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Fitch gives stable rating on Palomar Health, with warning

Fitch Ratings has given a BB+ rating for four series of bond issuances for Palomar Health -- raising concerns about its liquidity.

The rating agency says while the outlook of $159.25 million, $228.47 million, $171.6 million, and $22.19 million in certificates of participation bonds that helped bankroll the $1.06 billion, 288-bed Palomar Medical Center in Escondido are stable, there are concerns.

These issues include profitability negatively impacted by one-time move-in costs to the new facility, negative variance to budget due to continued shift of inpatient admissions to observation cases, and rising depreciation and interest expense related to the new facility.

While capital needs going forward will drop dramatically to $17 million budgeted in fiscal 2013 from an average of $197.1 million over the last four fiscal years, Fitch says Palomar’s debt burden remains high and is inconsistent with an investment-grade rating.

Liquidity has dropped as of Dec. 31, 2012, mainly due to the remaining spend on the master facilities plan from equity. In addition, debt service was paid from cash due to negative cash flow.

“It is imperative that PH improve its cash flow in order to cover its high debt service requirements,” the ratings agency writes. “Fitch will monitor PH's progress over the next few months and the failure to substantially improve cash flow will result in negative rating action.”

For fiscal 2012 (ended June 30), Palomar Health reported $552 million in total operating revenue.

Through the interim, PH reported an operating loss of $41.1 million, or a negative 14.9 percent operating margin (exclusive of property tax income). For fiscal 2012, PH generated $6.3 million in operating income, or a 1.2 percent operating margin.

As of Dec. 31, 2012, PH had $581.5 million in revenue bonds and $492.4 million in general obligation bonds outstanding.

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