<0> Fitch Affirms Stanford Hospital & Clinics, CA's Revs; Outlook Revised to Positive </0>
<0> Fitch RatingsPrimary AnalystDana N. Sodikoff, +1-312-368-3215Associate DirectorFitch Ratings, Inc.70 West Madison StreetChicago, IL 60610orSecondary AnalystJames LeBuhn, +1-312-368-2059Senior DirectororCommittee ChairpersonEva Thein, +1-212-908-0674Senior DirectororMedia RelationsElizabeth Fogerty, New York, +1-212-908-0526 </0>
Fitch Ratings has affirmed the respective 'AA-' and 'AA-/F1+' ratings on the California Health Facilities Financing Authority's revenue bonds issued on behalf of Stanford Hospital & Clinics (SHC), which are listed at the end of this press release.
The Rating Outlook is revised to Positive from Stable.
SECURITY
Debt payments are secured by a gross revenue pledge of the obligated group.
KEY RATING DRIVERS
CONSISTENT FINANCIAL IMPROVEMENT: The Positive Outlook is based on the confluence of sustained operating improvement, robust debt service coverage and SHC's success with their fundraising effort in support of their capital project.
EXCELLENT CLINICAL AND RESEARCH REPUTATION: SHC's reputation and brand recognition for excellent tertiary and quaternary care and state of the art clinical research is a primary credit strength as the organization continues to diversify its revenue base through strategic growth initiatives regionally, nationally and internationally. SHC is leveraging its information technology resources in partnerships with eight leading Silicon Valley corporations, providing on-site and near site clinics and telemedicine for employees located around the world.
RELATIONSHIP WITH STANFORD UNIVERSITY: Stanford University (rated 'AAA'; Stable Outlook) is the sole corporate member of SHC. Although the two entities have separate boards and leadership teams, the reputation, research and fundraising efforts resulting from this relationship are accretive to SHC's credit profile.
GROWTH STRATEGY: SHC is investing in near-term growth in certain strategic clinical services in which it has demonstrated distinction. The strategic plan also calls for strengthening local market presence and promoting growth in higher acuity procedures. Fitch believes this strategy should serve SHC well in the large and highly competitive San Francisco Bay Area and in attracting patients both nationally and internationally.
RATING SENSITIVITIES
CONSTRUCTION PROGRESS: Fitch believes the reduction in development risk as the project moves forward and continued successful fundraising coupled with its strong financial profile positions SHC for positive rating movement in the near term.
CREDIT PROFILE
Organization
Stanford Hospital and Clinics (SHC) is a principal teaching affiliate of the Stanford University's (revenue bonds rated 'AAA'; Stable Outlook) School of Medicine. SHC, together with Lucile Salter Packard Children's Hospital at Stanford (rated 'AA'; Stable Outlook), operates clinical settings through which the School of Medicine educates medical and graduate students, trains residents and clinical fellows, supports faculty and community clinicians and conducts medical and biological sciences research. SHC operates a 613 licensed bed tertiary, quaternary and specialty hospital, and the primary, specialty and sub-specialty clinics in which the medical faculty of the School of Medicine provide clinical services. The hospital and a majority of the clinics are located on the campus of Stanford University adjacent to the School of Medicine in Palo Alto, California. In fiscal year 2012, SHC had $2.43 billion in total operating revenue.
SHC has embarked on a six-year, $2.5 billion capital plan to replace, expand, and renovate major portions of the main hospital campus in order to address California's seismic mandates. The plan will be funded from existing bond proceeds, operations, investment income, and philanthropy. Aside from the series 2012, SHC plans to issue an additional $100 million in new money debt in 2016. Construction of the new hospital began in 2012 and is scheduled to be completed in 2017, with transition to the new hospital anticipated to occur through 2018. Upon completion of the project, SHC's bed capacity, including both the new hospital and the renovated portions of the existing Hospital, will increase to approximately 580 patient beds.
Strategic Growth
Fitch believes SHC's strategic plan is a strong base for sustained profitability and market share growth over the long term. The strategy builds on SHC's strength and excellence in five strategic clinical service lines: cardiac, cancer, transplantation, orthopedics, and neurosciences. The plan's goals are to strengthen SHC's outpatient subspecialty presence in selected local markets and to simultaneously increase its share of patient care volume and revenue derived from higher-complexity tertiary and quaternary cases in regional, state, and national markets.
