NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to approximately $250 million taxable fixed-rate revenue bonds series 2013A expected to be issued by the North Shore-Long Island Jewish Health System (NSLIJ).
Fitch also affirms $135,000,000 North Shore-Long Island Jewish Health System Taxable Fixed-Rate Bonds, series 2012B, as well as the following parity debt issued on behalf of the NSLIJ Obligated Group at 'A-':
--$48,930,000 Dormitory Authority of the State of New York revenue bonds, series 2012A;
--$380,120,000 Dormitory Authority of the State of New York revenue bonds, series 2011A;
--$235,115,000 Dormitory Authority of the State of New York revenue bonds, series 2009A;
--$125,000,000 Dormitory Authority of the State of New York revenue bonds, series 2009B-D;
--$60,890,000 Dormitory Authority of the State of New York revenue bonds, series 2009E;
--$144,270,000 Dormitory Authority of the State of New York revenue bonds, series 2007A;
--$48,420,000 Dormitory Authority of the State of New York revenue bonds, series 2007B;
--$113,6680,000 Dormitory Authority of the State of New York revenue bonds, series 2005;
--$22,485,000 Dormitory Authority of the State of New York revenue bonds, series 2003;
--$26,405,000 Dormitory Authority of the State of New York revenue bonds, series 1998*.
*The rating for this series is an underlying rating.
The Rating Outlook is Positive.
The $250 million fixed-rate series 2013A bonds will be issued as taxable bonds with approximately $50 million of the proceeds to be used to reimburse the system for capital expenditures and investments and the remaining proceeds to be used for general corporate purposes. The bonds have a bullet maturity in December 2043. The series 2013A issuance will increase maximum annual debt service (MADS) to $154.9 million from the current $137.2 million. MADS occurs in 2014. The bonds are expected to price the week of Nov. 9, 2013.
SECURITY
Bonds are secured by revenue pledge of the obligated group (OG) and by mortgages on primary health care facilities of the NSLIJ OG. The series 2013A will have covenants and disclosure matching existing NSLIJ OG bond issues. The OG represented 96% of system assets and 95% of system revenues in 2012. Fitch reports on the performance of the NSLIJ system.
KEY RATING DRIVERS
LARGE INTEGRATED SYSTEM: The system's large operating footprint is expected to enhance operating stability and is a key credit strength. NSLIJ has achieved significant growth over the past decade, increasing from $3.1 billion in total revenues in fiscal 2002 to $6.6 billion in fiscal 2012 while maintaining a leading 27% market share in its primary service area (PSA). The systems expansive operating footprint includes a large employed physician faculty group and covers most of Long Island and large portions of New York City. Additionally, NSLIJ is further diversifying operations by creating two insurance subsidiaries. The system is led by a stable, long term management team with a clearly defined vision for the system.
COMPRESSED OPERATING MARGINS: The system's operating margin has been compressed to the mid 1% range due to flattening inpatient volumes and expenses related to the ongoing system transformation, which included completion of major projects at the LIJ facility, and in 2012 the impact of Super Storm Sandy. Going forward expectations for operating margin have been lowered to 1% and gradually increase as the system launches its insurance products and continues its ambulatory expansion. However, Fitch views both strategic investments positively.
MANAGEABLE DEBT BURDEN: Coverage of pro forma MADS by EBITDA of 3.8x through the interim period and pro forma MADS as a percentage of revenues at 2.3% continue to be favorable to Fitch's 'A' category medians despite the issuance of $250 million of new money in the current financing. The low debt burden is a key credit strength mitigating operating results and certain liquidity metrics that are on the lower end of the 'A' category.
LENOX HILL TURNAROUND: Operating losses at Lenox Hill were brought under control as management implemented a numbers of changes, including some in the clinical leadership. 2012 operating loss was significantly reduced to $3.3 million from the prior year's $19.8 million and the facility reported a $14.3 million gain from operations for the six month interim period ended June 30, 2013.
MODEST BUT STABLE LIQUIDITY: Cash and unrestricted investments, equal to $1.9 billion through the interim period, reflect strong cash flows, though historically liquidity metrics have been lower than Fitch's 'A' category medians. Days cash on hand (DCOH) at 104.7 days and pro forma cash to long-term debt at 102% remain low for the category.
