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Rating Update:

MOODY'S AFFIRMS CITY OF HOPE NATIONAL MEDICAL CENTER'S (CA) A1 DEBT RATING; OUTLOOK REMAINS STABLE

18 May 2011

AFFIRMATION AFFECTS TOTAL OF $154.6 MILLION OF RATED DEBT OUTSTANDING

ABAG Finance Authority for Nonprofit Corp. CA
Not-for-Profit Organization
CA

Opinion

NEW YORK, May 18, 2011 -- Moody's Investors Service has affirmed the A1 rating assigned to City of Hope National Medical Center's Series 1999A bonds (see debt list at end of report). The outlook remains stable.

RATINGS RATIONALE

The affirmation of the A1 rating and stable outlook reflect City of Hope's very strong operating performance and sizeable balance sheet. The rating incorporates risks related to lawsuits that could affect the patent portfolio and the fact that patents responsible for a quarter of total revenue don't expire until 2018.

STRENGTHS

*Well-defined patient care niche as a prominent and nationally recognized cancer hospital and major research institute

*Consistent track record of very strong operating margins with a 5-year average operating income margin of 9.6% and operating cashflow margin of 16.4%

*History of double-digit revenue growth rates, driven by good rate increases under managed care contracts, higher patient volumes following the opening of a new hospital, and significant growth in royalty revenues

*Exceptionally strong and diversified annual fundraising with good prospects for a $1 billion capital campaign

*Very strong balance sheet with 409 days of cash on hand for the entire organization and an adequate 238 days for the obligated group

*Manageable debt level and solid debt measures with a favorably low 1.4 times debt-to-cashflow, 7.6 times peak debt service coverage and a very good 320% cash-to-debt

CHALLENGES

*Patent that underlies the vast majority of royalty revenue expires in 2018; City of Hope is starting a strategic planning process to address the loss of this revenue and develop a comprehensive strategic plan

*Fairly large unrestricted cash balances at the Beckman Research Institute, which is not part of the obligated group on the 1999A bonds, and a prior agreement that suggests these assets may not be readily available to support non-research operations and debt service of the obligated group

*A large and growing proportion of patient revenues derived from Medi-Cal (18.7%), for which future reimbursement levels are uncertain given California's financial difficulties and proposed cuts to Medi-Cal funding

*Unionized work force, contributing to fairly high increases in labor costs in the past

DETAILED CREDIT DISCUSSION

LEGAL SECURITY: Bonds are secured by gross revenues and a mortgage of the City of Hope National Medical Center as well as a guarantee by City of Hope's Development Group (the parent); the Beckman Research Institute is not obligated on the bonds. Reserve fund is funded. Standard rate covenant and additional indebtedness tests.

INTEREST RATE DERIVATIVES: City of Hope has a total of $80 million in notional amount of floating-to-fixed rate swaps. Of this amount, approximately $50 million is related to Beckman's $50 million note payable with Wells Fargo. Beckman entered into a fixed rate swap agreement at 4.3875% with Wells Fargo and has two other smaller interest rate swaps related to two notes payable. The hospital has an interest rate swap related to the Series 2006B bonds ($19.5 million) to convert the issue to a fixed rate of 4.61%. No swap collateral has been posted.

RECENT DEVELOPMENTS/RESULTS

FY 2010 was another strong year for City of Hope. Operating revenue for the entire organization (which includes Beckman Research Institute and unrestricted contributions) grew 5.9% which is significantly lower than the double-digit increases of previous years, but is still quite strong. Importantly, patient care revenue grew 11.3% and City of Hope has enjoyed double-digit revenue growth in patient care over the last few years. In total, operating revenue has grown 55% since FY 2006 and operating cash flow has grown 64% to $154 million over the same period. Profitability has remained strong with the operating margin averaging 9.6% over the past five years and the operating cash flow margin averaging 16.4%. Moody's adjustments include removing investment income from operating revenue.

