Rating Action Commentary
ֳ Rates El Camino Health, CA's 2025 Revs 'AA'; Outlook Stable
Mon 12 May, 2025 - 1:58 PM ET
ֳ - San Francisco - 12 May 2025: ֳ has assigned a 'AA' long-term rating to El Camino Hospital District, CA's (the district) series 2025A, 2025B, and 2025C revenue bonds. The bonds are issued by the California Health Facilities Financing Authority on behalf of El Camino Hospital (El Camino, dba El Camino Health). ֳ has also affirmed ECH's Issuer Default Rating (IDR) at 'AA' and its other series of rated debt at 'AA' (issued by the district, El Camino Healthcare District, California Health Facilities Financing Authority, or Santa Clara County Financing Authority).
The Rating Outlook is Stable.
Proceeds from the series 2025A, 2025B, and 2025C bonds will primarily be used to refinance portions of the organization's outstanding series 2009A and series 2015A debt, provide reimbursement for prior capital expenditures (approximately $100 million), and pay for associated costs of issuance.
The 'AA' bond rating and IDR reflect El Camino's very strong operating profile assessment. It historically generates double-digit operating EBITDA margins and is anchored by a service area featuring strong demographics and a very healthy payor mix. The district also benefits from access to tax revenue funds that support community benefit programs and debt service of its general obligation (GO) bonds.
ֳ expects that El Camino will continue to deliver strong operating performance over the medium term, partly due to management's effective expense management practices and strategic initiatives aimed at growing top-line revenue. The hospital maintains a strong balance sheet, with more than 3.3x cash to adjusted debt in fiscal 2024 (as of June 30; audited). ֳ expects liquidity to remain robust, with strong cash flow generation despite increased future capital plans, even under stress case scenarios.
SECURITY
The GO bonds are direct obligations of the district payable from the collection of unlimited ad valorem taxes levied on all taxable property within the county of Santa Clara. The revenue bonds are secured by a gross revenue pledge (excludes property tax revenues) of El Camino.
KEY RATING DRIVERS
Revenue Defensibility - 'bbb'
Excellent Payor Mix in Competitive Market; GO Support
El Camino enjoys an excellent payor mix, with Medi-Cal accounting for 9.5% of gross revenues in FY24, up slightly from 8.8% in 2023, and self-pay exposure remaining below 1%. Medicare and commercial payors have remained relatively stable at 49.9% and 38.7%, respectively. This payor mix reflects a favorable service area and strong economic indicators.
The district receives tax revenues from Santa Clara County property taxes to support debt service payments on the GO bonds. In FY24, total tax revenues collected were approximately $33.5 million, representing just over 2% of total system revenues. El Camino's tax revenues do not enhance its revenue defensibility due to the lack of an available taxing margin to further support operations.
The district's ability to make debt service payments would not be affected by cyclical variations in the tax base, as seen during the pandemic. Proposition 13 caps the general tax rate at 1% of assessed value (AV), which cannot be increased. ֳ believes the district's tax base is unlikely to experience losses that would erode repayment capacity. The area's robust housing market also supports positive AV growth going forward.
El Camino operates in a competitive and fragmented market with several healthcare providers in its immediate vicinity, including Kaiser Permanente (AA-/Stable), Good Samaritan Hospital, Stanford Health Care ('AA'; Stable Outlook), Sutter Health (AA-/Stable), and Santa Clara Valley Medical Center. El Camino holds a leading market share of 20.6% in its primary service area (based on 2023 data), which is approximately twice that of its closest competitor. Specifically, within the Mountain View PSA market, El Camino holds a dominant 54% market position.
El Camino continues to lead in several key service lines, including urology, oncology, spine surgery, and orthopedics. The hospital's market position is further strengthened through its physician alignment strategy and continued focus on physician growth over the next several years.
Operating Risk - 'aa'
History of Very Strong Operating Margins; Elevated Capex Plans
El Camino's historical core operations are very strong, with robust cash flow generation supporting significant balance sheet growth. ֳ attributes this to management's continued focus on executing growth initiatives in key service lines, physician alignment strategies, and the delivery of high-quality care, while operating in a favorable, yet competitive market.
