LOS ANGELES — Loma Linda University Medical Center had its outlook lowered to negative by Fitch Ratings, which cited a higher-than-expected debt burden and a pressured financial profile.
Fitch made the change while affirming a BBB-minus rating ahead of the hospital's plans to price $650 million of revenue bonds on Dec. 8.
Standard & Poor's affirmed a BBB rating and negative outlook on the hospital system's bonds on Nov. 20 while Moody's Investors Service affirmed a Baa3 with a negative outlook in an Oct. 17 report.
"The negative outlook largely reflects our view of LLUMC's significant upcoming capital spending needs, which will be funded by additional debt," said Standard & Poor's credit analyst Geraldine Poon.
LLUMC, an 881-bed acute care teaching hospital located 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 act as senior manager with Goldman, Sachs & Co. as co-manager of the bond sale. Rounding out the financial team are Orrick, Herrington & Sutcliffe as counsel, Squire, Patton & Boggs as underwriter's counsel and DLA Piper as counsel for the obligated group.
The revenue bonds, being issued through conduit issuer, California Statewide Communities Development Authority, will be sold in two series: $543.3 million in tax-exempt fixed rate in the 2014A series and $106.6 million in taxable fixed-rate in the 2014B series.
The 2014 series will refund the majority of LLUMC's outstanding bonds and refinance a $501 million taxable bridge loan, fund $66 million of capital expenditures, refund various loans totaling $56 million, fund a $39 million debt service reserve fund, pay swap termination costs of $25 million and pay costs of issuance. The series 2014B is expected to be issued as a 10-year bullet maturity, which would also be of concern if LLUMC couldn't access the capital markets to refinance the debt, according to Fitch.
Following the sale, LLUMC's debt profile will be $785 million of 100% fixed rate with reduced capital structure risks, which Fitch analysts said they view favorably.
The financing will be issued under a new amended and restated master trust indenture with a new operating group that includes the Murrieta Hospital, according to Fitch. The security remains the same with a gross revenue pledge and mortgage pledge by the operating group in addition to a debt service reserve fund. LLUMC has a 60 days cash-on-hand covenant and annual debt service coverage covenant of 1.1 times.
All raters expressed concern about challenges represented by a costly capital improvement budget that includes an anticipated $800 million cost to replace the hospital system's flagship facility in Loma Linda within the next six years. Another debt issuance of approximately $514 million is expected in 2016, which wasn't included in this rating, Fitch said.
"Fitch does not believe LLUMC has capacity at an investment-grade rating level to fund the expected additional debt issuance in 2016 on its own credit," Fitch analysts said.
Fitch also expressed concern that the 2014-2016 provider fee program is still awaiting Centers for Medicaid & Medicare Service approval. Fitch analysts said they expect the funds will be released in the near term; if they aren't, it could result in a negative rating action.
The academic medical center maintains a leading market position and its market share is expected to increase based on the opening of its new 106-bed hospital in Murrieta, according to Moody's report.