Fitch Ratings affirms the 'A-' rating for California Statewide Communities Development Authority's revenue bonds series 2000 for the Los Angeles Orthopaedic Hospital Foundation and Orthopaedic Hospital (collectively, LAOHF).
The Rating Outlook is stable.
RATING RATIONALE:
--The rating reflects significant unrestricted cash and investments available for operating expenditures and support debt service coverage; available funds, defined as all cash and investments less restricted assets, are solid for LAOHF, covering debt and operating expenditures by 2.2 and 3.2 times (x), respectively.
--Operating performance, while still negative due to the charity mission of LAOHF, has improved due to increased outpatient volume, increasing royalty revenues, concerted staffing expenditure reductions including furloughs and consolidation of functions and discontinuing certain outreach programs.
--LAOHF remains unprofitable on an operating revenue basis and is dependent on investment returns for operations and DS coverage due to its charitable missions.
--LAOHF anticipates no future debt at this time with minimal capital needs including renovations to existing facilities.
KEY RATING DRIVERS:
--LAOHF maintains balance sheet resources at current or higher levels through prudent investment management and conservative asset allocations.
--Continued generation of sufficient investment returns to support operations and debt service given a history of weak operating performance.
SECURITY:
The bonds are secured by gross revenues of the hospital and foundation.
CREDIT SUMMARY:
LOAHF continues to operate the Lowman medical center and urgent care center in downtown Los Angeles. In addition LAOHF opened a children's clinic and a cerebral palsy clinic in Santa Monica in 2009 and continues to operate several outreach clinics. The corporation expects the new Santa Monica-UCLA Medical Center and Orthopaedic Hospital to be ready in late 2011. The corporation contributed $34 million to the joint medical center project and has a 34% co-tenancy right to the facilities and bears no financial obligation relating to facility's debt or operations. LAOHF uses 50% of the UCLA research center on the Westwood campus; a $30 million contribution from series 2000 bond proceeds entitles LAOHF use of the research center as well as 25% of all royalties derived from staff research in the facility.
Outpatient volume grew from 48.9 thousand visits in 2009 to 50.9 thousand visits in 2010. The Luskin Childrens Medical Clinic opened in May of 2009 and received over 3,800 patient visits through the end of the fiscal year, Oct. 31. The payor mix for the clinic is more HMO and PPO based and is thus more profitable than the downtown clinic with more state insured patients. LAOHF has experienced growth in its hemophilia program with revenues increasing year over year.
Operating margins improved from previous years, as a result of increased revenue and expenditure reductions. However subsidization of operating losses with investment earnings is required for LAOHF to achieve operating balance. During fiscal 2009 LAOHF recorded a positive margin of 16.9% including all investment returns, the exclusion of which reduces the margin to negative 29%. Fiscal 2009 reliance on the investment income was about 8%. Year to date fiscal 2010 results anticipate a loss of $5.5 million which equates to a 5.5% draw on the foundation investments. The Board has specified a 4.5% draw from investments annually starting in fiscal 2012 aiming to preserve the corpus of investments over the long term.
Liquidity remains strong, available funds defined as all cash and investments less restricted net assets total $97.6 million and covers operating expenses by 3.2 times (x) and outstanding debt of $42.9 million by 2.2x. Investments between the foundation and the hospital total $140 million as of August 2010. The investment target allocations remain at 60% equities, 25% fixed income and 15% alternative securities. LOAHF expects investment returns of approximately 6% in fiscal 2011.
LOAHF has no new debt expected and having paid down $5 million in fiscal 2009, has total debt outstanding of $41.6 million. LAOHF is not obligated on the debt of UCLA-OH SM. While debt burden is high at 16.8%, it is offset by the corporation's strong liquidity position and minimal future debt needs, partially mitigating risk. Capital outlay required for renovations and construction totals $299 thousand for the current fiscal year and $730 thousand for fiscal 2011.
Given the corporations' limited sources of new revenue, fund raising is an important component of increasing resources available for operations and debt service coverage. In an effort to bolster growth, LAOHF hired a new VP of advancement in January of 2010. The corporation will utilize the opening of the new Santa Monica-UCLA Medical Center and Orthopaedic Hospital in 2011 as well as the 100th year anniversary for LAOH to drive a new fund raising campaign.
The hospital was started in 1911 as a clinic for crippled children. It is one of the largest and most advanced treatment and teaching centers in the United States for children with disorders that strike bones, joints, muscles, nerves and connective issue. In June 1998, the hospital formed a strategic alliance with UCLA and the Board of Regents of the University of California. The alliance was formed to eliminate the financial risk to the hospital associated with operating an inpatient hospital facility, to improve the hospital's ability to manage revenues and expenditures, to enable the hospital to increase capacity, and to expand its research and education efforts.
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Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated Aug. 13, 2010.
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
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