OREANDA-NEWS. October 13, 2015. Fitch Ratings has affirmed the 'BBB' rating on Eisenhower Medical Center's (EMC) revenue bonds which are listed at the end of the press release.

The Rating Outlook is Stable.

SECURITY
Gross revenue pledge of the obligated group (OG).

KEY RATING DRIVERS
SUSTAINED TREND IN IMPROVED PERFORMANCE: EMC has been steadily narrowing its losses after a significant decline in performance in fiscal 2011 related to the opening of its new inpatient facilities and lack of expected volume growth. The improvement in performance in fiscal 2015 (June 30 year end; unaudited) was due to very strong volume growth related to its clinic and physician growth strategy as well as Medi-Cal expansion.

HIGH DEBT BURDEN AND WEAK LIQUIDITY: Credit concerns continue to be EMC's high debt burden and low liquidity for its rating level. EMC had 128 days cash on hand (adjusted for provider fee), 47.1% cash-to-debt and 7x cushion ratio at June 30, 2015. Debt service coverage was solid at 3x; however, there were some one-time items in fiscal 2015 and projected debt service coverage for fiscal 2016 is only 2.4x compared to the 'BBB' category median of 2.7x.

STRONG PHILANTHROPY: EMC's rating has been maintained despite its weak financial profile for the rating level due to its strong philanthropic support. Over \\$600 million has been raised from fiscal 2011-2015 and donor support funded a third of the cost of its inpatient facilities. Another capital campaign is expected to be launched in fiscal 2016 and there are preliminary plans to earmark some of the philanthropy for the paydown of debt, which would be viewed positively.

CAPITAL SPENDING: Capital spending was very high from fiscal 2007-2011 as the inpatient pavilion was built, and after a period of scaled-back capital, projected capital expenditure for fiscal 2016 is expected to be \\$52 million (1.1x depreciation expense). Management stated that capital spending would be scaled back if targeted cash flow is not met. There are longer-term information technology needs and management expects to make a decision over the next three months regarding the size and scope of the investment.

RATING SENSITIVITIES
ACHIEVING BUDGET: In light of Eisenhower Medical Center's high debt burden and low liquidity, there is little tolerance for negative variance in operating profitability at the current rating level. The fiscal 2016 budget is reasonable and below fiscal 2015 results (adjusted for one-time items). The failure to achieve the fiscal 2016 budget would likely generate negative rating action.

CREDIT PROFILE

EMC is a 463-licensed bed community hospital located in Rancho Mirage, CA (near Palm Springs), and approximately 120 miles east of Los Angeles and 120 miles northeast of San Diego. Total operating revenue in fiscal 2015 (June 30 year end; unaudited) was \\$616 million. Fitch's analysis is based on the consolidated system. The OG includes the hospital and Eisenhower Health Services, and comprised 95% of total consolidated assets and 99% of total consolidated revenues in fiscal 2015.

CONTINUED IMPROVEMENT IN CASH FLOW

Fiscal 2015 performance was solid and significantly exceeded budget. Operating EBITDA margin was 11.1% compared to 9.6% in fiscal 2014 and 9.2% in fiscal 2013. EMC did have approximately \\$9 million of one-time items in fiscal 2015 related to a Recovery Audit Contractor (RAC) settlement and receipt of Medicare proportionate share payments related to prior year periods. Adjusting for the one-time items, operating EBITDA margin would have still been a solid 9.8% compared to the 'BBB' category median of 7.7%.

Volume growth has been very strong driven by EMC's regional growth strategy, with eight outpatient clinics in the service area and two more planned that should open in 2017 in addition to the benefits of Medi-Cal expansion. Discharges grew 6.6% from the prior year while emergency room visits were up 12.9%, total clinic visits increased 14%, and total surgeries improved by 13.8%. In addition, there are additional strategic opportunities with payors as well as the development of its oncology service line, which if successful, could provide more cushion at the rating level.

EMC's payor mix is heavily concentrated in Medicare (64.5% of gross patient revenue) in fiscal 2015; however, Medi-Cal increased to 12.4% from 7.2% the prior year while the self-pay and other category declined to 4.9% from 8.2%.

FISCAL 2016 BUDGET

The fiscal 2016 budget for the OG indicates a slight decline in operating performance with a budgeted 8.5% operating EBITDA margin. The budget includes a \\$5 million pension expense increase primarily due to the updated mortality tables. Fitch believes that the budget is reasonable and expects EMC to meet or exceed the budget and performance, otherwise negative rating action is likely.

WEAK LIQUIDITY

Total unrestricted cash and investments at June 30, 2015 was \\$191.4 million, which equated to 127.9 days cash on hand (adjusted), 7x cushion ratio, and 47.1% cash-to-debt compared to the 'BBB' category medians of 161.5, 11.1, and 89.5%, respectively. Fitch adjusted the days cash on hand calculation to exclude the provider fee expense since EMC does not benefit from the provider fee program. Days cash on hand for the OG is projected to decline to 91 days at year-end 2016 due to higher than normal capital expenditures, which management states is conservative as there are some capital projects that are likely to be funded from philanthropy.

CAPTIAL SPENDING
With a virtually new plant, capital spending was reduced significantly over the last few years and is budgeted at \\$51.8 million in fiscal 2016 compared to \\$29.4 million in fiscal 2015, \\$21.1 million in fiscal 2014 and \\$33 million in fiscal 2013. There is one remaining seismic retrofit project (Ike Wing), which will be 100% funded from philanthropy and the total amount has been raised (\\$25 million). This project will start in fiscal 2016. Other major areas of capital spending include information technology, and management is evaluating the cost to upgrade and combine its disparate systems.

HISTORICALLY STRONG PHILANTHROPY

EMC has enjoyed a history of strong philanthropic support with \\$610 million raised from 2001-2015. Another capital campaign is expected shortly and the organization is contemplating earmarking a portion of philanthropy toward early repayment of debt, which would be viewed favorably.

CONSERVATIVE DEBT PROFILE

Total outstanding debt of the consolidated entity at June 30, 2015 was \\$406 million and is 100% fixed rate. Fitch used maximum annual debt service of \\$27 million which includes \\$25.6 million of bonded debt and \\$1.5 million related to a note payable. Debt service coverage was 3x in fiscal 2015 compared to 2.4x in fiscal 2014 and 1.9x in fiscal 2013.

DISCLOSURE

EMC covenants to provide annual audits within 150 days of fiscal year end and unaudited quarterly financial statements within 45 days of quarter end for all four quarters to the Municipal Securities Rulemaking Board's EMMA system.

OUTSTANDING DEBT:
--\\$109,015,000 California Municipal Finance Authority (CA) (Eisenhower Medical Center) revenue bonds series 2010A;
--\\$261,053,000 Rancho Mirage Joint Powers Financing Authority (CA) (Eisenhower Medical Center) revenue bonds series 2007A;
--\\$25,560,000 Rancho Mirage Joint Powers Financing Authority (CA) (Eisenhower Medical Center) certificates of participation series 1997B.