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Rating Action:

Moody's assigns A1 rating to City of Hope's (CA) $343 million of Series 2012 bonds; Outlook revised to positive from stable

23 Oct 2012

$343 million of rated debt to be outstanding

New York, October 23, 2012 -- Moody's Rating

Issue: Revenue Bonds, Series 2012A; Rating: A1; Sale Amount: $278,290,000; Expected Sale Date: 11/01/2012; Rating Description: Revenue: Other

Issue: Variable Rate Revenue Bonds, Series 2012B; Underlying Rating: A1; Enhanced Rating: VMIG 1; Sale Amount: $32,500,000; Expected Sale Date: 11/07/2012; Rating Description: Revenue: Other

Issue: Variable Rate Revenue Bonds, Series 2012C; Underlying Rating: A1; Enhanced Rating: VMIG 1; Sale Amount: $32,500,000; Expected Sale Date: 11/07/2012; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned an A1 rating to City of Hope's $278 million of Series 2012A fixed rate revenue bonds and an A1/VMIG 1 rating to the Series 2012B and 2012C variable rate demand bonds, to be issued by the California Health Facilities Financing Authority. The outlook has been revised to positive from stable. At this time, we are affirming our A1 rating on the Series 1999A bonds, expected to be refinanced with this transaction.

SUMMARY RATINGS RATIONALE

Assignment of the A1 rating is attributable to City of Hope's multi-year trend of strong financial performance and favorable leverage metrics, combined with its strong brand name and number two market share for oncology services in the competitive Los Angeles market. The rating also reflects City of Hope's role as a major research organization, with strong fundraising capabilities, and a favorable reputation in Southern California.

The revision in the outlook to positive from stable reflects several favorable developments that we believe will benefit the organization over the long term. Over the past year, City of Hope implemented a significant corporate reorganization and long range strategic plan that positions the organization for growth in the fractured Los Angeles market. In addition, the organization has identified how it will absorb the likely end of royalty revenue in 2019 after the associated patents expire in 2018

SHORT-TERM RATING RATIONALE: GOOD TREASURY MANAGEMENT PRACTICES AND STRONG INTERNAL LIQUIDITY SOURCES SUPPORT VMIG1 ON SERIES 2012B & C BONDS BASED ON SELF-LIQUIDITY PROGRAM

The Series 2012B&C issuance represents City of Hope's first time issuing debt with tender features supported with its own liquidity. The assignment of A1/VMIG1 ratings to the bonds reflects the system's strong treasury management function, its large portfolio of diversified investments, and its strong balance of daily as well as weekly liquidity. Moody's believes City of Hope has adequate liquidity and procedures in place to support the tender feature of its variable rate demand debt in the case of a failed remarketing. Per the loan agreement, payment of principal, interest, and purchase price of the Series 2012B&C bonds is a general obligation of City of Hope.

The $65 million series 2012B&C bonds will be issued in weekly mode. The $32.5 million series 2012B bonds will be underwritten and remarketed by JP Morgan, and the $32.5 million series 2012C bonds will be underwritten and remarketed by Wells Fargo. City of Hope plans to keep the bonds in weekly mode for as long as the program is supported with City of Hope's own liquidity. As of 9/30/2012, City of Hope had approximately $118 million of investments that could be liquidated on a same day basis. Half of the balance ($66 million) is held in accounts that are designated as bank depository money market accounts - these are not 2a7 compliant money market funds. These accounts are interest bearing and have similar liquidity as regular depositary accounts, but have restrictions as to the number of times they may be accessed each month before reverting to a non-interest bearing mode. The balance of daily liquidity is held in US Treasuries with less than three years maturity ($31 million) and US Treasuries with greater than three years maturity ($28 million). City of Hope's coverage of self-liquidity debt with daily liquidity is adequate at 1.82 times.

Following the refinancing of outstanding debt with this transaction, City of Hope will have no additional demand debt aside from the Series 2012 B&C bonds. Based on balances at 9/30/2011 total monthly liquidity (on a non-discounted basis) was over ten times total proforma putable debt. Concurrent with this transaction, City of Hope will be terminating existing interest rate swaps and entering into two new swaps with notional amounts equal to the amount of variable rate debt outstanding. At the current rating of A1, collateral posting is only required at a threshold of $20 million, suggesting that collateral posting needs will be modest.

We believe City of Hope's treasury practices are sufficient to provide appropriate administrative support to the program. Moody's will initially monitor the program on a monthly basis, and publish certain data relating to the program quarterly.

STRENGTHS

*Strong clinical and research reputations and well known brand name contributing to second place market share for all oncology services and first place share within certain service lines

*City of Hope undertook a deliberate strategic planning process over the past year to address the loss of patent royalty revenue in 2019 and develop plans to grow patient volume and market share through closer integration with physicians and other hospitals. Although not a guarantee of success, we view the deliberate nature of the planning positively.

*Consistent track record of very strong operating cash flow margins generally over 15%; although strong, FY 2011 was an exception with operating cash flow margin of 10.6%. Through nine months FY 2012, the margin was 12.5%

*Strong fundraising ability: unrestricted contributions have averaged over $50 million a year over the last five years and City of Hope is on its way to completing a $1 billion fundraising campaign

*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

*Very strong balance sheet with pro-forma 392 days cash on hand and 286% cash-to-debt based on balances at June 30, 2012; low pro-forma debt load with good pro-forma leverage metrics including a favorably low 1.97 times debt-to-cashflow, and 9.52 times peak debt service coverage

*New legal structure with current offering brings Beckman Research Institute and approximately $500 million of cash and investments into the obligated group

CHALLENGES

*Very competitive market in Los Angeles and surrounding counties with no hospital having over 5% oncology market share in the primary service area and 70% of outpatient services performed in physician offices. Dense population and geography present obstacles in getting patients to commute to the main campus

*Large research program (over $200 million) that is partly funded through royalty revenue and could present funding challenges in the future

*A large and growing proportion of patient revenues derived from Medi-Cal (19.8% in FY 2011), 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

*Revenue generated through royalties is excluded from pledged receivables for bondholder security

Outlook

The change in the outlook to positive from stable reflects the considerable organizational changes and strategic planning City of Hope implemented over the last year. Although a significant amount of work remains in order for City of Hope to successfully execute its plans, we believe that if the organization is able to meet fundraising, clinical market share, and balance sheet growth targets over the next several years, an upgrade would be warranted.

WHAT COULD MAKE THE RATING GO UP

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

WHAT COULD MAKE THE RATING GO DOWN

Loss of market share; reduction in profitability; decline in balance sheet strength

RATING METHODOLOGIES

The methodologies used in this rating were Not-For-Profit Healthcare Rating Methodology published in March 2012, and Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-LiquidityRating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

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Daniel J Steingart
Asst Vice President - 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

Bradley E. Spielman
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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Moody's assigns A1 rating to City of Hope's (CA) $343 million of Series 2012 bonds; Outlook revised to positive from stable
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