SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has downgraded the following Palomar Pomerado Health (the district), California, bonds:
-- $481.6 million general obligation (GO) bonds (election of 2004), series 2005, 2007A, 2009A, and 2010A to 'A+' from 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an unlimited, voter-approved, ad valorem tax levied on all taxable property within the district boundaries. The district is required to pay the GO bond debt in the unlikely event that the ad valorem property tax revenues are insufficient.
KEY RATING DRIVERS
HOSPITAL OPERATIONS RISK: The rating downgrade reflects Fitch's increased focus on the financial risk related to the operation of the hospital as outlined in the July 15, 2011 press release 'Fitch Refines Methodology for Rating Tax-Supported Debt of Public Enterprises'.
DIVERSE TAX BASE APPEARS TO BE STABILIZING: After two years of TAV declines, the tax base appears to be stabilizing in fiscal 2012 despite ongoing house price declines. TAV stabilization and high taxpayer diversity will help offset the district's high overall net debt and very slow debt amortization.
GOOD GROWTH PROSPECTS: Despite mixed socio-economic characteristics, the district retains good potential for long-term growth due to its location and the availability of relatively affordable land for development.
STRONG MARKET SHARE AND TAXPAYER SUPPORT: The district's 61% market share (including affiliates) is strong, as was voter support at the time of the 2004 bond authorization with almost 69% approval. Fitch expresses some concern over current and projected tax rates well in excess of those originally presented at the bond election, but the district reports no negative public feedback to date.
CREDIT PROFILE
SOMEWHAT MIXED ECONOMY
The district covers more than 800 square miles of northeast inland San Diego County. The service area is primarily residential, with some light industrial and commercial activity.
While wealth levels within the district vary considerably, county per capita money income and median household income are above-average, and the county's individual poverty rate is below-average. After robust average annual TAV growth of 9.2% in fiscal years 2000-2009, the district incurred a 3.4% decline in fiscal 2010 and a 1.1% decline in fiscal 2011. After those two years of decline, TAV rose 0.8% in fiscal 2012. Property taxpayer concentration remains very low.
The district retains good potential for long-term growth due to its location near the San Diego and southern Orange County economies, as well as relatively affordable and available land for development. Nevertheless, the county's unemployment rate remains stubbornly high at 9.8% in September 2011, while remaining lower than the state unemployment rate (11.4%).
STRONG MARKET POSITION; SOME OPERATING PRESSURE
Fitch maintains a 'BB+' and Stable Outlook on $582.5 million in district certificates of participation and revenue bonds which reflects the hospital's ongoing construction project, low liquidity, and adequate profitability along with Fitch's expectation that management will successfully complete its master facility plan without further deterioration in the district's liquidity and leverage positions.
The district holds a significant 45% of hospital beds in the north San Diego County area, with facilities that currently include two acute care hospitals, two skilled nursing facilities, a surgery center, and an ambulatory care center. The district's large market share results from there being no other hospitals located within its primary service area and no immediate threat of competitors building one. The district provides inpatient and outpatient hospital services to Kaiser's health plan members and is affiliated with Rady Children's Hospital. Fitch views these contractual relationships as a positive credit factor since they result in a combined market share of approximately 61%. The district continues to take actions to expand its market share and position itself for health care reform.
The district's substantial $1.057 billion facilities master plan is driven by capacity constraints at the existing facilities. When the first phase is complete in 2012, with the opening of a third acute care hospital in August, the district will be able to accommodate its projected demand through 2020 and comply fully with seismic standards.
HIGH DEBT BURDEN
Demonstrating strong community support, almost 69% of district voters approved a $496 million GO bond authorization in 2004 to finance a substantial expansion and modernization of the district's facilities. That authorization has been fully depleted with GO bonds funding almost half of the $1.057 billion capital program. Fitch expresses some concern over declines in TAV and commensurate increases in the tax rate to fund debt service, well beyond initial projections.
Other funding sources include a mixture of revenue bonds and certificates of participation (40.4%), working capital (12%), and philanthropic support (0.7%). $7.1 million in philanthropic support has been received to date; further philanthropic funding would enable the district to reduce its cash contributions commensurately.
Overall debt is high at $2,182 per capita and 4.6% of TAV. The district's very slow debt amortization (approximately 13% in 10 years), with an escalating debt schedule, has the potential to diminish the district's debt management flexibility.
The district has manageable pension costs through a defined contribution plan, and its relatively minor other post-employment benefit liabilities are funded annually on a pay-as-you-go basis.
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.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
-- 'Tax-Supported Rating Criteria' (Aug. 15, 2011);
-- 'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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CONTACT:
Fitch, Inc.
Primary Analyst
Alan Gibson, +1-415-732-7577
Director
650 California Street, 4th Floor, San Francisco, CA 94108
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Secondary Analyst
Matthew Reilly, +1-415-732-7572
Associate Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
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Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
[email protected]
KEYWORDS: United States North America California New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance
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