RATING SENSITIVITIES
OPERATING STABILITY: Fitch views the large operating footprint and leading market share as key strengths which are expected to impart a high degree of credit stability to the system. While management is projecting lower profitability in 2013 and 2014, an upgrade may occur provided management meets projected profitability targets and leverage and liquidity metric remain stable.
CREDIT PROFILE
With corporate headquarters in Great Neck, NY, NSLIJ includes five tertiary-care teaching hospitals - North Shore University Hospital-Manhasset (804 certified beds), Long Island Jewish Hospital (583 bed), Staten Island University Hospital North (508 beds), Lenox Hill Hospital (652 beds) and Southside Hospital (341 beds); seven community hospitals; three specialty hospitals, three long-term care facilities; and other health care related entities. The NSLIJ system is the fifth largest not-for-profit secular health care system in the U.S. based on 2012 revenues of $6.6 million.
The affirmation of the 'A-' rating and maintenance of the Outlook at Positive reflect the system's large operating footprint and significant market presence, slimmer but positive operating performance in fiscal 2012 and for the interim period, as well as the system's solid coverage of debt and moderate debt burden. Fitch believes that the system's operating platform with fifteen hospitals, a large employed physician component and expansive ambulatory network should enable NSLIJ to produce operating margins projected in the low 1% range, sufficient to produce debt service coverage consistent or above the 'A' medians, and moderately grow liquidity over the next several years.
LARGE INTEGRATED SYSTEM
The system's large operating footprint and leading market share in its PSA are expected to provide a high degree of credit stability and are key credit strengths. NSLIJ has achieved significant growth over the past decade, growing from $3.1 billion in revenue in fiscal 2002 to $6.6 billion in total revenue in fiscal 2012. NSLIJ has slightly increased its market share of its five county service area to 27.4% in 2012 from 26.6% two years ago and market share growth has been recorded in all but one major service line, neuroscience, which management is addressing through focused recruitment.
A major system transformation effort is underway. Several large construction projects have been completed, most significantly Katz's Women's Hospital, a new inpatient pavilion and emergency department at Cohen's Children's Medical Center and a replacement psychiatric facility at Zucker Hillside Hospital on the Long Island Jewish Medical Center (LIJ) campus. As part of the Health System's realignment strategy, the Health System has recently announced that it plans to downsize inpatient capacity at Glen Cove Hospital and convert the facility to a comprehensive ambulatory care facility in early 2014 - accommodating most of Glen Cove Hospital's current inpatient services at other Health System facilities. These programmatic changes remain subject to New York State Department of Health (DOH) approval, and there can be no assurances that the DOH approval will be obtained.
The system is continuing the expansion of its already large, 400 site, ambulatory network. Three new freestanding emergency departments are in the planning stages, the first to open will be located in the former O'Toole medical building in Greenwich Village, as that facility undergoes a $125 million remodeling. Several other 'big box' ambulatory facilities, some with specific focus, such as cancer, are also planned. Physician acquisition effort is slowing down as the system has reached a critical mass with 2,600 employed faculty physicians on its medical staffs and relationships with over 6,500 community physicians, though approximately 200 new physicians will continue to be recruited annually.
As part of its diversification effort, NSLIJ has received licenses to operate two insurance subsidiaries, North Shore-LIJ Health Plan, Inc. (HPI), which will be authorized to operate a Medicaid managed Long-Term Care Plan in New York and North Shore-LIJ Insurance Company, Inc. (ICI), a for-profit health plan which will offer insurance to individuals and groups both on and off the insurance exchange starting with late 2013. The system already provided $28 million of capitalization for ICI (HPI will require under $7 million), and based on estimated enrollment of 30,000 members by 2017, is not expected to breakeven until 2017, though total losses in aggregate for the initial years are projected not to exceed $10 million. While the implementation of the health plan represents a risk, Fitch believes that given NSLIJ's strong brand name recognition in the market and its extensive physician and facility network, the system should be able to achieve its targeted membership goal. NSLIJ already provides health insurance for its 50,000 employees and dependents and can use that experience in managing the health plan. While expected to compress operating profitability in the near term during the start-up phase, Fitch views the insurance companies positively as they should benefit the system's operations over the longer term.
