with veto power over AP-HP’s key financial decisions.
The state does not explicitly guarantee AP-HP’s debt, and AP-HP’s creditors have no direct recourse to the French government. However, owing to AP-HP’s legal status, we view the French government as ultimately responsible for AP-HP’s solvency and for safeguarding its liquidity position. AP-HP became in 2010 one of France’s 32 regional public hospitals (“Centres Hospitaliers Regionaux”; CHR), which--as state public agencies--can only be created and dissolved by state decree. By law, the state is ultimately responsible for meeting the obligations of a CHR, as it would have to take over (directly or through another public agency) all its assets and liabilities if it were dissolved.
AP-HP’s budgetary performance has deteriorated since 2004 following the 100% application of an output-based financing system to surgery, medicine, and obstetrics activities, which account for the bulk of AP-HP’s activities. Given its below-average productivity, AP-HP has temporarily benefited from compensation under a tariff convergence scheme which has reduced gradually to fully disappear in 2012. This reduction in compensation has been partly offset by AP-HP’s improvement in reporting its activity to social security institutions (which fund AP-HP), by controlled expenses, and also by increasing grants. However, AP-HP’s operating margin has declined since 2004 to turn slightly negative (-0.7% of operating revenues on average in 2009-2011).
In 2011, AP-HP posted stable operating revenue, given limited growth in medical activity (1%, as in 2010) and it was able to contain its operating charges, notably its personnel charges. As a result, its operating margin improved slightly (to -0.3%, from -0.5% in 2010). Thanks to one-off revenue items, its funds from operations (FFO) increased significantly to EUR382 million (up EUR100 million from 2010), covering 3.4x the debt installment in 2011.
AP-HP has accumulated debt quickly in recent years--reaching EUR2.4 billion at year-end 2011 (6.4x estimated FFO), versus EUR1 billion at year-end 2006 (2.5x FFO)--resulting primarily from growing capital expenditures, refinancing of social security advances, and also declining FFO. Given recent adjustments to its capital expenditure plan, we now expect AP-HP to deleverage slightly from 2014.
Under its 2012-2016 medium-term plan, AP-HP aims to report a positive operating margin from 2012 and improve its efficiency, thanks to a mix of additional revenues and cost reduction (totaling EUR40 million in 2013 and EUR33 million in 2014). The strategic plan incorporates sizable asset sales (EUR240 million in total in 2012-2016) and scaled-down investments (less than EUR400 million annually in 2013-2016, from EUR465 million in 2011 and a EUR592 million peak in 2009). If AP-HP successfully bridges its efficiency gap, we think debt could decrease slightly and represent around 5.2 years of FFO in 2016, from 6.4 years in 2011. However, we consider that the implementation of the plan is subject to certain state decisions regarding potential increases in staff wages and the evolution of tariffs and grants.
AP-HP implements a zero-based cash management policy and, in its aim to minimize cash holdings (which cannot yield interest under French legislation), actively uses credit facilities. Reflecting prudent debt management in our view, AP-HP secured at year-end 2011 parts of its funding for 2012 through bond issues and it has secured most of its 2012 long-term funding needs in the first quarter of 2012.
AP-HP currently uses three credit lines totaling EUR160 million, available until February 2013. We note that AP-HP also has access to other uncommitted bank lines, which it has used in 2011-2012. As of mid-July 2012, AP-HP has four committed revolving credit lines totaling EUR82 million, all of which are available beyond year-end 2012. We note that most of AP-HP’s cash inflows and outflows are predictable and that AP-HP’s financial management has introduced some measures to reduce its working capital needs from the end of 2011. We therefore expect AP-HP to use its liquidity lines less in 2012. We anticipate that AP-HP will retain on average available undrawn committed lines representing almost 100% of its debt service in 2012.
In addition, in our opinion, AP-HP enjoys excellent capital-market access, as evidenced by its ability to issue bonds despite very adverse market conditions. We believe that, if needed, AP-HP would almost certainly receive prompt extraordinary state funding, in the form of cash advances from the social security institutions (at the request of the state), advance payments of state subsidies, or advances from the state’s public debt fund (“Caisse de la Dette Publique”).
The negative outlook reflects our outlook on the French Republic. We expect AP-HP to retain its “critical” role for and “integral” link with the French state. We therefore anticipate that our rating on AP-HP will move in line with our long-term rating on the Republic of France.
Related Criteria And Research
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Not-For-Profit Healthcare, June 14, 2007