<0> Fitch Affirms Community Hospital of the Monterey Peninsula (CA) Revs at 'AA-'; Outlook Stable </0>
<0> Fitch RatingsPrimary AnalystMichael Borgani, +1-415-732-5620DirectorFitch Ratings, Inc.650 California Street, 4th FloorSan Francisco, CA 94108orSecondary AnalystEmily Wong, +1-212-908-0561Senior DirectororCommittee ChairpersonEva Thein, +1-212-908-0674Senior DirectororMedia Relations:Elizabeth Fogerty, New York, +1 212-908-0526Email: </0>
Fitch Ratings has affirmed its 'AA-' rating on the following revenue bonds issued on behalf of Community Hospital of the Monterey Peninsula (CHOMP), California:
--$31,405,000 California Statewide Communities Development Authority health facility revenue bonds, series 2011A;
--$55,000,000 California Statewide Communities Development Authority health facility revenue bonds, series 2011B.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues of the obligated group.
KEY RATING DRIVERS
ROBUST PROFITABILITY: CHOMP's financial profile demonstrates consistently strong operating and operating EBITDA margins that exceed Fitch's medians for the 'AA' category. Since FY 2008, CHOMP has averaged 6.8% and 15.7% operating and operating margins, respectively, compared to Fitch's respective medians of 4.0% and 10.6%.
DOMINANT MARKET SHARE: CHOMP's operations benefit from its dominant 80% market share in the primary service area; the closest competitor has an 8% share.
STRENGTHENED BALANCE SHEET: Liquidity metrics rose sharply by FYE 2012 as a result of favorable profitability, strong investment returns, and lower capital expenditures. At Dec. 31, 2012 (interim), days cash on hand rose to 286 from 213.4 a year ago, and cash to debt increased to 239.1% from 168%.
LOW DEBT BURDEN: CHOMP's robust profitability and strong cash flow generation have led to excellent debt service coverage ratios. In addition, debt to EBITDA and debt to capitalization ratios remain favorably low and below Fitch's medians for the 'AA' rating category.
UNCERTAIN ENVIRONMENT: Fitch believes CHOMP's strong financial profile and manageable capital spending needs afford it sufficient financial cushion at the current rating level as the organization transitions to a population health management delivery care model.
Community Hospital of the Monterey Peninsula is a 259 licensed-bed (207 staffed) acute care hospital located in Monterey, California, which is 120 miles south of San Francisco. CHOMP had total revenues of approximately $428.1 million in FY 2012 (Dec. 31 year end, unaudited).
The 'AA-' rating reflects CHOMP's history of strong operating profitability and cash flow generation, exceptional debt service coverage, a very good liquidity position, and a dominant market share in the primary service area.
Continuing a trend of robust profitability, CHOMP has posted another year of strong financial results (unaudited, ended Dec. 31, 2012), with operating margins of 6.1% and 5.8% for FY 2012 and 2011, respectively. Historically, strong profitability has been driven by favorable contracts with commercial payors that are all reimbursed as a percentage of charges. Fitch believes this reimbursement methodology is more at risk in the reduced reimbursement environment; however, Fitch views positively CHOMP's initiatives as it transitions to a population health management delivery care model.
Very Good Liquidity
Liquidity metrics strengthened in FY 2012 and are well above Fitch's medians for the 'AA' rating category. At Dec. 31, 2012, CHOMP had $291.1 million in unrestricted cash and investments, up from $215.7 million a year ago. Strong cash flow generation, large investment returns, and lower capital expenditure helped replenish the balance sheet after a period of heavy capital spending on CHOMP's capital plan.
Manageable Capital Needs
CHOMP's 2013 capital plan totals $31 million, funding health IT projects ($15 million), facilities ($8 million), routine maintenance ($5 million), and various other projects. Capital spending is budgeted at 100% of depreciation expense. Given CHOMP's very good cash flow generation, Fitch expects CHOMP to easily fund its capital plan and simultaneously strengthen the balance sheet.
Low Debt Burden
CHOMP's robust profitability and cash flow generation have led to excellent debt service coverage ratios. Coverage of maximum annual debt service (MADS) by operating EBITDA has averaged a strong 8.0x over the last five fiscal years (8.5x at FYE 2012), compared to Fitch's 'AA' category median of 4.2x, with MADS accounting for a moderately low 2% of FY 2012 revenues. Additionally, debt to capitalization of 23.1% and debt to EBITDA of 2.0x are favorably low for the rating category.
At Dec. 31, 2012, CHOMP had $121.8 million in long-term debt, of which $55 million, series 2011B, is in variable-rate mode, backed by a five-year letter of credit (LOC) from U.S. Bank that expires on May 11, 2016. The long-term debt includes $34.9 million in fixed-rate series 2012A direct placement bonds with Siemens Financial Services, which were issued to refund all maturities of CHOMP's series 2003B bonds (see below).
Management has no additional debt plans. Under a liquidity draw scenario, the LOC affords CHOMP a three-year term-out provision, with no principal payment in the first year. In the event of non-remarketing, the bonds amortize in eight quarterly installments. Fitch believes CHOMP has sufficient resources and ample access to capital markets to meet any potential put risk. CHOMP has in place two fixed payor swaps used as a hedge for benefit of the series 2011B bonds. As of Dec. 31, 2012, the swap had a negative $14 million mark-to-market value. Fitch notes that CHOMP has no collateral posting requirements associated with the swaps.
Healthcare Reform Preparations
CHOMP is undertaking several operational and organizational initiatives to bend the cost curve, standardize care and medical management, align with local physicians, and improve quality outcomes. Management indicated that CHOMP is currently pursuing a Knox Keene license and is in discussions with physician providers and commercial payors to strengthen its competitive edge in the managed care arena and manage population health. Fitch views these actions positively.
Rating Outlook Stable
The Stable Rating Outlook reflects Fitch's expectation that CHOMP will achieve its budget of 4% operating margin for fiscal 2013, preserve the balance sheet, and maintain strong cash flow generation.
CHOMP covenants to disclose quarterly financial information within 75 days of quarter-end and annual financial information within 150 days of the year-end to the EMMA system.
Series 2003B are Pre-refunded
Fitch Ratings has also withdrawn its ratings on certain maturities of the following bond due to pre-refunding activity:
-- California Statewide Communities Development Authority (CA) (Community Hospital of the Monterey Peninsula) health facilities revenue bonds series 2003B (all maturities).
The updated rating history for the above maturities is now reflected on Fitch's web site at ''.
Additional information is available at ''. 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 12, 2012;
'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 23, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria