As part of its ongoing surveillance efforts and in anticipation of Stanford Hospital and Clinics'(SHC) bond remarketing, Fitch Ratings has affirmed the following California Health Facilities Financing Authority (CHFFA) bonds issued on behalf of Stanford Hospital and Clinics as follows:
-- $149.3 million, refunding revenue bonds, series 2010A, affirmed at 'AA-';
-- $146.7 million, refunding revenue bonds, series 2010B, at 'AA-';
--$70.4 million, refunding revenue bonds, series 2008A1, at 'AA-';
--$104.1 million, refunding revenue bonds, series 2008A2, at 'AA-';
--$85.7 million, refunding revenue bonds, series 2008A3, at 'AA-/F1+';
--$84.1 million, refunding revenue bonds, series 2008B1, at 'AA-/F1+';
--$84.1 million, refunding revenue bonds, series 2008B2, at 'AA-/F1+';
--$78.6 million, revenue bonds, series 2003A, at 'AA-'.
SHC's anticipated remarketing plan is as follows:
--Remarket the $104.1 million series 2008A-2 bonds from weekly variable-rate demand bonds (VRDBs) supported by a Bank of America Letter of Credit to fixed-rate mode to maturity bonds;
--Remarket the $85.7 million series 2008A-3 bonds from a three-year put to fixed-rate mode to maturity, or VRDBs in a commercial paper mode supported by self-liquidity;
--Remarket the $84.1 million series 2008B-2 bonds from weekly VRDBs supported by self-liquidity to VRDBs in a commercial paper mode supported by self-liquidity.
The bonds are expected to be remarketed on June 15 and 16.
The Rating Outlook is Stable.
--SHC has leveraged its academic and clinical relationship with Stanford University's School of Medicine and its biological research activities to further its clinical excellence and reputation in the treatment of the most complex medical cases and diseases. In 2009, SHC ranked 15th on U.S. News and World Report's 'Best Hospitals Honor Roll';
--Fitch believes SHC's clinical excellence and focus on tertiary/quaternary services has driven increased referral volumes and strongly mitigates the risks of SHC's highly competitive service area;
--SHC's historical operating profitability has been robust over the last four fiscal years, exceeding Fitch's 'AA' category medians. Operating margins over the last four fiscal years have ranged between 5.1% and 7.2%, averaging better than 6%. Similarly, operating EBITDA margins have exceeded 11% in each of the last four fiscal years;
--SHC's liquidity indicators are consistent with Fitch 'AA' peers. At Feb. 28, 2011, SHC's unrestricted cash and investments totaled $1.61 billion which translates into 232 days of cash on hand, a cushion ratio of 24.7 and 144% cash to long-term debt.
KEY RATING DRIVERS:
--SHC has experienced consistent increases in inpatient admissions and surgeries over the last four years. While the recent opening of the SHC Outpatient Center in Redwood City has created additional inpatient capacity at the main hospital, Fitch believes capacity constraints could limit continued revenue growth;
--SHC's 10-year capital plan includes up to $2 billion for a replacement of the current inpatient hospital facility and approximately $1 billion for routine capital expenditures. While SHC anticipates issuing roughly $650 million of debt to fund the capital plan, the ultimate costs and capital needs present a degree of uncertainty and may limit upward movement of the rating.
SECURITY: A pledge of gross revenues of the Obligated Group.
The 'AA-' rating is supported by SHC's clinical excellence and reputation in advanced, high-acuity clinical procedures, its proximity to and close relationship with Stanford University (revenue bonds rated 'AAA' by Fitch) and Lucile Salter Packard Children's Hospital (revenue bonds rated 'AA'), its strong operating profitability and debt service coverage, and solid liquidity indicators.
Located on the campus of Stanford University (SU) and adjacent to both Lucile Salter Packard Children's Hospital and SU's School of Medicine, SHC has leveraged the biological research activities of SU to focus on treating the most complex medical cases and diseases. SHC and SU's School of Medicine have created four Institutes that align research, education and clinical efforts in the areas of regenerative medicine, cardiovascular, neuroscience and transplantation. As a result, SHC's Medicare Case Mix Index in fiscal 2010 was a very high 1.97. SHC's historical operating profitability has been robust over the last four fiscal years, exceeding Fitch's 'AA' category medians and is attributed largely to high-acuity volume growth, solid rate increases and realization of physician alignment strategies.
Primary credit concerns include SHC's potential capacity limitations and its sizable long-term capital plan. Given SHC's increasing referral volumes and higher average length of stay, management will be challenged to create more capacity within its existing space. SHC has developed a long-term capital plan to replace the existing inpatient facility at a projected cost of $1.9 billion, of which $650 million is anticipated to be funded through debt. The plan and any additional debt are subject to formal approval by the SHC Board, which has not yet been requested or received, and is not expected to commence until 2013 or later.
The affirmation of the 'F1+' short-term rating is supported by the adequacy of SHC's highly liquid resources available to fund any un-remarketed puts on the series 2008A-3 bonds and the series 2008B-1 and B-2 bonds, which total $253.9 million. At Feb. 28, 2011, SHC had cash and cash equivalents available on a same-day basis of $426.3 million. In addition, $200 million of SHC's approximately $750 million of unrestricted cash and investments managed by Stanford Management Company in the merged pool is available for same-day settlement. 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 1.25 times (x) requirement to cover the maximum tender exposure on any given date.
The Stable Outlook reflects Fitch's belief that SHC will maintain historical operating profitability and successfully manage continued volume growth in high-acuity/ complex clinical cases. Furthermore, the timing and scope of SHC's long-term capital budget is subject to change. The expected debt issuance associated with the replacement hospital project is not anticipated until at least 2013 and does not affect the rating at this time.
SHC is a 466-operated-bed hospital located in Palo Alto, California on the campus of Stanford University. Total revenue in fiscal 2010 was $1.97 billion. SHC covenants to provide annual audited financial and utilization data within 150 days of each fiscal year-end and quarterly un-audited financial and utilization data within 60 days of each fiscal quarter-end. Quarterly disclosure includes balance sheet, income statement, and statement of cash flows.
This action was informed by the 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
Nonprofit Hospitals and Health Systems Rating Criteria
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