CHICAGO — Standard & Poor's revised its outlook on Mayo Clinic's AA rating to stable from negative due to its improved operating results.
The review came ahead of the Rochester, Minn.-based system's sale of $120 of commercial paper through the city of Rochester and $180 million of floating rate bonds through the Phoenix Industrial Development Authority, Ariz.
"The outlook revision is due to improved operating results and stronger balance sheet metrics despite additional debt," said Standard & Poor's analyst Liz Sweeney.
The clinic's operating income has improved, unrestricted reserves grew, pension funding rebounded, and leverage dropped considerably due to the better earnings, strong market returns, and improved pension funding status, Standard & Poor's added.
"We were also concerned with steady growth in debt, especially as we already considered the balance sheet relatively light for the rating level," analysts said. "Although we still consider the balance sheet only adequate for the rating, we believe that Mayo Clinic's financial improvement in the last year, and our expectation that financial results will remain adequate going forward warrant the return to a stable outlook."
The credit benefits from the clinic's strong national brand with demonstrated success in all of its business locations and lines and its unique business position as the nation's largest multispecialty group practice with a world-renowned reputation for patient care, research, and education. The clinic operates 22 wholly owned hospitals in Minnesota, Iowa, Wisconsin, Florida, Georgia, and Arizona.
The clinic has a strong history of fundraising including $384 million in contributions in 2013 which provides funding for research, medical education costs, and capital spending. The clinic also benefits from an experienced management team and sound governing board.
The system saw operating income of $377 million for a 4.1% operating margin in 2013, up from $233 million in 2012. Maximum annual debt service was adequate in fiscal 2013 at 5.3 times.
Credit risks include below average unrestricted liquidity levels, only adequate maximum annual debt service, and postretirement employee health care benefits that remain a longer-term unfunded risk, Standard & Poor's said.
Mayo has a five year capital plan totaling $3.3 billion. That follows $628 million in spending on capital in 2013. The five year program includes about $500 million for electronic medical records as the system will be unified under a single platform, and almost $300 million for proton beam therapy centers in Rochester and Arizona.
Moody's Investors Service affirmed the clinic's Aa2 rating and stable outlook ahead of the sales. The system has $2.8 billion of debt, of which $1.2 billion has been incurred during the last three years.
Moody's said the rating reflects "multiple factors including Mayo's large size and scope of operations, favorable margins on patient care activity, adequate balance sheet reserves, strong fundraising ability, and favorable leverage metrics, despite the growth in debt over the last several years."
