Fitch Rates Community Hospital of the Monterey Peninsula (CA) 2011 Rev Bonds ‘AA-‘; Outlook Stable
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The series 2011A bonds are expected to be issued in fixed rate mode to a) finance ongoing construction and renovation projects at CHOMP's various facilities, and b) repay a
In addition, Fitch affirms its 'AA-' rating on the following bonds issued on behalf of CHOMP:
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The Rating Outlook is Stable.
RATING RATIONALE:
--CHOMP's financial profile is characterized by strong profitability and cash flow generation that compare favorably with Fitch's medians for the 'AA' rating category. Further, and post issuance, CHOMP's liquidity relative to expenses is still adequate for the current rating.
--Despite the added debt, CHOMP's debt burden remains manageable as CHOMP's robust profitability and cash flow generation have led to very strong debt service coverage. Additionally, CHOMP's pro forma debt to capitalization and debt to EBITDA metrics remain relatively low. However, absent sizable improvement to its balance sheet, Fitch believes that CHOMP has no added debt capacity under the current rating.
--CHOMP's operations benefit from its dominant 77% market share in its primary service area; its closest competitor has an 8% share.
KEY RATING DRIVER:
--Management's ability to meet its financial projections in 2011 and 2012, all while enhancing liquidity.
SECURITY:
Debt payments are secured by a pledge of the gross revenues of the obligated group.
CREDIT SUMMARY:
CHOMP is a 259 licensed (205 staffed) bed acute care hospital located in
The 'AA-' rating reflects CHOMP's history of strong operating profitability and cash flow generation, exceptional debt service coverage, and a good liquidity position. These factors compensate for an elevated, though manageable, debt burden and a challenging operating environment related to reimbursement pressures and adverse shifts in payor mix.
CHOMP's profitability has been historically very strong, averaging a 6.6% operating margin over the last four years. At year-end 2010, CHOMP posted an operating margin of 5.1%, which exceeded Fitch's median of 3.8% for the 'AA' rating category. Of note is CHOMP's ability to generate strong profitability while proactively adjusting its revenue and expense base in a bid to maintain its competitive edge and in preparation for healthcare reform. Over the last two years, CHOMP sought to streamline its operations by adjusting its labor force and reducing supply expense. These actions were taken in light of anticipated price reductions to CHOMP's commercial contracts. Thus, while CHOMP experienced a 10% drop in net patient revenue due to price reductions and an adverse payor mix shift, it managed to reduce overall operating expenses by 2% and still post a strong 5.1% and 14% operating and operating EBITDA margins in 2010. Fitch believes that management's ability to undertake strong actions bodes well for CHOMP's ability to maintain strong profitability and enhance its already good liquidity position.
Post-financing, CHOMP's liquidity metrics remain in line with Fitch's medians for the 'AA-'rating category. As of
Despite the added debt, CHOMP's debt burden remains manageable as CHOMP's robust profitability and cash flow generation have led to very strong debt service coverage. At fiscal year-end (FYE) 2010, pro forma MADS coverage by EBITDA was a strong 6.4x, well above Fitch's 'AA' median of 3.8x. Further, CHOMP's pro forma debt to capitalization of 25.6% and its debt to EBITDA of 2.0x are light for the rating category. However, absent sizable improvement to its balance sheet, Fitch believes that CHOMP has no added debt capacity under the current rating.
Credit concerns revolve around CHOMP's ongoing efforts to adjust its revenue and expenses structure in a bid to maintain a competitive edge and to prepare for healthcare reform. Management's long term strategy is to lower its average expense per adjusted occupied bed to be more consistent with the regional average. As a result, several labor and supply expense initiatives have been implemented in fiscal 2010 to reduce expenses. Further, CHOMP has granted price reduction on its commercial contracts in 2009 and 2010, followed by discounts on its gross charges in 2010, all of which have resulted in a downward shift in CHOMP's revenue base. As a result, CHOMP's overall profitability is expected to compress in 2011 as management has budgeted a 3.2% operating margin. Going forward, CHOMP expects profitability to return to near historical trend, averaging above 5% annually. Fitch believes that management's initiatives should position CHOMP well in a post-healthcare reform era and that management's history of producing stronger than budgeted results help mitigate such concerns.
An adverse shift in CHOMP's payor mix that led to a
Post sale of the series 2011 bonds, CHOMP's outstanding long-term debt will total
The Stable Rating Outlook reflects Fitch's belief that CHOMP will succeed in achieving its budget targets while it completes its cost control initiatives and ongoing construction projects. Financial projections provided by management show a return to historical results in fiscal 2012 and sharp growth in liquidity indicators over the next three years. Fitch believes those CHOMP's projections are reasonable given the corporation's market position, the benefits of management's expense control initiatives and minimal future capital needs.
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.
Additional information is available at 'www.fitchratings.com'
--'Revenue-Supported Rating Criteria', dated
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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