COMPRESSED OPERATING MARGIN
The system reported income from operations of $97.9 million on revenues of $6.6 billion in fiscal 2012, after an operating gain of $134.2 million in 2011. Several factors contributed to a slight compression in the system's operating margin in 2012 and for the 2013 interim period. While operating revenues increased by 7.6% in 2012, which included the acquisition of the Long Island Home in mid-2012 and net $48.6 million of a CMS settlement of a lawsuit related to the rural floor provision of the Balance Budget Act of 1997, operating margin declined to 1.5% from 2.2% in 2011 and operating EBITDA margin to 6.7% from 7.5%. The system is experiencing flattening inpatient volumes, expenses associated with the ambulatory growth, implementation of the electronic health record and increased depreciation expenses related to completion of several recent projects. The 2012 results were also negatively impacted by $17 million from the effect of Super Storm Sandy. Operating gain was reported at $57.2 million through the 2013 interim period (1.7% operating margin). Management has lowered their expectation of operating margins to approximately 1% for 2013 and 2014, then gradually increasing to 2% by 2018. Management recognizes that the execution of the full capital plan requires generating sufficient cash flow from operations and is committed on scaling back the capital plan should the required level of profitability not be achieved. The fiscal 2013 budget is for $75 million operating profit which is likely to be achieved based on the year-to-date profitability.
MANAGEABLE DEBT BURDEN
The system has a $3.4 billion capital plan for the 2013-2019 period, which includes capitalization for the insurance companies and roughly equals 150% of system depreciation expense. Approximately 53% of the capital needs are projected to be generated from operating cash flow, with 32% from debt issuance and 10% from philanthropy. NSLIJ had solid coverage of pro forma debt of 3.1x in fiscal 2012 and pro forma debt coverage is reported at 3.8x though the interim period, consistent with the 'A' category median of 3.8x. MADS represents a manageable 2.3% of revenues, favorable to the 'A' category median of 3.1%. Following the 2013A issuance, the system will have approximately 86%of its debt as fixed rate and pays down approximately $55 million of principal each year on, allowing it to keep its debt load relatively unchanged and management is committed to monitor and reevaluate capital plans in order to maintain its balance sheet. The system's five swaps have a notional par of $116 million had a negative $8.3 million mark-to-market at June 30, 2013 and no collateral posting was required at that time.
LENOX HILL TURNAROUND
The financial turnaround at Lenox Hill is the result of management's focus on enhancing clinical services, which necessitated changes in the leadership of some of clinical departments and continuing effort to recruit high-caliber physicians. Operating loss was reduced to $3.3 million in 2012, a significant change from the $19.8 million loss in 2011 and the institution generated a $14.3 million operating gain for the interim period ended June 30, 2013. Fitch continues to believe that the Lenox Hill acquisition was an important strategic gain for NSLIJ, providing the system a significant foothold in Manhattan, while expanding and strengthening its presence in key areas of Queens. Lenox Hill is now experiencing some capacity constraints, which are being addressed by shifting some outpatient volume to Lenox Hill's MEETH outpatient facility on East 64th street (the former Manhattan Eye, Ear and Throat Hospital).
MODEST BUT STABLE LIQUIDITY
Supported by solid cash flow from operations NSLIJ's absolute liquidity has grown by 23% since 2010, but liquidity metrics have historically trailed the rating category. Unrestricted cash and investments through the interim 2013 period were reported at $1.9 billion, equal to 104.7 DCOH, cushion ratio of 12x and 102% pro forma cash long-term debt, all of which are weaker than Fitch's 'A' category medians of 196.3 DCOH, 15.6x cushion and 129.2% cash to debt. Reducing cash by the $110.5 million of draws on a line of credit at June 30, 2013, would reduce DCOH to 98.5 days. NSLIJ uses the lines of credit to fund construction costs of projects for which it will eventually issue debt and to bridge the receipt of capital pledges. Maintaining liquidity will remain crucial as the system continues to execute its capital plan which requires over 50% to be generated from operations. Management will periodically review and adjust the capital plan in order not to cause deterioration of its balance sheet metrics and projects DCOH to be at 105 days or higher.
DISCLOSURE
The obligated group covenants to provide bondholders with annual and quarterly financial disclosure as well as operating statistics. Current financial disclosure for the OG is excellent and includes a balance sheet, income statement, utilization statistics, cash flow statement and management discussion and analysis.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Rating Criteria, this action was additionally informed by information from Citi.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=801239
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