LOS ANGELES — Moody's Investors Service affirmed an A1 rating for Rady Children's Hospital-San Diego and revised the hospital's outlook to positive from stable, affecting $404 million in outstanding debt.
"If the balance sheet and debt measures continue to improve, and operating measures remain strong, they would expect to upgrade to Aa3 in the next 12 to 24 months," Moody's analysts said.
The debt was issued through two conduit issuers, the California Health Facilities Finance Authority and the California Statewide Community Development Authority.
In addition to balance sheet strengths, Moody's cited the hospital's clinical excellence and position as the primary provider of pediatric services in San Diego County and a strong management team in the Nov. 14 report.
The extension of the California State Provider Fee Program through 2016 was also a factor in the improved outlook as the children's hospital is a significant beneficiary, according to Moody's analysts. The extension is still pending federal approval, however.
The children's hospital received $147.7 million from fiscal year 2011 through fiscal year 2014 from the fee program, according to Moody's. It is also expected to receive approximately $160 million additional through December 2016.
Moody's also noted the hospital's stable and solid operating performance overall for fiscal year 2014 with the operating cash flow margin at 11.2%, compared to 12.8% in fiscal year 2013.
Debt measures, while still reflecting high leverage, have continued to improve, analysts said. Cash to debt measured 202%, debt to revenue was 49%, and Moody's adjusted maximum annual debt service coverage, excluding the California State Provider Fee, was 6.2 times, and debt to cash flow measured 3.3 times at the end of the fiscal year, June 30, 2014. The hospital also received a $120 million donation to help establish the Rady Pediatric Genomics and Systems Medicine Institute.
Challenges include exposure to variable rate debt and swaps equal to 56% of all debt.
"Rady has had to post as much as $74 million in swap collateral in the past," Moody's analysts said. "Current swap collateral levels are at approximately $40 million."
Offsetting some of these risks are the diversification of letter of credit and direct placement providers, and good staggering of LOC and DP renewal dates, Moody's said.
"The positive outlook reflects Moody's expectation that Rady Children's will continue to produce strong and stable operating performance measures over the next several years, and will continue to build cash balances, thereby improving its balance sheet measures," Moody's analysts said. "Rady Children's does not currently have any major capital or debt plans."
