Mixed Rating Messages Ahead of a Massive Junk Bond Deal

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LOS ANGELES — Loma Linda University Medical Center received mixed messages from two rating agencies as it prepares what will be the municipal bond market's largest junk rated deal of the year.

It plans to price $883 million in revenue bonds the week of April 25.

Standard & Poor's knocked the medical center's rating to BB from BB-plus.

Fitch Ratings took a more optimistic tack, revising the outlook to stable from negative as it affirmed its BB-plus rating.

The 881-bed acute care teaching hospital 60 miles east of Los Angeles is part of a conglomerate that includes four hospitals – University Hospital, Children's Hospital, East Campus Hospital and the Heart and Surgical Hospital. The hospital system also has five affiliates for a total system of 1,076 licensed beds.

Bank of America Merrill Lynch will be the underwriter, and Orrick, Herrington & Sutcliffe will be both bond and authority counsel.

The junk-rated public offering will be limited to qualified institutional buyers and accredited investors, according to a staff report from the conduit issuer, California Statewide Communities Development Authority.

"We believe the BB rating reflects LLUMC's weaker-than-expected financial profile, light pro forma (maximum annual debt service] coverage due partly to weaker-than-budgeted operating performance in 2015, and a thin balance sheet due to the large debt issuance for a significantly-sized project," said S&P credit analyst Suzie Desai. It revised its outlook to stable from negative at the new, lower rating.

Fitch took a brighter view of its rating outlook because the medical center's 2015 operating performance exceeded budget targets, analysts Emily Wong and Jim LeBuhn wrote. Fitch analysts also cited the medical center's success in keeping the project cost and financing plans in line with what was presented to Fitch in September.

Fitch had downgraded the medical center's rating from an investment- grade rating of BBB-minus in September, saying the volume of debt issuance it has planned to pay for earthquake safety projects was more than anticipated.

Roughly $599 million of the series 2016A bonds will fund projects on the University Hospital and Children's Hospital campuses that expand services and meet earthquake safety requirements, according to an April 7 staff report from the conduit issuer.

Another $258 million will fund capitalized interest through December 2010 and a debt service reserve fund and $13 million will refund the series 2014C bonds, the report said.

LLUMC is an international leader in infant heart transplants and proton treatments for cancer, and the only level-one regional trauma center for Inyo, Mono, Riverside and San Bernardino Counties, according to CSCDA's staff report.

The medical center has been working on a campus transformation project to meet earthquake safety requirements that are supposed to be completed by Jan. 1, 2020 under state law.

Work is expected to begin on the $1.08 billion project in May and be complete by December 2019. The new patient towers and improved facilities are expected to open June 2020. Plans are for two new patient towers, expanded emergency rooms and a neonatal intensive care unit and birthing center, 16 new operating rooms, and improved diagnostic imaging services and cardiovascular labs.

"This is a tight timeframe to meet the regulatory deadline related to seismic requirements; however, Fitch believes LLUMC would have other options if there were a delay in the construction schedule, such as requesting an extension on the deadline," Wong and LeBuhn wrote.

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Healthcare industry California
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