Nov. 6, 2009 (Business Wire) -- Fitch Ratings has affirmed its 'AA-' long term rating on approximately $333.2 million in outstanding revenue bonds issued on behalf of Cottage Health System (Cottage). In addition, Fitch has affirmed its 'F1+' short-term rating on $100 million in outstanding series 2008A&B revenue bonds. The Rating Outlook is Stable.
The 'AA-' rating reflects Cottage's exceptionally solid profitability buoyed by strong balance sheet metrics, outstanding cash flow, dominant market position in Santa Barbara County, and the strong support of the Santa Barbara Cottage Hospital Foundation (the Foundation). The 'F1+' short-term rating is supported by the adequacy of Cottage's highly liquid resources available to fund any un-remarketed puts on the $100 million series 2008A&B. As of Sept. 30, 2009, Cottage had $221 million in adjusted cash and cash equivalents available; in addition, Cottage has secured a $75 million line of credit facility from Bank of America. When combined, these resources cover the maximum weekly put exposure by 2.96 times (x).
In fiscal 2008, Cottage continued its history of robust operating performance with operating and operating EBITDA (earnings before interest, depreciation, taxes, and amortization) margins of 13.4% and 18.7%, respectively (17.6% and 22.9% through 3Q'09). As such, Cottage has been one of the strongest performers among Fitch's healthcare portfolio, averaging 11.6% operating margin and 17% operating EBITDA margin over the last four fiscal years. This solid operating profitability and strong cash flow generation has allowed Cottage to fund its sizable capital plan while preserving liquidity. On Sept. 30, 2009, Cottage's unrestricted cash and investments totaled $354 million which equates to 342 days of cash on hand, a cushion ratio of 17.4x and 106% of long-term debt. Of note is Cottage's decision to rebalance its investment portfolio in the first quarter of 2009 (1Q'09) in a bid to ensure balance sheet stability and the availability of funding sources for its ongoing replacement hospital project.
As the only acute inpatient facility in southern Santa Barbara County, Cottage remains the dominant market-share leader in its Primary Service Area (PSA) with market share of over 95%. Strategically, Cottage has committed to investing in a new flagship hospital and building and expanding its specialty clinical services, thereby stemming the outmigration of high-acuity patient volume and further buttressing profitability. In addition, Cottage's financial performance and volume growth is further bolstered by a service area with above-average wealth indicators.
Credit concerns remain Cottage's sizable capital plan and construction risk associated with such large capital projects. Cottage is in the midst of phase IV of its 10-year capital plan for replacement and renovation of its three facilities, notably the replacement of its flagship hospital in Santa Barbara. Management reports that despite a three month delay in the construction project, construction costs remain within budget and that its Santa Barbara Cottage Hospital is slated to open in June, 2011. Remaining project costs for phase IV total $235.5 million and will be funded from unspent bond proceeds ($100 million), cash flow ($80.5 million), and Foundation contributions ($50 million). While the sizable nature of Cottage's capital plan is likely to limit cash growth over the construction period, this concern is somewhat mitigated by the ample financial support from the Foundation, evident in its pledged to contribute $203 million of its reserves for Cottage's 10-year capital plan.
Cottage consists of the 408-licensed bed Santa Barbara Cottage Hospital and two smaller acute-care hospitals with 132 licensed beds, all located in southern Santa Barbara County, California. Total revenues in 2008 were $475.9 million. Cottage covenants to provide bondholders with annual disclosure within 150 days of fiscal year-end and unaudited quarterly statements within 75 days of quarter end. Disclosure to Fitch and bondholders has been timely and interim statements include a consolidated balance sheet, income statement, and cash flow statement, but without management discussion and analysis.
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