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Fitch Upgrades Cedars Sinai Medical Center (CA) Rev Bonds to 'AA-'; Outlook Revised to StableFitch Ratings has upgraded the rating on Cedars Sinai Medical Center's (CSMC) outstanding debt to 'AA-' from 'A+', which is listed at the end of this press release. The Rating Outlook is revised to Stable from Positive. SECURITY The bonds are secured by a gross revenue pledge of the medical center, which accounted for 99% of total assets and 95% of total revenue of the consolidated entity in fiscal 2014 (June 30 year end; audited). Fitch's analysis is based on the consolidated entity. KEY RATING DRIVERS SUSTAINED STRONG FINANCIAL RESULTS: The upgrade to 'AA-' is supported by continued strong performance in fiscal 2014 (year-end June 30), exceeding budget, and through the second quarter of fiscal 2015, with both operating and operating EBITDA margins better than Fitch's 'AA' medians, while improved liquidity and debt metrics are now closer to the rating category. MANAGEABLE CAPITAL PLANS: CSMC completed one of its largest capital projects in 2013, the Advanced Health Sciences Pavilion (AHSP), and does not have any significant capital needs in the foreseeable future and no plans for debt issuance. Coverage of maximum annual debt service (MADS) by EBITDA was 5.3x in fiscal 2014, consistent with the 'AA' median of 5.4x and 4.7x through the second quarter of fiscal 2015 ended Dec. 31, 2014 (the interim period). IMPROVED LIQUIDITY: While liquidity has historically been modest, unrestricted cash and investments have grown significantly - by over $500 million since 2012 and were reported at $1.7 billion at Dec. 31, 2014, translating to 241.6 days cash on hand (DCOH) and cash equal to 166.7% of long-term debt, a marked improvement over 185 DCOH and 102% cash to debt in fiscal 2012. TRANSFORMATION INITIATIVES UNDERWAY: CSMC has implemented several value-based initiatives to leverage its high quality care while focusing on reducing costs and improving efficiency. Clinical and operational transformation initiatives resulted in a $75 million reduction in expenses in 2014. COMPETITIVE MARKET: CSMC operates in the highly competitive and fragmented Los Angeles market with a number of providers competing for the high-end tertiary and quaternary services. CSMC is one of seven hospitals in the Los Angeles area that is part of Vivity - a joint venture with Anthem Blue Cross which will offer a health maintenance organization plan intended to align care delivery and in which the providers and the insurer will share financial risk and gain. RATING SENSITIVITIES CONTINUED STRONG PERFORMANCE: Fitch expects CSMC to continue to produce solid operating performance by leveraging CSMC's qualitative strengths and strategic initiatives. With modest future capital needs, liquidity should improve as debt burden declines. CREDIT PROFILE CSMC is an academic medical center with 886 licensed beds located in Los Angeles. CSMC has a medical foundation that includes 280 employed physicians with an additional 636 physicians in the IPA. Total revenue in fiscal 2014 was $2.9 billion. Sustained Strong Financial Results CSMC has continued to produce profitability metrics favorable to Fitch's 'AA' medians. After an exceptionally strong fiscal 2013, profitability continued to be excellent in fiscal 2014. The year ended with operating income of $279 million, equal to an operating margin of 9.6%, exceeding the budgeted 8.2%, and operating EBITDA margin of 16.3%, both comparing well to the 'AA' category medians of 3.9% and 11%, respectively, despite a decline in inpatient admissions, driven by a shift to observatin stays. Outpatient utilization, aided by the opening of the AHSP which houses outpatient services in heart and neurosciences as well as research space, was robust, with outpatient revenues up 18% last year. Leveraging CSMC's strong clinical reputation, acuity continued to rise with Medicare case mix index at a high 1.83. Operating income through the second quarter of fiscal 2015 ended Dec. 31, 2014 was reported at $127 million, ahead of the budgeted $96 million, translating to operating and operating EBITDA margins of 8.3% and 15%. Management has budgeted to end the year with operating income of $182.1 million, which Fitch believes is achievable, and is supported by continued strong outpatient volumes and slight uptick in inpatient admissions through the second quarter. Improved Liquidity Fitch had noted CSMC's liquidity as being relatively modest in the past, but driven by robust cash flow and good returns, unrestricted cash and investments increased by $556 million since the close of fiscal 2012. Liquidity metrics at 241.6 DCOH, cushion ratio of 17.8x and cash to debt at 166.7% are still slightly lower than the 'AA' rating category medians of 277.1 DCOH, 26.5x cushion ratio and 178.5% cash to debt, but should further improve given the absence of planned major investment needs and debt issuance. CSMC also has significant fundraising capabilities given its teaching and research mission as well as its reputation. CSMC is currently in a capital campaign to raise $600 million by fiscal 2018 and has raised $350 million to date. Manageable Capital Plans and Moderating Debt Burden CSMC completed its last major capital project, the AHSP, in 2013 and has been making continuous investments in its facility, which is seismically compliant. Capital budget for the current year is $160 million, roughly equal to the organization's depreciation expense, with $58 million slated for IT. There are no plans for debt issuance in the near to medium term. CSMC's debt burden, which had initially been high, has been moderating and MADS as a percentage of revenue has declined to 3.2% in fiscal 2014 from 4.7% five years ago, compared to the 'A' category median of 2.6%. Debt service coverage has also improved to 5.3x in fiscal 2014, consistent with the category median of 5.4x. Market Leader in Competitive Environment CSMC maintains a leading market share in its primary service area, despite facing strong competition from several highly regarded and reputable academic centers and healthcare systems in the greater Los Angeles area. A recently announced partnership between Anthem Blue Cross and seven area hospital systems, including CSMC and UCLA Health is an effort to provide a lower cost insurance product while providing high quality care and should foster collaboration between the hospitals. One area of focus is reducing the outmigration of highly profitable tertiary and quaternary referrals, of which CSMC captures a fair percentage. CSMC has a highly aligned physician-hospital platform facilitated through its foundation, which is affiliated with over 900 physicians who practice in CSMC's service area and CSMC operates the largest heart transplant program in the world. Debt Profile CSMC's total debt as of June 30, 2014 was $1 billion and is 100% fixed rate and there are no swaps. CSMC's debt service is front loaded and MADS of $97 million declines to $83 million in fiscal 2016 and $75 million in fiscal 2021. Disclosure CSMC covenants to provide annual financial statements through EMMA. Outstanding Debt --$130,574,000 California Health Facilities Financing Authority (CA (News - Alert)) (Cedars-Sinai Medical Center) revenue refunding bonds series 2011; --$461,576,000 California Health Facilities Financing Authority (CA) (Cedars-Sinai Medical Center) revenue bonds series 2009; --$479,680,000 California Health Facilities Financing Authority (CA) (Cedars-Sinai Medical Center) refunding revenue bonds series 2005. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30, 2014. Applicable Criteria and Related Research: U.S. Nonprofit Hospitals and Health Systems Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979343 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