Over the past several years, City of Hope has been working to form a medical foundation with California Cancer Specialist Medical Group (CCSMG) the large medical group that is responsible for the vast majority of City of Hope's patient volume. Following several lawsuits, discussions between City of Hope and CCSMG have moved forward and it appears likely that a medical foundation will be formed. Over the long term, the formation of a medical foundation could be positive insomuch as it allows City of Hope to better coordinate care, reduce costs, improve strategic planning for entering new markets, and improve physician alignment. The inclusion of CCSMG will likely involve a cash payment which will not have a material impact on City of Hope's financial position.

Total operating revenues continue to include a large component of royalty revenue from the Cabilly patent. Royalty revenue comprises nearly a quarter of consolidated revenue and the vast majority is related to the Cabilly patent. This patent expires in 2018; strategic planning to offset the loss of this revenue stream will be of increasing importance in future credit reviews.

City of Hope is a co-defendant in a lawsuit filed by GlaxoSmithKline over the validity of the Cabilly patent; other lawsuits over the same patent have been settled. There is a possibility that the FDA will revoke the approval of Avastin for breast cancer (the FDA recommended that Avastin no longer be used to treat breast cancer, although a final ruling has not yet been made). Avastin is approved for other types of cancer so a negative ruling would not eliminate this royalty stream; Avastin royalties were $43.1 million in FY 2010 and $40.6 million in FY 2009.

City of Hope's balance sheet remains strong with consolidated unrestricted cash of over $850 million, translating into 409 days cash on hand and 320% cash to debt at FYE 2010. There is a significant amount of cash at the Beckman Research Institute, which is not obligated on the bonds and may not be available to bond holders. Based on management's calculations, the obligated group held 294 days cash on hand at FYE 2010.

City of Hope is in the midst of a $1 billion fundraising campaign. To date, the organization has raised $677 million in cash and pledges. Fundraising has historically been strong with over $50 million in unrestricted contributions annually for over a decade, and over $1 billion raised over the last decade.

Outlook

The stable outlook reflects City of Hope's strong market position, profitability, and sizeable balance sheet.

WHAT COULD MAKE THE RATING GO UP

Material growth in non-royalty related revenue; maintenance of very strong operating margins; balance sheet growth of the obligated group

WHAT COULD MAKE THE RATING GO DOWN

Insufficient planning for loss of royalty revenue in 2018; reduction in profitability; decline in balance sheet strength

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for City of Hope and Affiliates

-First number reflects audit year ended September 30, 2009

-Second number reflects audit year ended September 30, 2010

-Interest "grossed up" to include capitalized interest of $4.3 million in FY 2009 and $946,000 in FY 2010

-Investment returns normalized at 6% unless otherwise noted

*Inpatient admissions: 6,361; 6,263

*Total operating revenues: $845.5 million; $895.1 million

*Moody's-adjusted net revenue available for debt service: $198.9 million; $205.4 million

*Total debt outstanding: $272.8 million; $265.4 million

*Maximum annual debt service (MADS): $26.9 million; $26.9 million

*MADS Coverage with reported investment income: 5.4 times; 7.0 times

*Moody's-adjusted MADS Coverage with normalized investment income: 7.4 times; 7.6 times

*Debt-to-cash flow: 1.5 times; 1.4 times

*Days cash on hand: 368 days; 409 days

*Cash-to-debt: 261%; 320%

*Operating margin: 12.0%; 10.5%

*Operating cash flow margin: 18.4%; 17.2%

RATED DEBT (debt outstanding as of September 30, 2010)

-Series 1999A; fixed rate ($154.6 million outstanding) rated A1

CONTACT

Obligor: Gary Conner, CFO, (626) 930-5445

The last rating action with respect to the City of Hope National Medical Center was on April 8, 2009, when the rating was upgrade to A1 from A3. That rating was subsequently recalibrated to A1 with a stable outlook on May 7, 2010.

The principal methodology used in this rating was Not-for-Profit Hospitals and Health Systems published in January 2008.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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Analysts

Daniel Steingart
Analyst
Public Finance Group
Moody's Investors Service

Lisa Martin
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S AFFIRMS CITY OF HOPE NATIONAL MEDICAL CENTER'S (CA) A1 DEBT RATING; OUTLOOK REMAINS STABLE
No Related Data.
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