OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the following revenue bonds issued on behalf of Community Hospital of the Monterey Peninsula (CHOMP):

--\$28,805,000 California Statewide Communities Development Authority health facility revenue bonds, series 2011A;
--\$55,000,000 California Statewide Communities Development Authority health facility revenue bonds, series 2011B.

The Rating Outlook is Stable.

SECURITY
Debt payments are secured by a pledge of the gross revenues of the obligated group (OG). The OG accounted for 102% of total assets and 96% of total revenue of consolidated entity in fiscal 2014 (Dec. 31 year end; draft audit). Fitch's analysis is based on the consolidated entity.

KEY RATING DRIVERS

GOOD MARKET POSITION: CHOMP is located in a favorable service area in Monterey and the primary service area includes the cities of Monterey, Big Sur, Carmel, Carmel Valley, Pacific Grove, Pebble Beach and Seaside. Management has been expanding its outpatient presence with the growth of clinics beyond its primary service area.

STRATEGIC INITIATIVES UNDERWAY: CHOMP has made several strategic investments to prepare for alternative payer arrangements and position the organization to be able to manage population health. These initiatives include a new health plan (Aspire), an organization to advance and support integrated population health management (Community Health Innovations), aligning with primary care physicians and expanding its outpatient presence.

STRONG PROFITABILITY: Profitability rebounded in fiscal 2014 (Dec. 31 year end; draft audit) with a 7.3% operating margin and 14.2% operating EBTIDA margin compared to 3.5% and 10.8%, respectively in fiscal 2013. Performance was more in line with historical metrics with a 6.1% operating margin in fiscal 2012 and 5.8% in fiscal 2011.

LOW DEBT BURDEN: CHOMP's debt burden is low with MADS accounting for only 2% of total revenue and 1.6x debt to EBITDA in fiscal 2014 compared to Fitch's 'AA' category medians of 2.6% and 2.9x. Combined with strong profitability, historical debt service coverage has been robust at 8.1x in fiscal 2014 compared to 6.7x in fiscal 2013 and 7.9x in fiscal 2012.

IMPROVED LIQUIDITY: Liquidity has significantly improved due to continued solid cash flow, good investment returns and manageable capital needs. Unrestricted cash and investments totaled \$401.7 million, which equated to a very strong 350.2 days cash on hand and 323.8% cash to debt at Dec. 31, 2014 compared to the AA category medians of 277.1 and 178.5%.

MANAGEABLE CAPITAL NEEDS: Capital needs are manageable and projected to be \$32 million in fiscal 2015, \$24 million in fiscal 2016, and \$28 million in fiscal 2017 compared to EBITDA of \$76.6 million in fiscal 2014.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: Fitch believes CHOMP's strong financial profile provides flexibility as it continues to execute on its strategic operations to prepare for the changing reimbursement environment.

CREDIT PROFILE
Community Hospital of the Monterey Peninsula is a 258 licensed-bed (220 staffed) acute care hospital located in Monterey, California, which is 120 miles south of San Francisco. CHOMP had total revenues of approximately \$440.6 million in fiscal 2014.

Profitability Rebounds in 2014
Fiscal 2014 performance was strong after a temporary dip in performance in 2013 due to the investment in its strategic initiatives. Fiscal 2014 performance was benefited by an improved payor mix with the expansion of Medi-Cal in addition to a continued focus on cost containment. Operating and operating EBITDA margins were very strong at 7.3% and 14.2%, respectively compared to the 'AA' category medians of 3.9% and 11%. The fiscal 2015 budget has an operating margin budget of 3% due to more conservative profitability at the hospital while strategic operations continue to operate at a loss. However, the strategic operations did perform ahead of budget in fiscal 2014.

The provider fee has a minimal impact with \$169,000 booked in fiscal 2014 and \$2.4 million expected in fiscal 2015 (which includes a portion related to fiscal 2014). The current three year provider fee program (2014-2016) should net about approximately \$1.2-\$1.5 million a year.

Strong Liquidity
CHOMP's unrestricted cash and investments have increased to \$401.7 million at Dec. 31, 2014 from \$193.6 million at Dec. 31, 2010. Liquidity metrics are very strong with 350.2 days cash on hand, 42.5x cushion ratio, and 323.8% cash to debt at Dec. 31, 2014 compared to the 'AA' category medians of 277.1, 26.5x and 178.5%. CHOMP's asset allocation is fairly aggressive with 28.6% in domestic equities, 25.2% in international equities, 25.1% in hedge funds, 19.5% in commodities, private equity, and other, and 1.6% in cash. CHOMP also has an underfunded defined benefit pension plan and expects to make pension contributions of \$40 million in fiscal 2015.

Low Debt Burden
Total debt outstanding at Dec. 31, 2014 was \$124.1 million and increased slightly from last year with the addition of a \$7.5 million equipment loan for the construction of a wellness center. Other than the series 2011A&B bonds, CHOMP also has a series 2012 bond issue that is a direct loan with Siemens Financial Services and the term of the loan is through the maturity of the bonds in 2023. MADS totals \$9.4 million and aggregate debt service is fairly level. In addition, CHOMP has \$6 million outstanding on a line of credit, which was used to fund property acquisition.

The \$55 million series 2011B variable rate demand bonds are supported by a letter of credit, which was replaced in June 2014 with Wells Fargo Bank. The letter of credit expires June 2019. There are two fixed payor swaps outstanding with no collateral posting requirements.

Disclosure
CHOMP covenants to disclose quarterly financial information within 75 days of quarter-end and annual financial information within 150 days of the year-end to the EMMA system.