AFFIRMATION AFFECTS TOTAL OF $290 MILLION OF RATED DEBT OUTSTANDING
Torrance (City of) CA
NEW YORK, Sep 8, 2011 -- Moody's Investors Service has affirmed the A2 rating assigned to
Torrance Memorial Medical Center's (Torrance) bonds (see RATED DEBT at end of
report). The outlook remains stable.
The affirmation of the A2 rating and stable rating outlook is attributable to
Torrance's good market position and management's swift responses to declining
patient volumes. We expect that actions taken by management will improve
financial performance from current levels.
*Construction project proceeding on schedule and budget, although it will not be
complete for several years; a guaranteed maximum price contract is in place
*Long term contracts with two large physician groups representing approximately
40% of the hospital's volume help mitigate against lost volume due to physician
*Strong balance sheet with 293 days cash on hand and 115% cash-to-debt
*Good market position in a demographically favorable market with low 5.0%
exposure to MediCal
*Patient volumes have declined unexpectedly in the six months through June 2011;
inpatient admissions are down 6.1%, although some decline is the result of a
shift to observation stays, similar to other markets
*As a result of the volume declines, profitability fell to a 1.1% operating
margin through six months FY 2011, from 2.7% in the prior year. Management has
taken a number of steps to reverse the trend, as discussed in the body of the
*Construction project requires equity contribution and original plan of finance
anticipates Torrance producing annual cash flow of approximately $60 million
(including investment returns), which implies operating performance at or above
*Relatively high leverage for the organization with 65% debt-to-revenue and 5.3
times debt-to-cash flow through six months 2011
DETAILED CREDIT DISCUSSION
LEGAL SECURITY: The bonds are secured by a gross receivables pledge of the
obligated group, which consists of the Torrance Memorial Medical Center.
Although only the Medical Center is obligated on the bonds, our analysis refers
to the entire system, Torrance Health Association, Inc. and Affiliates
(Torrance), which also includes the Torrance Memorial Medical Center Healthcare
Foundation. Unless otherwise noted, all financial statistics refer to the
INTEREST RATE DERIVATIVES: None
Financial performance at Torrance over the past several quarters has
slipped from historical trends, but we believe management is taking
appropriate steps to improve results. Fiscal year (FY) 2010 operating
margin fell to 1.5% after averaging 3.0% in the preceding two years. Through six
months FY 2011 (June 30, 2011) patient volumes have declined and the operating
margin has fallen to 1.1% and the operating cash flow margin is down to 8.5%
versus 9.6% in FY 2010.
Patient volumes are down as a result of a variety of factors including the
generally sluggish economy and shift of inpatient admissions to
observation status. Inpatient admissions are down 6.1% while combined admission
and observation stays are down 3.9%. Management has taken a variety of steps in
response including a soft freeze on hiring, flex staffing to lower volumes,
recasting budgets throughout the hospital in light of the volume changes with
departments looking for additional savings, and other steps. There are other
projects underway to find additional savings through value analysis, realtime
review of patient insurance to reduce bad debt, and better revenue cycle
Torrance has several initiatives underway to increase physician alignment. The
organization has established several clinics in cardiology and primary care.
Management is in discussions regarding the acquisition of a physician
organization, which management believes will lead to closer alignment with the
group's physicians and better performance under capitation contracts.
Additionally, management is also in discussions with several physician groups to
form an accountable care organization (ACO) to address issues surrounding
Torrance is constructing a new patient tower at a cost of $479 million (the
project has been expanded to include a build out of the seventh floor at a cost
of $15 million, which will reduce the project contingency from $35 million to
$20 million without affecting the total project budget). The project is
proceeding on time and on budget, although it is not scheduled to open until FY
2015. Financing includes $200 million from the Series 2010 bonds, $200 million
equity, and $75 million of philanthropy. Fundraising is on budget with $16
million pledged to date. The equity contribution relies on consistent cash flow
generation from operations and investments and Torrance will have to improve
performance from current levels in order to meet projections.
Torrance's balance sheet remains healthy with $331 million of unrestricted cash
and investments (293 days cash on hand and 115% cash-to-debt) at June 30, 2011.
Liquidity balances improved in FY 2010 as $27 million of the Series 2010 bond
proceeds were used for reimbursement. Management projects that unrestricted cash
will fall to $227 million when the new tower opens as a result of the equity
contribution. Torrance has a defined benefit pension for most of its
employees, although all new hires since January 1, 2010 are on a defined
contribution pension plan. The plan was underfunded by $35 million at FYE 2010
and contributions have risen to $13 million over the last two years from $7 to
$8 million in prior years.
The stable outlook reflects management's swift reaction to declining volumes in
FY 2011 and our expectation that the organization can improve
operating performance to historical levels.
WHAT COULD MAKE THE RATING GO UP
Sustained improvement in operating performance and leverage metrics; substantial
completion or opening of the new patient tower
WHAT COULD MAKE THE RATING GO DOWN
Continued deterioration in patient volumes; inability to return
operating performance to historical levels; significant construction cost
overruns or delays
Assumptions & Adjustments:
-Based on financial statements for Torrance Health Association, Inc. and
-First number reflects audit year ended December 31, 2009
-Second number reflects audit year ended December 31, 2010
-Investment returns normalized at 6% unless otherwise noted
*Inpatient admissions: 25,149; 25,852
*Total operating revenues: $431.8 million; $462.2 million
*Moody's-adjusted net revenue available for debt service: $63.5 million; $64.1
*Total debt outstanding: $90.8 million; $289.6 million
*Maximum annual debt service (MADS): $7.3 million; $16.3 million
*MADS Coverage with reported investment income: 5.6 times; 4.0 times
*Moody's-adjusted MADS Coverage with normalized investment income: 8.7 times;
*Debt-to-cash flow: 1.5 times; 5.0 times
*Days cash on hand: 242 days; 284 days
*Cash-to-debt: 287%; 114%
*Operating margin: 3.3%; 1.5%
*Operating cash flow margin: 10.9%; 9.6%
RATED DEBT (debt outstanding as of December 31, 2010)
-Series 2001A; fixed rate ($55 million outstanding), rated A2
-Series 2010A; fixed rate ($135 million outstanding), rated A2
-Series 2010B; VRDB ($65 million outstanding), rated Aa2/VMIG1, LOC provided by
Citbank, expires 9/23/2013; A2 underlying rating
-Series 2010C; VRDB ($35 million outstanding), rated Aa1/VMIG1, LOC provided by
JP Morgan, expires 9/23/2013; A2 underlying rating
Obligor: Bill Larson, Vice President of Finance, (310) 517-4612
Financial Advisor: Kaufman Hall and Associates: Jody Hill-Mischel Kaufman Hall,
Senior Vice President, (818) 430-9425; Carlos Bohorquez, Vice President (310)
The last rating action with respect to Torrance was on August 18, 2010 when a
rating of A2/stable was assigned to the Series 2010 bonds and parity debt was
downgraded to A2/stable from A1/stable.
The principal methodology used in this rating was Not-for-Profit Hospitals and
Health Systems published in January 2008. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
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MOODY'S AFFIRMS TORRANCE MEMORIAL MEDICAL CENTER'S (CA) A2 DEBT RATING; OUTLOOK REMAINS STABLE
Moody's Investors Service, Inc.
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New York, NY 10007