As of FY24, the hospital generated $162.6 million in income from operations, resulting in a robust operating margin of 10.3% and an operating EBITDA margin of 17.5%. During the six-month interim period ending Dec. 31, 2024 (unaudited), El Camino showed further improved performance, achieving a 13.4% operating margin and a 19.6% operating EBITDA margin, which is exceptionally strong.
ֳ expects operations to remain robust and consistent, with a strong operating cost flexibility assessment for the foreseeable future, despite various expense headwinds and competitive challenges. Management anticipates maintaining double-digit operating EBITDA margins over the five-year forward scenario through strong cost management and strategic capital deployment, which are expected to yield strong returns.
El Camino's average age of plant is relatively low at 9.7 years as of FYE24, following a period of higher capital spending to replace the main tower at the Mountain View campus, meeting California seismic requirements. Capital expenditure plans for the next decade are elevated at an estimated $2.3 billion, with most investments directed toward the Los Gatos campus, primarily for seismic compliance. Another significant portion will fund ambulatory investments across El Camino's broader market. ֳ believes the hospital has some additional debt capacity at the current rating to fund capital plans in combination with cash flow from operations and philanthropic sources over time.
Financial Profile - 'aa'
Very Strong Capital-Related Ratios
Total unrestricted cash and investments of $1.9 billion translated to approximately 536 days cash on hand (DCOH) and 333% cash to adjusted debt as of fiscal 2024 (June 30; audited), reflecting strong financial metrics commensurate with the 'AA' rating level. Net adjusted debt to adjusted EBITDA (NADAE), which serves as a proxy for the number of years of cash flow required to repay all outstanding debt and debt equivalents, was favorably negative at -4.4x for the period.
Total debt was $582.6 million at fiscal year-end, comprised of the series 2006 and 2017 GO bonds and series 2009, 2015A, and 2017A revenue bonds. The debt service on the GO bonds is covered by tax revenues pledged by the district. ֳ anticipates strength and consistency in key balance sheet metrics over the next couple of years, considering the series 2025 debt issuance (new money portion) and the hospital's future capital expenditure plans. Even under stress applied to operations and the investment portfolio, ֳ's scenario analysis indicates that cash to adjusted debt and NADAE will continue to remain strong, supporting rating stability at the 'AA' rating category. This reflects the hospital's balance sheet strength and the financial flexibility it provides.
Asymmetric Additional Risk Considerations
No asymmetric risk considerations are relevant to the rating.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
--Although unlikely, if cash flow generation significantly declines with operating EBITDA margins yielding below 9%, which inhibits the organization's ability to fund its long-term capital plan;
--Cash to adjusted debt deteriorates and is sustained below 180%;
--The hospital experiences a significant and long-lasting decline in the local economy and tax base resulting in deterioration of the hospital's payor mix and tax revenues.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--Given the 'AA' rating, the size and scope of the organization, a positive rating action is not likely at this time. However, if unrestricted balance sheet resources relative to outstanding debt levels achieves much higher positioning, then positive movement could be considered.
PROFILE
The El Camino Hospital District was formed in October 1956 by a vote of the district's electorate and is the sole owner of the land and hospital facility leased to the hospital under a lease that runs through December 2049. The district does not operate the hospital; however, it is the sole member of the obligated group for the GO bonds.
El Camino is a single hospital that serves approximately 48 square miles of northern Santa Clara County and is comprised of two campuses located Mountain View and Los Gatos. At ECH's Mountain View campus, the organization has separate behavioral health and women's and newborn hospitals. The hospital offers clinical and surgical services including cancer, diagnostic imaging, dialysis, emergency, heart and vascular, pediatric, orthopedic, rehabilitation, senior services, community health, and corporate health.
Collectively, the system includes the district, El Camino (two campuses) plus the El Camino Hospital Foundation, El Camino Health Medical Network, CONCERN, Employee Assistance Program, El Camino Surgery Center, and El Camino Hospital Foundation. The majority of assets sit on the hospital's balance sheet with the district holding a relatively small percentage of total cash and investments along with the GO debt. ֳ's analysis is based on a consolidated view, the district and hospital. Total revenue as of audited FY24 (June YE) was approximately $1.6 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.
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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
| El Camino Healthcare District (CA) | EU Endorsed, UK Endorsed |