SHC has embarked on a six-year, $2.5 billion capital plan to replace,
expand, and renovate major portions of the main hospital campus in order
to address California's seismic mandates. The plan will be funded from
existing bond proceeds, operations, investment income, and philanthropy.
Aside from the series 2012, SHC plans to issue an additional $100
million in new money debt in 2016. Construction of the new hospital
began in 2012 and is scheduled to be completed in 2017, with transition
to the new hospital anticipated to occur through 2018. Upon completion
of the project, SHC's bed capacity, including both the new hospital and
the renovated portions of the existing Hospital, will increase to
approximately 580 patient beds.
Fitch believes SHC's strategic plan is a strong base for sustained
profitability and market share growth over the long term. The strategy
builds on SHC's strength and excellence in five strategic clinical
service lines: cardiac, cancer, transplantation, orthopedics, and
neurosciences. The plan's goals are to strengthen SHC's outpatient
subspecialty presence in selected local markets and to simultaneously
increase its share of patient care volume and revenue derived from
higher-complexity tertiary and quaternary cases in regional, state, and
In January 2011, and in support of regional growth strategy, SHC and
Stanford University, acting on behalf of its School of Medicine, formed
United Healthcare Alliance (UHA) to operate clinics staffed by a network
of community-based physicians complementing the faculty practice clinics
operated by SHC and staffed by members of the faculty of the School of
Medicine. UHA continues to expand its membership of community physicians.
Solid Financial Profile
Robust operating profitability has resulted in operating EBITDA of over
$379.4 million (15.6% operating EBITDA margin) and income from
operations of $236.7 million (9.7% operating margin) in fiscal 2012,
further improved from 15% operating EBITDA margin and 8.2% operating
margin in 2011. Strong performance continued through the six months
ended February 28, 2013, with 15.2% operating EBITDA and 9.9% operating
margin compared to the respective 'AA' category medians of 10.6% and 4%.
Continued growth in high acuity outpatient and inpatient volumes has
generated improved profitability, which resulted in a strengthening of
SHC's strong revenue growth and robust cash flow generation resulted in
strong debt service coverage. Maximum annual debt service (MADS) of
$72.9 million is a moderate 3% of total fiscal 2012 operating revenue as
compared to Fitch's 'AA' median of 2.5%. Coverage of MADS by EBITDA in
2012 was a very strong 5.3x compared to 4.4x in fiscal 2011 and the 'AA'
category median of 4.8x.
As of Aug. 31, 2012 total debt (including $100 million series 2012D
direct placement not rated by Fitch) is approximately $1.28 billion and
includes $328.2 million or 26% in variable-rate bonds backed by SHC's
self-liquidity. In recent years, SHC undertook several financing actions
to restructure its debt profile and lower its variable-rate bond put
risk. Fitch views these actions positively, especially as SHC will now
need to preserve and grow its cash reserves in support of its large
capital projects. SHC has 11 fixed-payer swaps for a total notional
amount of approximately $746.1 million outstanding. The counterparties
on the swaps are diversified among five different financial institutions
but certain aggregate collateral thresholds do exist.