Moody's Investors Service upgraded Citrus Valley Health Partners, Calif.'s underlying revenue bond ratings to Baa3.

The upgrade to Baa3 from Ba2 that propelled the bonds to investment grade reflects "very significantly improved balance sheet measures, the extension of the California State Provider Fee program, and ongoing deleveraging of the balance sheet," according to Moody's Aug. 26 report.

The upgrade affects $63 million in debt issued through the California Statewide Communities Development Authority. The debt consists of Series 1998 fixed rate debt and auction rate certificates of participation that have a final maturity in 2028.

Moody's revised Citrus Valley's outlook to positive from stable in October 2013 and affirmed its Ba2 bond rating. The outlook is stable at the recently improved rating.

The regional not-for-profit health system reports a $417 million revenue base in fiscal 2014 generated by its three acute care hospitals and a hospice/home health care located in contiguous service areas that serve a population of close to a million people. It commands 31% market share in its primary service area in eastern Los Angeles County.

The health system benefits significantly from the California provider fee program as a large Medi-Cal provider, Moody's analysts said.

Strengths include that 66% of the regional healthcare provider's debt structure is fixed rate. The system has no swaps and operates a defined contribution pension plan which limits demands on liquidity.

Challenges include the hospital system's payer mix, a fragmented provider market, a highly unionized workforce, and high reliance on supplemental governmental funding. CVHP is dependent on supplemental government funding with Medicare making up 44.2% of gross revenues.

Disruption or discontinuation of the California State Provider Fee Program, a drop in underlying operating performance measures, and very significant increase in capital spending could cause the rating to drop, Moody's said.

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