SAN FRANCISCO - Fitch Ratings upgraded bonds issued for Stanford Hospital & Clinics to AA from AA-minus, based on improving operating profitability as the medical center proceeds with its multibillion-dollar hospital renovation plan.
The action affects around $882 million of outstanding revenue bonds, and $292 million of outstanding variable revenue bonds, issued by the California Health Facilities Financing Authority on behalf of SHC.
Fitch also revised the outlook on the ratings to stable from positive following the upgrade.
The upgrade reflects improving operating profitability, robust debt service coverage, growing liquidity and strong philanthropic support for a hospital replacement project, analysts said in a report released Monday.
They also cited SHC's relationship with triple A-rated Stanford University and double-A rated Lucile Packard Children's Hospital as a positive credit factor.
CHS is a principal teaching affiliate of Stanford's School of Medicine, with its hospital and a majority of its clinics located on the Stanford campus.
The hospital's operating margin of 10.3%, as of Feb. 28, is more than double Fitch's double-A category median of 4.2%. Operating earnings before interest, taxes, depreciation, and amortization of 15.5% during the same time period is also significantly above the median category of 11.8%.
"Fitch believes the reduction in development risk associated with its hospital replacement project in conjunction with a stronger financial profile and exceptional qualitative attributes warrants the upward rating movement," analysts said.
Construction of SHC's new hospital began in 2012 and is scheduled to be completed in 2017, with transition to the new hospital expected to occur through 2018.
Development risk has been mitigated by a signed guaranteed maximum price contract and SHC's experienced construction team, Fitch said.
The new hospital is part of a six-year, $2.5 billion capital plan to replace, expand, and renovate major portions of the main hospital campus in order to address California's seismic mandates. Total debt for the project is estimated at $600 million, with $500 million already issued.
Another $100 million is being considered for 2016, which Fitch believes SHC can absorb at the current rating level.
The hospital system had around $2.7 billion in total operating revenue during fiscal year 2013. As of Aug. 31, total debt was approximately $1.27 billion.
