NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed at 'B' the outstanding $21.2 million New Jersey Health Care Facilities Authority's revenue bonds, Deborah Heart and Lung Center (DHLC), series 1993 as part of its ongoing surveillance effort.
The Rating Outlook is Stable.
Rating Rationale:
--The opening of the satellite emergency department (SED) on Deborah Heart and Lung Center's (DHLC)campus in March of 2010 has had a positive impact on the both utilization and financial performance and has returned the organization closer to a point of fiscal stability.
--The financial improvement, which started in 2009, has been maintained for fiscal 2010 with a further reduction of the operating loss at DHLC to $1.3 million from a $5.9 million loss in the prior year and has continued for the five-month interim period ended May 31, 2011 with a loss of $2.2 million as compared to $2.6 million for the prior year interim period.
--DHLC is realizing an additional 90 admissions per month from the SED and admissions were 14.3% higher in 2010 versus the prior year.
--The lower operating loss had reduced need for contribution transfers from the Foundation, which is obligated to fund DHLC's cash flow requirements, including debt service payments. In fiscal 2010 the Foundation transferred $1.7 million to DHLC, as compared to a high of $13 million in 2008.
--Liquidity, while stabilized, remains a significant credit negative, with combined DHLC and Deborah Hospital Foundation (Foundation) unrestricted cash and investments at $27 million at 2010 year end, equal to 70.8 days cash on hand (DCOH). Cash at the May 2011 interim period, which is typically lower at the midyear before the bulk of the fundraising and charity funding is received, was at $16.5 million, but was $3.8 million higher than in the prior year interim period.
Key Rating Drivers:
--Maintaining the recent financial improvement resulting in a more stable and sustainable liquidity position.
--Realizing a sufficient level of fundraising through the Foundation in support of hospital operations.
Security:
Bonds are secured by a revenue pledge and a mortgage lien on DHLC's facility and additionally benefit for a Subsidy Agreement from the Foundation, which is obligated to fund DHLC's cash flow requirements, including operating costs, capital needs and debt service payments.
Credit Summary:
The affirmation of the rating reflects the improvement in DHLC's financial operations which has been maintained for fiscal 2010 and for the five-month 2011 interim period. While stabilized over the last two years, the low liquidity remains a chief credit concern.
DHLC's operating loss was further reduced in 2010 to $1.3 million, equal to a negative operating margin of 0.9% and an operating EBITDA margin of 5%, a marked improvement over the prior year operating loss of $5.9 million (negative 4.6% operating margin and 1.8% operating EBITDA margin). The stronger operating results are to a significant degree due to the March 2010 opening of satellite emergency department on DHLC's campus, which is operated by Our Lady of Lourdes Health System (Lourdes), part of Catholic Health East (rated 'A+' by Fitch). DHLC benefits from cardiac, pulmonary and vascular admissions, while patients needing other services can choose to be admitted to Lourdes or other institutions. Revenues increased by 9.2% in fiscal 2010 and by a further 12% through the five-month interim period owing to the more robust volumes.
The increase in volumes following the opening of the SED has exceeded expectations and management reports 90 additional admits per month which are attributed to the new SED. Admissions increased by 14.3% in 2010 and year to date admission continue to exceed the prior year by 9.5%, when one day stays are included. Open heart cases registered a small uptick in 2010 for the first time, despite the increased use of alternative cardiac treatment modalities, such as stents. DHLC expects a further increase in demand for services from the official opening of the Joselin Diabetes Center on its campus, planned for later this summer. The diabetes center, which will be operated under an agreement with a nationally renowned diabetes program, will be geared towards care of patients whose complications often involve vascular and cardiac disease.
Despite the significant improvement in operating performance, Fitch continues to be concerned with DHLC's liquidity position.
Fitch notes the decreased need for the Foundation's support, as the DHLC's operating losses were brought under control. Nevertheless, both the support of the Foundation and the continued willingness of New Jersey to provide charity funding are important factors in supporting DHLC operations. The Foundation raised $11.3 million last year, exceeding the $7.8 million raised in 2009, and expects to keep fundraising at the 2010 level in the current fiscal year. Combined DHLC and Foundation unrestricted cash at 2010 year end was $27 million, equating to 70.8 DCOH and the Foundation transfer to DHLC was reduced to $1.7 million in 2010 from $2.2 million in the prior year and from the high of $13 million in 2008. Going forward management expects the Foundation contribution to be at approximately $3.8 to $4 million annually.
The state support for the institution is being maintained for the time being with $6.6 million committed for the current fiscal year, actually a slight increase over last year. Unrestricted cash at May 31, 2011 is down to $16.5 million, but exceeds the prior year period by $3.8 million. The lower mid-year cash position is due to the several factors including: 1) reduction of accounts payable of $2.5 million, 2)the bulk of the fundraising typically realized in the fourth quarter of the calendar year and the timing of the receipt of the New Jersey charity funding, anticipated to come in July. Coverage of MADS, including the Foundation transfer, was 2.3 times (x) in fiscal 2010.
The Stable Outlook is based on Fitch's expectation that DLHC will be able to continue to maintain the improvement in its operating performance at a lower operating loss level, reducing the need for Foundation transfers, which will further stabilize the organization's liquidity position.
Deborah Heart and Lung Center is a 139-bed tertiary care cardiac, pulmonary, and vascular care facility, which is located in Browns Mills, NJ (approximately 20 miles from Trenton). DHLC had total revenues of approximately $139 million in fiscal 2010. DHLC covenants to disclose only annual audited financial information (within 120 days) to the Municipal Securities Rulemaking Board's EMMA system, which Fitch views negatively. However, Fitch does note that DHLC's bond covenants date back to documents produced in 1993 when the expectations for disclosure were not as thorough. Currently, DHLC does provide unaudited interim quarterly and annual audited information to the trustee and the New Jersey Health Care Facilities Authority as well as to bondholders upon request.
For more detail on DHLC see Fitch's press release 'Fitch Upgrades Deborah Heart and Lung Center's (New Jersey) Revs to 'B'; Outlook Revised to stable, dated October 29, 2010.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Aug. 16, 2010);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (Dec. 29, 2009).
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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