|[July 21, 2014]
Fitch Upgrades Stanford Hospital & Clinics, CA's Revs to 'AA'; Outlook Revised to Stable
CHICAGO --(Business Wire)--
Fitch Ratings has upgraded to 'AA' from 'AA-' and to 'AA/F1+' from
'AA-/F1+' the ratings on the respective 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
The Rating Outlook is revised to Stable from Positive.
Debt payments are secured by a gross revenue pledge of the obligated
KEY RATING DRIVERS
CONSISTENT FINANCIAL STRENGTHENING: The upgrade to 'AA' from 'AA-'
reflects SHC's improving operating profitability, robust debt service
coverage, growing liquidity and strong philanthropic support on their
hospital replacement project. Operating margin of 10.3% at Feb. 28, 2014
(six month interim), is more than double the 'AA' category median of
4.2% and operating EBITDA of 15.5% during the same time period is also
significantly above the category median of 11.8%. Fitch believes the
reduction in development risk associated with its hospital replacement
project in conjunction with a stronger financial profile and exceptional
qualitative attributes warrants the upward rating movement.
RELATIONSHIP WITH STANFORD UNIVERSITY: Fitch views SHC's close and
collaborative relationship with Stanford University (rated 'AAA'; Stable
Outlook) and Lucile Packard Children's Hospital (rated 'AA'; Stable
Outlook) as a positive credit factor. Stanford University is the sole
corporate member of SHC and Lucile Packard Children's Hospital. Although
the entities have separate boards and leadership teams, the coordination
between the organizations in research, fundraising and clinical and
educational activities are accretive to SHC's credit profile.
EXCELLENT CLINICAL AND RESEARCH REPUTATION: SHC's strong reputation and
brand recognition for excellent tertiary and quaternary care and state
of the art clinical research conducted by faculty physicians is a key
credit strength as it increases its geographic footprint in the Bay Area
and beyond. SHC is leveraging its information technology resources to
partner with nine major Silicon Valley corporations, providing on-site
and near-site clinics and telemedicine for employees around the world.
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 inpatient and outpatient
procedures. SHC signed a letter of intent to affiliate with ValleyCare
Medical Center, which Fitch views positively as it will expand SHC's
outreach to the Tri-Valley service area. 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.
CONSTRUCTION PROGRESS: SHC's $2.5 billion master facility plan is
underway and on schedule. The new facility is expected to open in 2018
and Fitch anticipates construction to continue on time and within budget.
CONTINUED SOLID FINANCIAL PERFORMANCE: SHC's overall financial profile
is strong and financial performance is expected to remain in line with
'AA' category medians. Fitch notes that there may be near term softening
of certain liquidity metrics due to the remaining funding of its master
facility plan however, the impact of this is expected to be temporary.
Stanford Hospital and Clinics (SHC) is a principal teaching affiliate of
the Stanford University's School of Medicine. SHC, together with Lucile
Salter Packard Children's Hospital at Stanford 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's close relationship with Stanford University and
its School of Medicine generates certain reputational and clinical
benefits that are unique in the service area and are important for
recruitment. 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
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 remaining spend totals
$2.3 billion and is expected to be funded from debt, operating cash
flow, investment income and philanthropy. Total debt contemplated for
the project is $600 million, $500 million has been issued and $100
million is being contemplated in 2016, which Fitch believes SHC can
absorb at the current rating level. 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. Currently,
construction is on time and on budget. Fitch believes the development
risk has been mitigated by a signed guaranteed maximum price contract
($807.6 million) an SHC's experienced construction team. Upon
completion of the project, SHC's bed capacity, including both the new
hospital and the renovated portions of the existing hospital, will be
approximately 600 patient beds. In fiscal year 2013, SHC had $2.7
billion in total operating revenue.
SOLID FINANCIAL PROFILE
The upgrade to 'AA' from 'AA-' is supported by continued robust
operating performance, growing liquidity position and very healthy debt
service coverage metrics.
Due to standardization, and adherence to LEAN methodology, operating
profitability metrics all well exceed the 'AA' category medians.
