Fitch Ratings has upgraded to 'A+' from 'A' the ratings on Scripps Health approximately $446.3 million of revenue bonds outstanding (listed below). The Rating Outlook is Stable.
The rating upgrade is supported by Scripps Health's material improvement in financial performance and balance sheet liquidity since Fitch's last review, strong debt service coverage, manageable debt burden, a leading market position, and good management practices. Scripps posted operating income of $80 million in fiscal year (FY) 2005; almost three times more than 2004's $26.7 million operating income and nearly double the 2005 budget of $41 million.
For the seven-month interim period ended April 30, 2006 management reported operating income of $59.9 million, which translates into a 6.4% operating margin and exceeds budget by roughly $27 million. Scripps' improved operating performance results primarily from the conversion of commercial capitated contracts at Scripps Clinic/Green Hospital to discounted fee-for service over the past three years, greater collaboration between medical staffs at Scripps La Jolla and Scripps Clinic, and the joint licensure of Scripps Mercy San Diego and Scripps Memorial Hospital Chula Vista. Scripps' improved EBITDA margin has led to increased debt service coverage of maximum annual debt service (MADS) of 6.9 times (x) and 8.2x in FY 2005 and in the seven-month interim period, respectively. At FY 2005, MADS as a percentage of revenue of 1.7% and debt to EBITDA of 2.6x were stronger than Fitch's 'A' medians of 3.4% and 3.5x, respectively. Scripps shares a leading market position with Sharp Health (25.3% in 2004 versus Sharp at 26.1%) in a competitive service area. Fitch believes Scripps' improved financial performance results from the management practices that were implemented with the hiring of the current CEO in 2000 and the subsequent hiring of the current CFO in 2001.
Key credit concerns include Scripps' seven-year, $1.5 billion capital budget, the competition for the growing north San Diego County area from Sharp Healthcare (not rated by Fitch) and Kaiser Permanente (rated 'A+' by Fitch), and the difficult operating environment at the Scripps Memorial Chula Vista location. Over the last five years, capital spending on average has been low, averaging approximately 97% of depreciation expense. Management has acknowledged that certain capital spending had been deferred while the operating turnaround plan took effect. Over the last two fiscal years capital spending as a percentage of depreciation expense has averaged 127.2%, which is slightly below the 'A' median. Management has outlined a seven-year, $1.5 billion capital plan which includes a new cardiovascular center at the Scripps Memorial La Jolla campus, and investment in outpatient facilities in the north San Diego county market. Capital budget projections through 2013 include roughly $450 million in additional debt issuance, $350 million in philanthropy, and the balance through operations and investment returns. The San Diego health care market is very competitive with Scripps Health, Sharp Healthcare, and Kaiser vying for the growing population base. Although substantial financial improvement has been made at the Scripps Memorial Chula Vista Hospital with the operating loss narrowing from $14.8 million in 2004 to $5.5 million expected in 2006, Fitch believes management will be challenged to improve operations further.
The Stable Rating Outlook is based on Fitch's belief that Scripps will be able to sustain operating margins in the 3.5%-4.0% range. Management stated that capital investment is predicated on continued operating success and Fitch believes that there is enough flexibility to maintain an operating and balance sheet profile consistent with the 'A+' category. Scripps' community support is substantial having raised an average of $30 million per year in philanthropic contributions for the past five years without a specific capital campaign. Fitch believes Scripps' fundraising potential for the cardiovascular center is substantial.
Scripps Health is a nonprofit health system located in San Diego County, CA, comprising four hospitals on five campuses (1,435 licensed beds), the Scripps Clinic, and various outpatient facilities. Total revenue was $1.5 billion in FY 2005. Scripps covenants to submit annual and quarterly disclosure to the NRMSIRs. However, quarterly disclosure is only covenanted for the first three quarters and includes balance sheet and income statement only.
-- $40,975,000 California Health Facilities Financing Authority variable-rate revenue bonds (Scripps Health), series 2005A ('A+' underlying rating only);
-- $249,025,000 California Health Facilities Financing Authority insured revenue bonds (Scripps Health), series 2005B-F ('A+' underlying rating; the bonds are insured by Ambac whose insurer financial strength is rated 'AAA' by Fitch);
-- $13,950,000 California Health Facilities Financing Authority variable-rate revenue bonds (Scripps Health), series 2001A ('A+' underlying rating; the bonds are insured by MBIA whose insurer financial strength is rated 'AAA' by Fitch);
-- $60,900,000 California Health Facilities Financing Authority variable-rate revenue bonds (Scripps Health), Series 1998A&B ('A+' underlying rating; the bonds are insured by MBIA whose insurer financial strength is rated 'AAA' by Fitch;
-- $31,500,000 California Health Facilities Financing Authority variable-rate revenue bonds (Scripps Health), Series 1991B ('A+' underlying rating; the bonds are insured by MBIA whose insurer financial strength is rated 'AAA' by Fitch);
-- $50,000,000 California Statewide Communities Development Authority commercial paper revenues notes (Statewide Easy Equipment Program) (Not rated by Fitch).