Fitch Rates Palomar Pomerado Health (CA) Bonds 'BBB'; Outlook Stable
Fitch Ratings has assigned a 'BBB' rating to the approximately $224 million in certificates of participation (COPs), series 2009, to be issued by Palomar Pomerado Health (PPH). In addition, Fitch has assigned a 'BBB' rating to approximately $172 million in outstanding series 2006 COPs and $41.5 million in outstanding series 1999 refunding revenue bonds. The Rating Outlook is Stable.
Proceeds from the sale of the 2009 certificates, along with interest earnings, operating cash flow, property tax supported general obligation (GO) bond proceeds, and philanthropy will fund PPH's sizable $983 million facilities master plan, including the construction of a new hospital facility on a new campus. The facilities master plan will address PPH's capacity constraints, meet California's seismic standards, and have the competitive advantage of a state of the art facility at a new and easily accessible location. The certificates are expected to sell via negotiation during the week of Nov. 9, 2009.
The 'BBB' rating reflects PPH's good financial and operational management practices, leading market share in a large primary service area, and taxing authority (for operations and GO bond repayment) over a large and diverse tax base. After posting a modest operating loss in fiscal year (FY) 2008, PPH's profitability rebounded strongly in FY 2009, as they reported an operating income of $17.6 million (3.8% operating margin). The turnaround in profitability is attributed to management actions which focused on cost containment and revenue enhancement as a response to a challenging operating environment in 2008. Interim data for the two months ending Aug. 30, 2009, show an operating income of $5 million (6.1% margin).
PPH's operations benefit from its leading (54%) market share in the large and highly populated north San Diego County area. Additionally, PPH has entered into a hospital service agreement with Kaiser Foundation Hospitals (rated 'A+' by Fitch) to provide inpatient and outpatient hospital services to Kaiser's Health Plan members, which Fitch views as a positive credit factor. In addition, as a California Hospital District (ie, a political subdivision of the State of California), PPH derives unrestricted property tax revenues from a fixed share of the 1% property tax levied by the County of San Diego on all taxable real property in PPH's boundaries. In FY 2009, PPH received $13.5 million in unrestricted property tax revenues. Fitch notes that these revenues are in addition to, and are separate from, the ad valorem tax revenues resulting from the separate voter-approved tax levy that is pledged solely to the payment of principal and interest on PPH's series 2005, 2007, and 2009 GO bonds (rated 'AA-').
Credit concerns reflect PPH's elevated debt metrics and leverage and low liquidity. With this issuance, PPH's long-term debt rises to $430 million (revenue bonds only) from $206 million. On a pro forma historical basis for the year ended June 30, 2009, the new issue drives maximum annual debt service (MADS) to 6.9% of net revenues, and MADS coverage by operating EBITDA to 1.4 times (x). Fitch medians for the rating category are 3.5% and 2.3x, respectively. Liquidity levels are low for the rating level, with unrestricted cash and investments at 106 days of expenses as of Aug. 30, 2009. The investment allocation is conservative and accessible. Although PPH's 2009 historical pro forma cash to debt and cushion ratios will drop with this issuance to 31% and 4.1x, respectively, management projects the continuation of robust operating profitability to quickly strengthen the balance sheet.
The Stable Rating Outlook reflects Fitch's expectation that management will maintain its current profitability trend based on the strength of its market position and delivery platform, prudently manage its liquidity position, and complete the construction of its new facility on time and on budget.
PPH operates two acute care hospitals, the 324-bed Palomar Medical Center (PMC) in Escondido and the 107-bed Pomerado Hospital in Poway, two skilled nursing facilities, a surgery center, and an ambulatory care center. In FY 2009, PPH had $459.5 million in total health care revenues. PPH covenants to provide annual audited financial reports and unaudited quarterly financial statements to bondholders. Quarterly information, including a balance sheet, income statement, and statement of changes in net assets will be provided within 45 days after the end of each of the first three fiscal quarters.
Additional information is available at 'www.fitchratings.com'.
Michael Borgani, 415-732-5620, San Francisco
Anthony Houston, 312-368-3180, Chicago
Cindy Stoller, 212-908-0526, New York
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