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Rating Action:

Moody's affirms Loma Linda University Medical Center's (CA) Baa3; Outlook negative

17 Oct 2014

$731M of debt outstanding

New York, October 17, 2014 -- Moody's Investors Service has affirmed Loma Linda University Medical Center's (LLUMC) Baa3 revenue bond rating affecting $329 million of rated debt issued by the City of Loma Linda. (Inclusive of unrated debt, LLUMC has a total of $731 MM of direct debt outstanding.) The negative outlook has been maintained.

SUMMARY RATING RATIONALE

The affirmation of the Baa3 rating and the maintenance of the negative outlook reflect ongoing weak and variable operating performance continuing through fiscal year (FY) 2013 and through the first six months of FY 2014 (ended June 30). A downgrade was precluded at this time by evidence that core operating results are improving in the second half of FY 2014, and the expectation that core performance indicators for full year FY 2014 will show improvement over FY 2013. LLUMC's other challenges include ongoing (though improving) economic pressures in the Inland Empire, continued losses at Murrieta Hospital and a very large capital project to be launched before the end of the decade (costing approximately $800 million and consisting of the replacement of LLUMC's flagship facility). LLUMC's strengths include: the medical center's strong ties to Loma Linda University, the medical center's strong market position within San Bernardino county, and a certain level of stability that we believe is achieved through the organization's size, breadth of clinical offerings, and reputation.

This review incorporates a $202 million increase in direct debt resulting from the refinancing of Murrieta Hospital's facility lease with a bridge loan. As the facility lease was already incorporated into our credit view, comprehensive debt remains mostly unchanged by the transaction, although direct debt measures do increase significantly. Long term financing is expected to be put in place before the end of the year.

CHALLENGES

*In FY 2013, LLUMC produced a second year of worsening core performance measuring (excluding the California State Provider Fee). Interim financial statements for the first six months of FY 2014 (unaudited, though June 30) show a continuation of poor results, though management expects results to improve by the end of the current fiscal year.

*LLUMC has very high direct leverage, with proforma FY 2013 debt to revenue measuring 56.4%, and with cash to direct debt equal to 51%. With the conversion of the Murrieta facility lease to direct debt, LLUMC now has relatively modest exposure to indirect debt. LLUMC's debt structure is somewhat aggressive for the rating category, with bank exposure on over 50% of all debt (excluding the Murrieta bridge loan) and with swaps equal to over 20% of all debt.

*LLUMC has relatively modest liquidity for the rating category (though better than previous years) with days cash on hand measuring 104 days.

*LLUMC employs an aggressive investment strategy for the rating category with an unusually high percentage of investments allocated to alternative vehicles, including trust deeds and triple net leases. Altogether, as much as 32% of unrestricted cash and investments are invested in illiquid non-marketable securities.

*LLUMC has an unfavorable payer mix with high exposure to Medi-Cal (36.8% of gross revenues, due in part to LLUMC's children's hospital). Parts of LLUMC's primary service area have challenging demographics and LLUMC is highly reliant on supplemental funds.

*LLUMC makes routine, sizable transfers to affiliates (to support the academic physician group, among other purposes) which perpetuates slow liquidity growth and dilutes MADS coverage.

STRENGTHS

*LLUMC is a significant beneficiary under the California State provider fee program, receiving approximately $280 million from 2010 through 2013, and expected to receive an additional $250 over the next three years.

*Operating losses at the Murrieta hospital, which are a significant driver of the weaker performance, are improving and are expected to drop to $10 million in FY 2014 from $50 million in FY 2012. Bringing Murrieta into the obligated group and exercising more direct management over the facility should strengthen the organization overall.

*LLUMC is highly integrated with A3-rated Loma Linda University and has a common parent, which increases the organization's stature, and provides additional stability and access to resources

*LLUMC is a provider of clinical excellence with a focus on high-end services. LLUMC is the only academic medical center and the only Children's Hospital in the Inland Empire, and its exclusive services include: Level I trauma, Level 3 NICU, proton treatment for cancer, and certain specialized transplant services. LLUMC fosters a culture of innovation and is responsible for developing a number of new protocols now in use nationally and internationally.

*LLUMC has the leading market position in its primary service area and receives the highest ratings for quality of any provider in its region.

OUTLOOK

The maintenance of the negative outlook reflects LLUMC's current operational challenges, coupled with its perennially challenged balance sheet measures.

WHAT COULD MAKE THE RATING GO UP

Given the negative outlook, an upgrade is unlikely at this time. Long term, factors that would contribute to an upgrade include material growth in liquidity and balance sheet measures; significant improvement in financial performance; and positive returns from its growth strategy

WHAT COULD MAKE THE RATING GO DOWN

Factors contributing to a downgrade would likely include: failure to improve operating performance; a further weakening of balance sheet and debt measures; or failure of the California State Provider Fee Program to be extended.

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was Not-for-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Eugene Bradley Spielman
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
One Front Street
Suite 1900
San Francisco, CA 94111
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Daniel Steingart
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Loma Linda University Medical Center's (CA) Baa3; Outlook negative
No Related Data.
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