Operating EBITDA of about $393.7 million (14.5% operating EBITDA margin)
and income from operations of $252.8 million (9.3% operating margin) in
fiscal 2013 compare favorably to the respective 'AA' category medians of
11.8% and 4.2%. Strong performance continued through the six months
ended Feb. 28, 2014, with 15.5% operating EBITDA and 10.3% operating
margin. Continued growth in high acuity outpatient and inpatient volumes
combined with coordinated-care efforts and attention to process
improvements 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
$73.9 million is a moderate 2.7% of total fiscal 2013 operating revenue
as compared to Fitch's 'AA' median of 2.6%. Coverage of MADS by EBITDA
in 2013 was a very strong 5.5x compared to 5.3x in fiscal 2012 and 4.4x
in fiscal 2011. Coverage improved further through February 28, 2014 (six
month interim) at 6.3x, well exceeding the 'AA' category median of 4.8x.
Including the potential $100 million of additional debt in 2016, MADS is
projected to increase to $82.4 million.
As of Aug. 31, 2013, total debt (including $100 million series 2012D
direct placement not rated by Fitch) was approximately $1.27 billion and
includes $228.2 million or about 18% 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, which Fitch views favorably. In February 2014, SHC terminated
two swaps, leaving four swaps outstanding and decreasing the notional
amount to $577.2 million from about $745 million. The counterparties on
the swaps are diversified but certain aggregate collateral thresholds do
Liquidity remains somewhat mixed but has grown year-over-year for the
last five years. Unrestricted cash and investments equaled $1.81 billion
in fiscal 2013, a 13% improvement from the prior year and nearly double
SHC's unrestricted cash position of $894.1 million at fiscal 2009
year-end. At Feb. 28, 2013 (six month interim), unrestricted cash and
investments equaled $1.86 billion, translating to 273.8 days cash on
hand, 142.8% cash to debt and 25.2x cushion ratio compared to the 'AA'
respective category medians of 254.3 days, 173.6% and 23.4x.
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. SHC continues to focus on providing the premier
patient experience, developing virtual care and providing an innovative
and service-oriented approach to care. 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 throughout
the Bay Area.
SHC and ValleyCare Health System signed a non-binding letter of intent
to affiliate in May 2014. If the transaction moves forward as
anticipated, ValleyCare Health System and its hospitals in Pleasanton
and Livermore would become a subsidiary of SHC and ValleyCare would
retain its medical staff and its physician organization would be
integrated with Stanford's University Healthcare Alliance. Fitch views
this affiliation positively as it would increase SHC footprint in the
east Bay/ Tri-Valley service area.
The assignment and affirmation of the 'F1+' short-term ratings are
supported by the adequacy of SHC's highly liquid resources available to
fund any un-remarketed 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.
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
Fitch affirms the following California Health Facilities Financing
Authority outstanding debt:
--$69,485,000 refunding revenue bonds, series 2008A-1, upgraded to 'AA'
--$102,775,000 C refunding revenue bonds, series 2008A-2, upgraded to
'AA' from 'AA-';
--$83,065,000 refunding revenue bonds, series 2008A-3, upgraded to 'AA'
--$140,200,000 refunding revenue bonds, series 2010A, upgraded to 'AA'
--$146,710,000 refunding revenue bonds, series 2010B, upgraded to 'AA'
--$84,100,000 variable rate refunding revenue bonds, series 2008B-1,
upgraded to 'AA/F1+' from 'AA-/F1+';
--$84,100,000 variable rate refunding revenue bonds, series 2008B-2,
upgraded to 'AA/F1+' from 'AA-/F1+';
--$340,000,000 revenue bonds, series 2012A upgraded to 'AA' from 'AA-';
--$63,550,000 variable rate revenue bonds, series 2012B,upgraded to
'AA/'F1+' from 'AA-'/F1+';
--$60,000,000 variable rate revenue bonds, series 2012C, upgraded to
'AA/'F1+' from 'AA-'/F1+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
--'Revenue-Supported Rating Criteria', dated June 16, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
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