California Municipal Finance Authority — Moody’s upgrades Palomar Health’s (CA) revenue bond rating to Baa3; outlook revised to stable

Rating Action: Moody’s upgrades Palomar Health’s (CA) revenue bond rating to Baa3; outlook revised to stableGlobal Credit Research – 02 Feb 2022New York, February 02, 2022 — Moody’s Investors Service has upgraded Palomar Health’s (CA) revenue bond rating to Baa3 from Ba1. At the same time, the outlook has been revised to stable from positive. Palomar Health (PH) has approximately $605 million of revenue bond debt outstanding.Moody’s also rates PH’s general obligation bonds, which currently are rated A2 positive. The general obligation bonds are secured by the district’s voter-approved unlimited property tax pledge and general obligation bondholders do not have any recourse to the hospital for payments under the bonds. Tax revenues, payments, and principal related to the general obligation bonds have been excluded from this analysis.RATINGS RATIONALEThe upgrade to Baa3 acknowledges significant improvement in operating performance and maintenance of liquidity in line with expectations, and assumes that the strengthening of both over the next several years will lead to gradually better leverage metrics. The rating also reflects the favorable contract resolution with Kaiser Permanente and positive agreements with other payors, which lent to better operating results in fiscal 2021 and contribute to the assumed durability of stronger operating cash flow. Additional drivers of the Baa3 include various ongoing strengths which will continue to undergird Palomar Health’s fundamental credit position, including the organization’s large size, leading market position, and comprehensive array of clinical offerings. Ongoing challenges include: very high leverage; modest liquidity (excluding temporary improvements); high level of losses at the medical foundation; significant competition within its broader service area; and somewhat thin, though improved, headroom to one of the covenants.RATING OUTLOOKThe stable outlook reflects maintenance of operating performance and growth in cash reserves such that debt and liquidity metrics will continue to gradually strengthen over-time.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Material reduction in revenue backed debt burden and strengthening of absolute and relative liquidity- Continued maintenance of stronger operating performanceFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Return to weaker operating results- Decline in liquidity- Issuance of additional debt- Failure to meet debt covenant requirementsLEGAL SECURITYRevenue bonds are secured by a pledge of gross revenues of the system and are backed by a fully funded debt service reserve fund. Covenants include: minimum days cash on hand requirement of 80 days (below 55 days constitutes an event of default; most recent official calculation as of June 30, 2021 was 135.1 days); minimum peak debt service coverage of 1.15 times (less than 1.0 times constitutes an event of default; most recent official calculation was 1.9 times); and minimum cushion ratio of 1.5 times (most recent official calculation was 7.7 times).PROFILEPalomar Health is the largest public health care district in the State of California, with over $800 million of revenues in fiscal 2021, and generating over 24,000 admissions. The district operates acute care facilities in the towns of Escondido and Poway, and captures 44.5% of the market share within the district. Palomar Health was formerly known as Palomar Pomerado Health and changed its name per board resolution in May 2012.METHODOLOGYThe 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 DISCLOSURESFor 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.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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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. 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