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Rating Action:

Moody's upgrades El Camino Hospital's (CA) revenue bond rating to A1 from A2; Outlook remains stable

22 Feb 2013

Upgrade affects $186.9 million of rated revenue bonds outstanding

New York, February 22, 2013 -- Moody's Investors Service has upgraded to A1 from A2 El Camino Hospital's (ECH) bond rating affecting $186.9 million of outstanding fixed and variable rate demand revenue bonds issued by Santa Clara County Financing Authority, CA. The outlook remains stable.

The El Camino Hospital District's (the "District") Series 2006 general obligation bonds ($142.2 million outstanding) are rated Aa1 and are secured by the District's voter-approved unlimited property tax pledge. Bondholders of the general obligation bonds do not have any recourse to the hospital for payments under the bonds. Tax revenues and payments related to the general obligation bonds have been excluded from this analysis. A complete list of the District's debt is included at the end of this report.

SUMMARY RATING RATIONALE

The rating upgrade to A1 and maintenance of the stable outlook is based on ECH's fundamental strengths as a large, high-end tertiary provider with operations in a wealthy and demographically strong service area in Silicon Valley. Over the past two and half years, ECH's balance sheet and operating performance and relative metrics have notably rebounded since tempering in FY 2010. ECH's balance sheet continues to strengthen with growth in unrestricted liquidity and with a relatively low revenue bond direct debt position. Operating performance through six months of FY 2013 is on track for another year of improved and very strong operating profitability and cash flow generation that can be attributed to good volume and revenue growth. Additionally, following a couple of years of instability and turnover in key management positions and under a newly developed and reenergized board, a permanent senior leadership team, and an engaged medical staff, ECH has outlined a renewed strategy focused on the triple aim of quality, service, and affordability with a focus on continuum of care, physician partnerships and other innovative business and community alliances. We expect ECH to continue to produce strong operating cash flow given its favorable market presence and location and its continued focus on operating efficiencies, in order to support future capital plans, maintain solid liquidity and leverage measures and offset any future reimbursement declines and competitive pressures.

STRENGTHS

*Sizable, high-end tertiary community hospital (operating revenue base of $664 million in FY 2012) with two campuses (flagship campus in Mountain View and Los Gatos campus) located in affluent and desirable service areas of Silicon Valley; ECH's Mountain View campus maintains a stable and leading inpatient market share of 41% and the Los Gatos campus maintains 10% market share in its primary service area (according to management provided data)

*FY 2013 is on track for another year of strong profitability and operating cash flow generation and double-digit cash flow margins; ECH reported an exceptionally strong 11.7% operating margin and 19.4% operating cash flow margin through six months of FY 2013; ECH's financial performance notably improved since the downturn in FY 2010 driven by strong volume growth at both its campuses related to service expansions and additions, performance improvement initiatives, expense growth commensurate with revenue growth, and favorable payer commercial payer contracts

*Steady growth in unrestricted cash and investments to $490 million as of December 31, 2012, equating to excellent 303 days cash on hand, 249% cash-to-debt, 214% cash-to-comprehensive debt, and cash-to-demand debt over nine times; ECH has a conservative asset allocation and highly liquid investments

*Maintenance of solid debt measures to service a low debt load (measured by debt-to-revenues of 29.7%) with Moody's adjusted maximum annual debt service (MADS) coverage of 6.8 times and a favorably low 1.5 times adjusted debt-to-cash flow in FY 2012 compared to 7.0 and 1.8 times, respectively, in FY 2011

*Conservative debt structure with largely (75%) fixed rate debt, modest and manageable amount of interest rate swap exposure and operating leases outstanding; operates an active cash balance defined benefit pension plan which had a funded status of 88.3% on a projected benefit obligation basis at FYE 2012; management is continuing to evaluate several sizable capital projects over the next 2-3 years and expects to finalize plans and funding sources over the next 12 to 24 months.

*All ECH facilities in Mountain View and Los Gatos subject to mandated state seismic regulations are 95% compliant until 2030. The final 5% will be 2030 compliant upon completion of minor voluntary upgrades in accordance with approved extensions by January 1, 2015.

CHALLENGES

*A highly competitive marketplace for high end services with the presence of a number of large, prominent health systems including Stanford Hospital and Clinics (rated Aa3/Stable) located nine miles to the north and Kaiser Permanente eleven miles to the south; the Los Gatos campus, located about thirteen miles south of the Mountain View facility, has greater direct competition and competes with three nearby larger hospitals: Good Samaritan Hospital (owned by for-profit HCA) located less than two miles south, O'Conner Hospital (owned by Daughters of Charity Health System) located five miles north, and Santa Clara Valley Hospital, also located to the north; state has no certificate of need law

*Historically has had a high level of dependence on the Palo Alto Medical Foundation (PAMF), a large, multi-specialty physician group that is responsible for about 50% of ECH's admissions; PAMF is affiliated with Sutter Health (rated Aa3/Stable) and captures a significant share of all outpatient services in Mountain View

*A unionized workforce with about 82% of employees represented by collective bargaining organizations including Professional Resource Nurse (PRN), the Service Employees International Union-United Health Workers, West (SEIU-UHW), and the International Union of Operating Engineers, Stationary Engineers, Local 39; while the agreement with SEIU-UHW extends through 2015, agreements with PRN and Local 39 end in 2013

*Measure M, which was passed by the electorate in fall 2012, would cap executive salaries at two times the Governor's salary, is currently under legal appeal by ECH; management has outlined contingency plans in the meantime

Outlook

The stable rating outlook reflects ECH's favorable market position in a strong demographic service area, steady growth in unrestricted liquidity, and continued strong and improved operating results through six months of FY 2013 due to strong volume and revenue growth. Furthermore, under a reenergized and newly developed board and senior leadership team, ECH has a renewed strategy to focus on the triple aim of quality, service and affordability. We expect given the system's strong market presence, favorable location, and focus on achieving operating efficiencies, ECH will continue to produce good operating cash flow in order sustain solid debt coverage and liquidity metrics, support future capital expenditures and offset any future operating volatility and reimbursement declines and new competitive pressures.

WHAT COULD MAKE THE RATING GO UP

Sustained growth in volumes contributing to favorable revenue growth; continued improvement and ability to sustain improved operating and cash flow performance for multiple years; growth in absolute liquidity; strengthening of debt coverage and liquidity measures

WHAT COULD MAKE THE RATING GO DOWN

Decline in volumes and revenues; prolonged decline in operating performance resulting in lower debt coverage levels; decline in liquidity; increase in debt without commensurate increase in operating cash flow generation and unrestricted cash growth; new competitive pressures and loss of market share

PRINICIPAL RATING METHODOLOGY

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.

Deepa Patel
Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lisa Goldstein
Associate Managing Director
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 upgrades El Camino Hospital's (CA) revenue bond rating to A1 from A2; Outlook remains stable
No Related Data.
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