Fitch Upgrades City of Hope (CA) Revs to ‘AA-‘; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings, as part of its ongoing surveillance efforts, has upgraded the rating on the following revenue bonds issued on behalf of City of Hope (COH) to 'AA-' from 'A+':

--$154,600,000 million city of Duarte, CA, certificates of participation (COPs) (City of Hope), series 1999A.

The Rating Outlook is Stable.

RATING RATIONALE:
--The Rating upgrade to 'AA-' from 'A+' reflects City of Hope's (COH) exceptional balance sheet, which demonstrates liquidity metrics that exceed Fitch's 'AA' medians. City of Hope's liquidity benefited in recent years from stronger investment returns, steady contributions, and the receipt of $261.5 million in net royalty judgment and settlement revenue in 2008 and 2009 related to its antibody patents.
--Further, City of Hope's financial profile exhibits very strong profitability and low debt burden for the rating category. Over the last four fiscal years, COH posted profitability metrics that have consistently exceeded Fitch's medians for the 'AA' rating category. The strong profitability stems from City of Hope's unique position in California as a biomedical research, treatment, and educational institution, dedicated to the prevention and cure of cancer and other life-threatening diseases. However, the strong profitability is reliant on the receipt of sizeable royalty income.
--City of Hope's debt burden is low as evidenced by the very strong debt service coverage of 10.6 times (x) by 2010 EBITDA, and the low debt to capitalization ratio of 18.2%.

KEY RATING DRIVER:
--While in the early stages, City of Hope is in current litigation related to the validity of its patent, co-owned with Genentech, to process and produce monoclonal antibodies used in treating cancer and other diseases. Should the court invalidate the patent, City of Hope stands to lose substantially all of its royalty income on a prospective basis. However, Fitch believes that COH's balance sheet mitigates this risk. If the royalty revenue stream were to end, Fitch would expect COH to adjust its operating expenses accordingly.

SECURITY:
The bonds are secured by a pledge of gross revenues of City of Hope Medical Center. A mortgage on certain buildings and properties and a debt service reserve fund provide additional security to bondholders.

CREDIT SUMMARY:
The rating upgrade reflects City of Hope's exceptional financial profile, with liquidity and profitability medians that exceed Fitch's 'AA' category medians. As of March 31, 2011, COH had $938.4 million in unrestricted cash and investments equating to very strong 428.5 days cash on hand (DCOH), 43.4x cushion ratio, and 370.3% cash to debt position, compared to Fitch's respective medians of 214.7 days, 19.6x, and 149.9%. The exceptional liquidity has benefited in recent years from stronger investment returns, steady contributions, and the receipt of $261.5 million in net royalty judgment and settlement revenue in 2008 and 2009 related to COH's antibody patents. As of March 31, 2011, the majority of COH's $938.4 million in unrestricted cash and investments is invested in cash and fixed income (38.2%) and equities (41.8%).

City of Hope's profitability has been equally strong, as it posted an operating income of $95.1 million in fiscal (FY) 2010, amounting to an operating margin of 10.6%, which far exceeds Fitch's 'AA' median of 3.7%. Over the last four fiscal years, City of Hope's operating and operating EBITDA margins averaged an annual 16.5% and 22.5%, respectively. City of Hope's very strong profitability reflects its highly specialized, high acuity service lines, and its strong generation of annual contributions and research grants. In addition, the strong profitability is bolstered by COH's receipt of sizeable royalty income. In 2010, COH received $202.6 million in royalty revenue.

The rating upgrade is also supported by COH's low debt burden. As of March 31, 2011, COH had $253.4 million in long-term debt outstanding. Fitch rates only the series 1999 COPs, with remaining debt consisting of several bank notes and private placement bank bonds. COH's strong revenue generation led to solid maximum annual debt service (MADS) coverage of 8.7x by FY 2010 EBITDA (9.5x in the interim); MADS accounted for a low 2.4% of operating revenue in FY 2010 (2.3% interim). Further, with City of Hope's debt to capitalization ratio being very low at 18.2%, Fitch believes that City of Hope has additional debt capacity at the current rating level.

Credit concerns center around the aforementioned ongoing litigation, which subjects virtually all of COH's royalty income to prospective risk - the risk affects future royalty payments only. However, City of Hope's profitability depends highly on receipt of sizable royalty income annually - $202.6 million in FY 2010, equaling 22.3% of total operating revenues. Fitch expects that COH would adjust its operating expenses accordingly if the royalty revenue stream were to end. In anticipation of such an occurrence, City of Hope is in the process of developing a long-term strategic plan, which will address, among other issues, the potential impact of diminished royalties.

On June 1, 2011, a new nonprofit City of Hope Medical Foundation (Foundation) was formed as a sister organization to City of Hope's National Medical Center and Beckman Research Institute. The Foundation will contract with the City of Hope Medical Group, the new medical group comprising physicians, psychologists, fellows and physician assistants from the California Cancer Specialists Medical Group (CCSMG) and Oncology Specialists of COH (OSCOH) - two of the physician groups providing patient care at City of Hope whose assets were purchased by COH on May 31, 2011. Fitch believes the formalization of this physician alignment strategy bodes well for City of Hope's operations as it should result in further stability and enhanced efficiency going forward, especially in light of healthcare reform.

The Stable Rating Outlook is predicated on Fitch's expectation that City of Hope will maintain its exceptional balance sheet as well as begin to reap benefits accrued to its physician alignment strategy.

City of Hope operates a 185-staffed bed cancer center and a research institute located in the city of Duarte, 21 miles northeast of downtown Los Angeles, CA. In FY 2010, City of Hope had total revenues of $895.1 million. COH covenants to provide bondholders an annual audit within 122 days of fiscal year-end and quarterly disclosure within 45 days of quarter end via the MSRB's EMMA system. Fitch considers City of Hope's disclosure to be excellent in terms of timeliness and content. Annual financial statements are also posted to City of Hope's web site at 'www.cityofhope.org', with quarterly information including an MD&A, balance sheet, income statement, and utilization statistics.

Additional information is available at 'www.fitchratings.com'

This action was informed by sources of information identified in the Revenue-Supported Rating Criteria.

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:
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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Fitch Ratings
Primary Analyst
Michael Borgani, +1-415-732-5620
Director
Fitch, Inc.
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or
Secondary AnalystEmily Wong, +1-212-908-0651
Senior Director
or
Committee ChairpersonJim LeBuhn, +1-312-368-2059
Senior Director
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Source: Fitch Ratings