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ABAG Finance Authority for Nonprofit Corp. CA -- Moody's assigns Aa3 to Sharp HealthCare's (CA) Series 2020 A&B; outlook stable

·14 mins read

Rating Action: Moody's assigns Aa3 to Sharp HealthCare's (CA) Series 2020 A&B; outlook stable

Global Credit Research - 01 Sep 2020

New York, September 01, 2020 -- Moody's Investors Service has assigned Aa3 ratings to Sharp HealthCare, CA's proposed, $341 million Taxable Bonds, Series 2020A and Series 2020B, and affirms the Aa3 ratings on Sharp HealthCare's outstanding revenue bonds, affecting $908 million of proforma rated debt (total proforma debt outstanding, inclusive of unrated debt, is $937 million). The outlook is stable.

RATINGS RATIONALE

The Aa3 reflects our expectation that Sharp HealthCare will continue to benefit from a number of well-established strengths, including: very strong balance sheet measures; good debt measures (despite a 28% increase in debt); and a fundamentally stable and strong strategic position within the organization's primary service area in San Diego County. Other strengths include: 19 consecutive years of market share growth; diversified revenue streams; strong clinical offerings; and good physician relationships. Despite challenges related to COVID-19, operating income in 2020 (fiscal year ending September 30) will be better than budget due to very strong performance in the first half of the year, proactive cost management, and good CARES Act funding. Going forward, we expect margins to continue to be somewhat modest for the rating category but to nevertheless generate sufficient income available for debt service. Additional challenges include: a difficult payer mix; ongoing pressures in the payer, provider, and labor markets; ongoing competition from large and clinically sophisticated organizations; increased reliance on the California State provider fee program; and relatively high levels of ongoing capital investment (averaging approximately two times depreciation over the next three years).

The most immediate social risk is the impact of COVID-19, which has resulted in short-term volume and revenue losses. Though the organization's margins and healthy liquidity levels prior to COVID-19, and relief funding from the CARES Act, have helped to offset margin pressures in fiscal 2020, a high degree of uncertainty still remains around the longer-term potential impact of COVID-19. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

RATING OUTLOOK

The stable outlook reflects our expectation that Sharp HealthCare will maintain at least adequate levels of profitability, and that balance sheet and debt measures will remain strong, despite high levels of capital spending over the next several years.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Significant enterprise growth with material geographic diversification, while achieving superior operating performance, and maintaining excellent balance sheet and debt measures

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Significant dilution of balance sheet measures (including a material increase in debt, or significantly increased capital spending beyond current expectations)

- Decline in operating performance greater than expectations

LEGAL SECURITY

Bonds are secured by a revenue pledge from the Obligated Group, which includes Sharp Memorial Hospital, Sharp Chula Vista Medical Center, Grossmont Hospital Corporation (dba Sharp Grossmont Hospital), and Sharp HealthCare (the parent corporation). Sharp Rees-Stealy Corporation is considered part of the parent corporation and is included in the Obligated Group. In fiscal 2019, the Obligated Group represented 95% of system net assets and 88% of total revenues.

Bond covenants include a debt service coverage ratio of at least 1.25 times, and a minimum days cash on hand requirement of 15 days. Sharp's LOC agreements contain a number of other covenants, including a minimum days cash on hand test of 50 days (measured semiannually), a minimum debt coverage test of 1.5 times (measured quarterly and based on the most recent rolling twelve months performance), and a maximum debt to capitalization ratio of 60%. The LOC providers have the ability to terminate and immediately accelerate the bonds if Sharp's long-term rating falls below either Baa2 or BBB.

USE OF PROCEEDS

Proceeds from the Taxable Bonds Series 2020 will refund prior debt, finance various projects, and support general corporate purposes. Total debt is increasing by approximately $200 million compared to fiscal year end 2019.

PROFILE

Sharp HealthCare is a not-for-profit, integrated delivery system operating exclusively in San Diego County, California. It operates four hospitals, runs a health plan covering over 145,000 lives, and is affiliated with three medical groups representing over 1,900 specialty and primary care physicians. Total revenues are approximately $4.0 billion annually and total admissions exceed 85,000. Sharp is San Diego's largest employer, and has a leading 30% in-patient market share in all of San Diego County. In each of the last nineteen years, Sharp has increased its market share.

METHODOLOGY

The principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1154632. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Eugene Spielman Lead Analyst PF Healthcare Moody's Investors Service, Inc. One Front Street Suite 1900 San Francisco 94111 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lisa Goldstein Additional Contact PF Healthcare JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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