NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following bonds issued by the New Jersey Health Care Facilities Financing Authority on behalf of Princeton HealthCare System (PHCS):
--$188 million hospital revenue bonds, series 2016.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a mortgage on hospital property and a pledge of gross revenues.
KEY RATING DRIVERS
MODERATING DEBT POSITION: PHCS's debt position has been moderating as a result of property sales used to repay debt and solid business growth. Total long-term debt of $304.6 million amounts to a moderately high 51.3% of capitalization and 4.9x EBITDA as of June 30, 2016. These levels compare adequately to Fitch's respective 'BBB' category medians of 50.2% and 4.3x. Maximum annual debt service (MADS) as a percent of revenue at 3.8% is also near Fitch's 'BBB' category median of 3.6%. However, PHCS's heavy use of operating leases reduces capital-related ratios when adjusting for those costs.
IMPROVING OPERATING PERFORMANCE: Given its growing volumes and good pricing flexibility, PHCS's operating profitability has been improving steadily since the completion of its replacement hospital project several years ago. Operating and operating EBITDA margins improved to negative 0.2% and 10.8%, respectively, for fiscal 2015 (Dec. 31 year-end), from negative 7.4% and 6% in fiscal 2013. These improved levels compare better to Fitch's 'BBB' category medians of 1.5% and 8.7%, respectively. Consistent with Fitch's expectations, earnings continue to strengthen, with operating and operating EBITDA amounting to 1.8% and 13.1% through the first six months of fiscal 2016.
ADEQUATE MARKET POSITION IN A FAVORABLE SERVICE AREA: PHCS greatly benefits from its location in the central New Jersey region about three miles east of Princeton in Plainsboro Township. Population, employment and income trends are very favorable and PHCS secured an adequate 33.5% inpatient market share in its primary service area during 2015. However, PHCS faces meaningful inpatient competition from several healthcare providers located about 15 miles away in all directions.
SATISFACTORY AND GROWING LIQUIDITY METRICS: PHCS's liquidity position is growing as a result of improving cash flow, moderating capital spending, and financial support from its affiliated foundation. As of June 30 2016, PHCS holds $164.4 million of unrestricted cash and investments that amounts to 54% of long-term debt, 157.5 days operating expenses, and 10.2x cushion ratio. These levels are much improved from $93.9 million or 100.1 days cash on hand, 25.4% of debt and 5.8x cushion ratio in fiscal 2012.
RATING SENSITIVITIES
SUSTAINED CASH FLOW IMPROVEMENTS: Fitch expects Princeton HealthCare System to maintain its financial performance over the next several years. However, softer volume levels or expenditure growth that results in weaker profitability and debt service coverage would lead to negative rating action.
IMPROVED LIQUIDITY POSITION: Manageable capital plans, proceeds from real estate sales and healthy cash flow are expected to continue to build liquidity balances. Actual performance that strengthens liquidity at or above projected levels could allow for upward movement in the rating.
CREDIT PROFILE
PHCS is the main not-for-profit subsidiary of a holding company that provides a broad range of healthcare services to residents of the greater Princeton, New Jersey area. PHCS operates three divisions. The University Medical Center of Princeton at Plainsboro (UMCP) is a 319-bed acute care hospital, Princeton House Behavioral Health is a 110-bed psychiatric health facility, and Princeton HomeCare Services provides home nursing care, home rehabilitation, homemaker services, and hospice programs. The holding company, PHCS and Princeton Healthcare System Foundation are members of the obligated group and represented 99.3% of total system assets and 93.6% total system revenues in fiscal 2015. Total system revenues amounted to $437.3 million in fiscal 2015.
On July 11, 2016, PHCS executed a non-binding letter of intent with the University of Pennsylvania Health System to explore a partnership. The two organizations are in the due diligence process and are working toward a definitive agreement. If a definitive agreement on a partnership is reached, then regulatory approvals would be sought. Given the preliminary nature of the negotiations and likely regulatory review, Fitch has not incorporated the potential partnership into its rating.
HOSPITAL REPLACEMENT PROJECT
PHCS issued $355 million of bonds in 2010 to construct and equip a replacement hospital for UMCP. In addition to the bond issue, Princeton Healthcare System Foundation raised and contributed an astounding $171.3 million to the $523 million project, which is indicative of very strong community support and the service area's robust economic indicators.
The replacement facility opened in May 2012 and is located three miles from its original site on a main thoroughfare. The new hospital was developed using evidence-based design concepts to improve clinical outcomes, reduce infection rates and improve patient satisfaction. PHCS's patient satisfaction results and quality of care surveys improved steadily over the past several years and are at very favorable levels.
DEBT PROFILE
Debt levels are decreasing and amounted to 51.3% of capitalization, 4.9x EBITDA and about 71% of total revenues as of June 30, 2016. MADS as a percent of revenue is more manageable at 3.8%, but PHCS's heavy use of operating leases increases the adjusted debt burden when accounting for those costs. As a result of several investments to support the campus development project, operating lease expenses are high and amounted to $16.7 million in fiscal 2015. However, operating leases are expected to decline to about $10.6 million by fiscal 2018. Adjusted MADS coverage incorporating both operating lease and pension expenses was 2.6x for the six-month period ending June 30, 2016. Traditional MADS coverage of 3.9x for the same six-month period is more favorable and is above Fitch's 'BBB' category median of 3.0x.
BUSINESS POSITION
PHCS's replacement hospital project was part of a board-directed strategic planning process that also resulted in the accomplishment of a variety of other goals including service expansions, the establishment and growth of its employed medical group (Princeton Medicine), strategic clinical partnerships with institutions such as Children's Hospital of Philadelphia, and the creation of structures for emerging reimbursement models such as an accountable care organization. PHCS also benefits from its ownership and operation of Princeton House Behavioral Health. As the largest and most comprehensive behavioral health service provider in the state, it is a regional leader in central New Jersey for psychiatric and substance abuse programs and services.
PHCS's geographic location in central New Jersey is a benefit, due to a growing population with above-average income levels (higher than the state overall), a higher percentage of older adults, and a payor mix that is among the best in the state.
LIQUIDITY AND DEBT PROFILE
The liquidity position is growing as a result of improving cash flow, moderating capital spending, and financial support from its affiliated foundation. As of June 30, 2016, PHCS holds $164.4 million of unrestricted cash and investments that amounts to 54% of long-term debt, 157.5 days operating expenses or 10.2x cushion ratio. These levels are mixed versus Fitch's 'BBB' category medians of 161.2 days, 90.8% of debt and 11.7x cushion
PHCS's total debt position has been reduced over the past several years as a result of revenue growth and property sales at the old hospital location ($31.4 million), and sold parcels at the new campus ($6.1 million). Total debt outstanding was reduced to $304.6 million as of June 30, 2016, from $369 million at the end of fiscal 2012.
DISCLOSURE
PHCS covenants to provide bondholders with quarterly financial information and operating statistics within 60 days of quarter-end and annual financial statements and utilization statistics within 150 days of fiscal year-end.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014203
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014203
Endorsement Policy
https://www.fitchratings.com/regulatory
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