Fitch Ratings affirms the 'BBB' rating on the $17,555,000 California Municipal Finance Authority revenue bonds, series 2006, issued on behalf of the Cancer Center of Santa Barbara (CCSB). The rating is removed from Rating Watch Evolving and the Outlook is Stable. The bonds are insured by Radian Asset Assurance, which Fitch does not rate.
The rating was placed on Rating Watch following an affiliation with the Sansum Clinic, whereby CCSB transferred its healthcare operations to the Clinic but retained its fund-raising and grant-making operations. CCSB retained all major assets and liabilities and now focuses on fundraising efforts and directed philanthropy. Pursuant to the affiliation, the Clinic leases CCSB's real property through the maturity of the series 2006 bonds, with the lease payment sized to meet debt service requirements. As a condition of Radian's consent to the terms of the affiliation, CCSB deposited $10 million of unrestricted funds with the bond trustee, to be used exclusively to make up any deficiencies in the debt service accounts.
The security for the 2006 bonds remains a gross revenue pledge of CCSB.
KEY RATING DRIVERS
SUPPLEMENTAL RESERVE FUND: The new supplemental reserve fund effectively offsets the credit impact of the transfer of clinical operations and their attendant patient service revenues to the non-obligated Clinic. The trustee-held account, created and funded through amendments to the series 2006 bond's indenture and loan agreement as a condition to Radian's consent to the affiliation, provides significant support for maintaining the rating at the current level. Currently funded at $10 million and scheduled to increase to $12 million by June 2, 2016, the supplemental reserve fund is amply sized to remedy any shortfalls in the debt service accounts. Annual debt service is level at approximately $1.3 million. Permitted investments for this account are limited to fixed income mutual funds of high liquidity, diversification and credit quality.
LEASE PAYMENTS TO TRUSTEE: As an additional condition to Radian's consent, the Clinic makes lease payments (which approximate debt service requirements) directly to the bond trustee. For the year ended December 31, the Clinic posted an operating margin of 1.7% on operating revenues of $196.3 million, representing an increase from 0.6% for the prior year.
ADDITIONAL CCSB RESOURCES: Other resources available to CCSB to cover debt service include contributions, investment income from the endowment, and unrestricted cash and investments. CCSB had $43.9 million in unrestricted cash and investments as of Dec. 31, 2012.
The stability of the rating is based on the magnitude of the reserves afforded by the supplemental reserve fund and the direct payment of rent to the bond trustee. At this level, the rating is relatively insensitive to changes in the market valuation of assets held in the reserve account.
Additional information is available at 'www.fitchratings.com'. The rating above was solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the rating.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria