Rating Action Commentary
ֳ Affirms Memorial Health Services, CA at 'AA-'; Outlook Negative
Tue 13 May, 2025 - 2:22 PM ET
ֳ - San Francisco - 13 May 2025: ֳ has affirmed the 'AA-' revenue bond rating on various debt issued by the California Health Facilities Financing Authority and Memorial Health Services on behalf of Memorial Health Services, CA (d/b/a MemorialCare). ֳ has also affirmed Memorial Health Services' Issuer Default Rating (IDR) at 'AA-'.
In addition, ֳ has affirmed the 'F1+' short-term rating on Memorial Health Services' outstanding self-liquidity debt, which is correlated to the organization's long-term rating and based on the system's access to highly liquid and ample resources to handle any potential unremarketed puts.
The Rating Outlook remains Negative.
The Negative Outlook reflects MemorialCare's difficulties in operating performance over the past two years. Although performance improved year over year in fiscal 2024 (June 30 FYE; audited), further gains are necessary before a return to a Stable Outlook would be considered.
MemorialCare's operations have been affected by industry and market pressures, initially due to the pandemic and more recently by heightened macro labor and inflationary expenses. These resulted in historically longer lengths of stay (LOS) and capacity issues, challenges faced by most acute care providers. Management is focused on alleviating these pressures and anticipates further performance improvements by the end of fiscal 2025 and into fiscal 2026.
The 'AA-' rating is primarily due to MemorialCare's core credit strengths, including a strong financial profile characterized by excellent unrestricted balance sheet resources relative to leverage and sound market positions in competitive service areas. ֳ believes the system's balance sheet strength and leverage position offer sufficient financial cushion during this period of weaker operating performance.
SECURITY
The bonds are secured by a gross revenue pledge of the obligated group (OG). The OG consists of the parent corporation, Long Beach Medical Center (LBMC) — which includes the operating division of Miller Children's & Women's Hospital (MCH) — as well as Orange Coast Medical Center (OCMC) and Saddleback Medical Center (SMC).
KEY RATING DRIVERS
Revenue Defensibility - 'bb'
High Governmental Payor Base in a Competitive Market; Good Market Positions
ֳ continues to assess MemorialCare's revenue defensibility as somewhat weak due to high exposure to governmental payors and its location in the competitive Los Angeles and Orange County markets. In 2024, Medicare, Medicaid, and self-pay accounted for approximately 71% of the system's gross revenues, with Medicaid contributing around 26%. ֳ views this level of reliance as high, affecting operating performance, although the gross payor mix has remained stable year over year.
MemorialCare hospitals generally hold second or third market positions in their respective service areas, except for LBMC, which has a leading position. The total service area is competitive, with major competitors including Torrance Memorial (affiliated with AA- rated Cedars-Sinai Health System), Hoag Memorial Hospital (rated AA), Children's Hospital of Orange County (rated AA-), Kaiser Health hospitals (rated AA-), Providence Health & Services (rated A), and the University of California Irvine Medical Center.
Individual market share for any one area hospital is modest. This indicates the level of fragmentation in this market and supports ֳ's assessment that MemorialCare's revenue defensibility is limited by current market dynamics. Management is focused on growing various service lines such as women's and children's, cardiology, and oncology, among others, which ֳ believes could be accretive to system performance over time.
Operating Risk - 'bbb'
Challenged, But Some Improvement to Fiscal 2024 Operations; Manageable Capex
In fiscal 2024, MemorialCare recorded an operating loss of $75.6 million, with a negative 2.5% operating margin and a positive 1.6% operating EBITDA margin. This represents a significant improvement from the prior year's loss of approximately $239 million, which had a negative 8.7% operating margin and negative 4.2% operating EBITDA margin.
Since the weak performance in fiscal 2023, operations have shown improvement due to increasing demand, abating inflationary expenses related to supply chain, staffing, and contract labor costs, and meaningful gains in throughput initiatives aimed at turning around operations. As of six months into fiscal 2025 (ending Dec. 31; unaudited), the system reported a consolidated loss of approximately $47.4 million, slightly behind budgeted expectations.
Looking forward to the remainder of fiscal 2025 and into fiscal 2026, management expects to improve operations by enhancing system throughput, reducing average length of stay, and lowering certain labor expenses, which ֳ believes is achievable. For fiscal 2025, ֳ anticipates MemorialCare to report an operating EBITDA margin of around 2% or better, increasing to around 3.7% in fiscal 2026, with plans for further improvement beyond this period.
ֳ notes that MemorialCare has a health plan covering approximately 75,000 lives, which lowers operating EBITDA margins compared to systems without health plans. Maintaining the 'AA-' rating, and ultimately returning the Outlook to Stable, is contingent on MemorialCare continuing to show significant and sustained operating improvement. Failure to do so would likely pressure the rating.
Despite the operational pressures, MemorialCare has invested sufficiently in its physical infrastructure, with capital investments averaging nearly 95% of depreciation over the past five years. ֳ believes these investments are crucial for maintaining MemorialCare's market position in competitive service areas. The system's five-year capital plan totals approximately $1 billion, although actual spending typically falls below budget targets. Management does not anticipate any new debt issuance in the near term.
Capital spending plans include routine infrastructure investments (some seismic related), renovations at the SMC, OCMC, and LBMC campuses, and new ambulatory locations throughout the service area. Overall, ֳ views the system's planned capital investment as appropriate, given the competitive environment.
Financial Profile - 'aa'
Strong Financial Profile with Robust Liquidity Levels
MemorialCare maintains a very strong financial profile with favorable leverage metrics, despite the more recent operational challenges. ֳ's forward-looking scenario analysis indicates that the system's financial profile remains robust, supporting the 'AA-' rating.
ֳ's analysis includes stress tests on unrestricted investments and operating cash flows. While these stresses may temporarily affect operations and unrestricted cash, recovery to levels supporting a 'AA' category rating is expected. This reflects MemorialCare's ample financial flexibility, providing a cushion to manage extended periods of operating stress.
At FYE 2024, the system reported a very strong 305% cash to adjusted debt ratio, which was fairly stable through the six-month unaudited period ending Dec. 31, 2024, and up from 290% at FYE 2023. Net adjusted debt to adjusted EBITDA (NADAE) remained favorably negative in fiscal 2024, reflecting a manageable debt burden and strong unrestricted balance sheet resources. Leverage metrics remained favorable during the interim period, with negative NADAE and debt to capitalization at approximately 20.3%. In the forward-looking stress case, cash to adjusted debt never falls below 210% and NADAE returns to a favorably negative position by year three.
MemorialCare has eight swap arrangements with five counterparties, totaling a notional amount of $500 million as of fiscal 2024. No collateral is currently posted, and the swaps had an approximate $15 million mark-to-market value as of Dec. 31, 2024. According to ֳ's criteria on self-liquidity, the system has access to highly liquid resources to handle any potential unremarketed puts.
Asymmetric Additional Risk Considerations
No additional asymmetric risks were considered in this rating affirmation.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
--A significant increase in debt and/or declining liquidity such that cash to adjusted debt drops below and is sustained under 200%;
--Failure to sustain operating improvements in the near term, and over the longer term operating EBITDA level expectations that reflect an ongoing trend below 5% margins without a plan to return operations to better profitability levels;
--Inability to fund the system's capital plan that would result in a lower level for the operating risk and revenue defensibility assessments, respectively.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--An upgrade is not likely in the Outlook period given the Negative Outlook and recent operating challenges;
--Demonstrated and sustained improvement in operating EBITDA margins to levels that are continuously in the 8%-10% range.
PROFILE
MemorialCare is comprised of four hospitals: LBMC including Miller Children's & Women's Hospital, Orange Coast Medical Center in Fountain Valley, CA, and Saddleback Medical Center in Laguna Hills, CA, with a total of 1,352 licensed beds. The system includes an extensive ambulatory network, a medical foundation, Select Health Plan and other related entities. The organization is an integrated delivery system with a geographic reach that covers southern Los Angeles County and Orange County. Total revenue reported in fiscal 2024 (June 30; audited) was approximately $3 billion.
Sources of Information
In addition to the sources of information identified in ֳ's applicable criteria specified below, this action was informed by data from Lumesis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Portfolio Analysis Model (PAM), v2.0.1 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Memorial Health Services (CA) | EU Endorsed, UK Endorsed |