In January 2011, and in support of regional growth strategy, SHC and Stanford University, acting on behalf of its School of Medicine, formed United Healthcare Alliance (UHA) to operate clinics staffed by a network of community-based physicians complementing the faculty practice clinics operated by SHC and staffed by members of the faculty of the School of Medicine. UHA continues to expand its membership of community physicians.
Solid Financial Profile
Robust operating profitability has resulted in operating EBITDA of over $379.4 million (15.6% operating EBITDA margin) and income from operations of $236.7 million (9.7% operating margin) in fiscal 2012, further improved from 15% operating EBITDA margin and 8.2% operating margin in 2011. Strong performance continued through the six months ended February 28, 2013, with 15.2% operating EBITDA and 9.9% operating margin compared to the respective 'AA' category medians of 10.6% and 4%. Continued growth in high acuity outpatient and inpatient volumes has generated improved profitability, which resulted in a strengthening of cash reserves.
SHC's strong revenue growth and robust cash flow generation resulted in strong debt service coverage. Maximum annual debt service (MADS) of $72.9 million is a moderate 3% of total fiscal 2012 operating revenue as compared to Fitch's 'AA' median of 2.5%. Coverage of MADS by EBITDA in 2012 was a very strong 5.3x compared to 4.4x in fiscal 2011 and the 'AA' category median of 4.8x.
As of Aug. 31, 2012 total debt (including $100 million series 2012D direct placement not rated by Fitch) is approximately $1.28 billion and includes $328.2 million or 26% in variable-rate bonds backed by SHC's self-liquidity. In recent years, SHC undertook several financing actions to restructure its debt profile and lower its variable-rate bond put risk. Fitch views these actions positively, especially as SHC will now need to preserve and grow its cash reserves in support of its large capital projects. SHC has 11 fixed-payer swaps for a total notional amount of approximately $746.1 million outstanding. The counterparties on the swaps are diversified among five different financial institutions but certain aggregate collateral thresholds do exist.
Liquidity metrics are mixed. Unrestricted cash and investments equaled $1.56 billion in fiscal 2012, a 12.1% improvement from the prior year. At Feb. 28, 2013 (six month interim) unrestricted cash and investments equaled $1.61 billion, translating to 262.3 days cash on hand, 122.2% cash to debt and 21.8x cushion ratio compared to the 'AA' respective category medians of 241.1 days, 169.4% and 24.1x.
Self-Liquidity
The assignment and affirmation of the 'F1+' short-term rating are supported by the adequacy of SHC's highly liquid resources available to fund any unremarketed puts on the $228.2 million series 2012C, 2008B1, and 2008B-2 VRDBs. Based on Fitch's rating criteria related to self-liquidity, SHC'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. SHC has liquidation procedures in place detailing the process by which internal funds would be liquidated to meet the tender obligations.
Disclosure
SHC covenants to provide annual audited financial and utilization data within 150 days of each fiscal year-end, quarterly un-audited financial and utilization data within 60 days of each fiscal quarter-end and monthly liquidity disclosure by the 15th of each month. Quarterly disclosure includes balance sheet, income statement, and statement of cash flows.
Fitch affirms the following California Health Facilities Financing Authority outstanding debt:
--$69,485,000 refunding revenue bonds, series 2008A-1, at 'AA-';
--$102,775,000 C refunding revenue bonds, series 2008A-2, at 'AA-';
--$83,065,000 refunding revenue bonds, series 2008A-3, at 'AA-';
--$140,200,000 refunding revenue bonds, series 2010A, at 'AA-';
--$146,710,000 refunding revenue bonds, series 2010B, at 'AA-';
--$84,100,000 variable rate refunding revenue bonds, series 2008B-1, at 'AA-/F1+';
--$84,100,000 variable rate refunding revenue bonds, series 2008B-2, at 'AA-/F1+';
--$340,000,000 revenue bonds, series 2012A at 'AA-';
--$68,320,000 variable rate revenue bonds, series 2012B, at 'AA-'/F1+';
--$60,000,000 variable rate revenue bonds, series 2012C, at 'AA-'/F1+'.
Fitch Ratings has withdrawn its ratings for the following California Health Facilities Financing Authority (CA) bond due to pre-refunding activity:
--(Stanford Hospital and Clinics) hospital revenue bonds series 2003A (all maturities).
The updated rating history for the above maturities is now reflected on Fitch's web site at ''.
Additional information is available at ''.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Additional Disclosure
Solicitation Status
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