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Rating Action:

Moody's affirms Palomar Health's (CA) (formerly Palomar Pomerado Health) Baa3 revenue bond rating; Outlook revised to negative from stable

Global Credit Research - 11 Mar 2013

$583 million of rated revenue bonds outstanding

New York, March 11, 2013 -- Moody's Investors Service has affirmed Palomar Health's (formerly Palomar Pomerado Health) Baa3 revenue bond rating on approximately $583 million of debt. The outlook has been revised to negative from stable.

As a district hospital, Palomar Health (PH) has the ability to issue tax supported debt backed by an unlimited property tax pledge. Concurrent with this rating review, Moody's has affirmed the A1 rating assigned to approximately $492 million of rated General Obligation (GO) bonds. The outlook on the GO bonds has also been revised to negative from stable. (See the report dated March 11, 2013 on the general obligation bonds for more information).

SUMMARY RATINGS RATIONALE

The affirmation of the Baa3 revenue bond rating reflects the system's leading market position in northern San Diego county, its status as the largest hospital district in the state, the completion of its large replacement hospital, and the absence of immediate competition within the district. The revision of the outlook to negative reflects very poor year-to-date operating performance, a precipitate drop in days cash on hand year-to-date, and the challenges posed by opening and operating the new, very large, replacement facility.

CHALLENGES

*Very poor operating performance through six months year-to-date (YTD) 2013 (ended December 31, 2012, unaudited) with operating margin measuring -12.2%, and operating cashflow margin measuring 1.6%; results reflect operations following the opening of the new facility in Escondido, which opened in August 2012, and also includes operations at the original facility in Escondido, which continues to offer certain services

*Poorer than expected volumes from Kaiser contract; one driver of the size of the new facility is the contract that PH has with Kaiser to provide Kaiser enrollees with services; following the opening of the new facility, average daily census (ADC) of Kaiser patients has ramped up since August, but has not yet reached targeted levels

*Material drop in unrestricted cash and investments as of December 31, 2012 (unaudited); days cash on hand fell to 82 days from 124 days at FYE 2012 (June 30); PH's has a minimum days cash on hand covenant of 80 days measurable semi-annually

*Heavy debt load; debt measures as of fiscal year end (FYE) 2012 (ended June 30, excluding the GO bonds) are very stressed, with cash to debt measuring 30.6%, debt to cash flow measuring 10.7 times, and maximum annual debt service coverage equal to 1.4 times; PH's debt measures are among the weakest in Moody's portfolio of rated public and not-for-profit healthcare organizations (debt measures exclude GO debt)

*Larger than average exposure to Medi-Cal constituting 19% of PH's payer mix in fiscal year (FY) 2012; Medicare contributes an additional 45% of gross revenues; changes to Medi-Cal's payment methodology, along with pressure on Medicare, could have a material effect on reimbursement; as a district hospital, PH has not benefited from California state's provider fee program

*Overall competitive and difficult operating environment with the presence of large providers in San Diego, and signs of increasing competition

STRENGTHS

*Dominant market position (55% market share) in northern San Diego County, operating the only inpatient facilities in the district

*History of strong community support as evidenced by passage of the $496 million General Obligation Bond measure in support of the system's master facility plan; PH also benefits from approximately $13 million in tax revenues annually in support of operations (Moody's reclassifies these tax revenues as operating revenue, and are included in our calculation of operating income, and operating cashflow)

*Conservative investment strategy with little exposure to equities or alternative investments; no putable debt; defined contribution pension plan

*Stable management team

OUTLOOK

The revision of the outlook to negative from stable reflects very poor year-to-date operating performance, a precipitate drop in days cash on hand year-to-date, and the challenges posed by opening and operating the new, very large, replacement facility.

WHAT COULD MAKE THE RATING GO UP

Long-term improvement of operating performance, liquidity, and debt measures

WHAT COULD MAKE THE RATING GO DOWN

Inability to improve operating performance by end of current fiscal year; further decline in days cash on hand

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.

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.

Bradley E. Spielman
Vice President - Senior Analyst
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

Robert P Azrin
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Palomar Health's (CA) (formerly Palomar Pomerado Health) Baa3 revenue bond rating; Outlook revised to negative from stable
No Related Data.

 

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