Moody's, S&P Tip Their Caps as Mayo Climbs Back

CHICAGO — Two rating agencies delivered good news to Rochester, Minn.-based Mayo Clinic this week in recognition of its fitter financial profile, including improved investment returns and revisions to its defined pension plan that lowered its liabilities.

Moody's Investors Service affirmed its Aa2 rating on $1.7 billion of outstanding debt and revised its outlook to stable from negative while Standard & Poor's affirmed its AA-minus and revised its outlook to positive from stable. The actions followed reviews on the clinic's reoffering of $130 million of its 2008 bonds that are being converted to a fixed-rate mode from a one-year term mode.

The prestigious clinic struggled through a challenging fiscal 2008, driving a downgrade nearly one year ago by Standard & Poor's that followed a significant $1.7 billion decline in unrestricted net assets, reduced cash flow that hurt debt-service coverage ratios, increased pension contributions, and the strain of funding its capital program. Moody's responded by assigning the negative outlook.

The management team responded quickly, scaling back on capital spending to $351 million from $466 million in fiscal 2008, cutting expenses and undertaking strategies aimed at improving revenues. The clinic expects to spend about $470 million in fiscal 2010 on capital projects, though it has no new debt-issuance plans.

Mayo also achieved a dramatic lowering of its unfunded pension liability to $274 million in fiscal 2009 from $1.19 billion a year earlier after making long-term changes to its defined benefit plan and recording a year of improved investment returns.

Mayo plans to make annual contributions of $150 million to $250 million to its pension plan going forward. While the changes are considered material, poor investment returns could again drive up the size of the liabilities.

The clinic closed out fiscal 2009 with a 2.8% operating margin, up from a negative 2.6% margin a year earlier, while its unrestricted cash and investments rose to $2.5 billion, up from $1.9 billion, according to Moody's. Its facilities generated $7.5 billion of revenue with more than 123,000 admissions.

Challenges include a decline in inpatient volumes of 8% in fiscal 2009, expectations that financial performance for fiscal 2010 will fall short of fiscal 2009 results, and significant exposure to private equity, venture capital and other illiquid investments that limit cash on hand for operations.

"While the earnings improvement over a one-year period is encouraging, we expect Mayo Clinic to demonstrate the ability to sustain earnings at the current level in order to achieve a higher rating," said Standard & Poor's analyst Stephen Infranco. "Furthermore, given Mayo Clinic's aggressive asset allocation, a higher rating would be considered only if there is further improvement in balance-sheet strength, particularly liquidity, to provide greater flexibility during times of operating stress."

Mayo's strengths are also weakened by its potential exposure to future Medicare and Medicaid physician reimbursement reductions, Standard & Poor's warned.

Aside from its quick response to challenges, the clinic's strengths include improved operations at its Florida and Arizona campuses, its success in exceeding its five-year capital campaign to raise $1.25 billion, and its international clinical reputation as one of the top health care facilities in the world, Moody's wrote.

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