NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA' rating on approximately $2.2 billion of outstanding debt issued by or on behalf of Memorial Sloan-Kettering Cancer Center (MSKCC) listed at the end of the press release.
The Rating Outlook is Stable.
SECURITY
The bonds are unsecured obligations. There are funding events that would trigger springing collateral including a gross revenue and mortgage pledge of certain entities. The entities pledged for springing collateral vary under each bond resolution.
KEY RATING DRIVERS
SUPERIOR CLINICAL REPUTATION: MSKCC is one of the world's premier cancer care and research institutions and is consistently ranked as one of the best cancer hospitals in terms of quality outcomes and patient satisfaction.
STRONG PHILANTHROPIC SUPPORT: MSKCC has strong fundraising abilities and philanthropy has been a consistent source of funds for operations, as well as capital needs. As of Sept. 30, 2016, MSKCC has exceeded its $4.0 billion goal for its ongoing capital campaign and revenues from philanthropic activities have increased 11.8% over the prior year period.
MAJOR CAPITAL SPENDING: MSKCC has been executing a clinical growth strategy with a significant investment in additional outpatient capacity and regional sites to capture growing demand. Approximately 64% of the capital plan remains to be spent, with over half of the funding coming from debt already issued. No additional debt is expected and Fitch believes MSKCC's debt capacity is limited at the current rating level.
STRONG OPERATING CASH FLOW: MSKCC's operating performance remains strong due to a diversified revenue base with solid growth in patient revenues as well as research and royalty revenue. Operating cash flow has also been robust and related ratios exceed Fitch's 'AA' category medians.
RATING SENSITIVITIES
MAINTAINING BALANCE SHEET STRENGTH: Fitch expects Memorial Sloan Kettering Cancer Center to maintain balance sheet metrics in line with 'AA' category medians, as it completes its major capital projects. If there is a material weakening in liquidity metrics, downward rating pressure could occur.
CREDIT PROFILE
MSKCC is the oldest and largest independent academic medical center exclusively focused on cancer care, research and education. MSKCC and Affiliated Corporations (consolidated entity) include the Cancer Center, Memorial Hospital for Cancer and Allied Diseases (477 operated beds, Sloan Kettering Institute for Cancer Research, SKI Realty and MSK Insurance. Fitch's analysis is based on the consolidated entity. Total revenue in fiscal 2015 (Dec. 31 year end) was $3.7 billion.
PREEMINENT ORGANIZATION
The affirmation of the 'AA' rating reflects MSKCC's strong clinical reputation as a leading provider of cancer care services, excellent philanthropic support and strong demand. The organization has higher five-year survival rates compared to other institutions and over 30% of patients are from outside New York State.
Management is implementing a growth strategy to expand its capacity regionally, as well as grow its reach both nationally, through affiliations with other healthcare providers, and globally through the development of a cancer diagnostic and treatment tool. MSKCC has formed a cancer alliance with three providers - Hartford Healthcare, Lehigh Valley Health Network and Miami Cancer Institute at Baptist Health South Florida - with the goal of expanding patient access to clinical trials. MSKCC expects the alliance to grow to include a total of six to seven partners over the next five years.
MAJOR CAPITAL PROJECTS
MSKCC is in a period of heavy capital investment. Recent projects completed include an ambulatory care facility in Harrison, NY that opened in October 2014; a surgery center on E. 61st St that opened in December 2015; and a phase one expansion to MSKCC's facility in Commack, NY that was completed in October 2016.
Approximately 64% of the capital plan remains to be spent and includes completion of a 760,000 sf ambulatory care facility on E. 74th St (opening in 2019), a laboratory medicine building on E. 64th St (expected completion 2017), phase two of the Commack, NY expansion (expected completion 2017), two additional regional sites in Monmouth County, NJ (expected completion 2016) and Nassau County, NY (targeting an opening in 2019) and the expansion of other regional outpatient centers.
The series 2015 taxable bonds were the last issuance for the capital plan. Bond proceeds available for capital total $868 million, with the balance being funded mostly through philanthropic giving and some internal liquidity. The projects will increase ambulatory care capacity by 40% and are generally on budget. Fitch views the expansion favorably and expects the projects to be additive to operating cash flow once they are opened. Any cost overruns or extended delays that cause stress on MSKCC's balance sheet could result in negative rating pressure.
SOLID BALANCE SHEET
Unrestricted cash and investments totaled $4.6 billion at Sept. 30, 2016 and have remained largely stable over the past four fiscal years. MSKCC had 494.6 days cash on hand and 36.3x cushion ratio at Sept. 30, 2016, compared to the 'AA' category medians of 277.4 and 29.9x. Any weakening in MSKCC's liquidity metrics could result in downward rating pressure.
DEBT BURDEN
MSKCC's debt burden is high; however, Fitch expects this pressure on the financial profile to be temporary until the projects funded by the additional debt are open and generate cash flow. In addition, MSKCC's 10-year projection includes $779 million of principal repayment. Given the number of bullet maturities in MSKCC's debt profile, average annual debt service is approximately $128 million. Management anticipates having an internal sinking fund for bullet maturities and expects to realize debt service savings on planned refinancings through direct bank placements of certain outstanding bonds.
STRONG PROFITABILITY
MSKCC has experienced strong profitability on a diversified revenue stream. Given the organization's fundraising capabilities, MSKCC has a policy of supporting operations with a portion of investment income. Total operating revenue in 2015 of $3.7 billion included $2.3 billion hospital care and medical practice revenue, $234.4 million of grants and contracts, $137.5 million of contributions allocated to operations, $197.9 million related to royalty income, $90.6 million of investment returns allocated to operations and $66 million of other income.
Operating cash flow has been very strong with operating EBITDA margins of 13.3% for the nine months ended Sept. 30, 2016, 12.3% in 2015 and 15.0% in 2014, compared to the 'AA' category median of 11.7%. Strong profitability has been mainly driven by strong growth in outpatient volume and a continued focus on costs.
DEBT PROFILE
As of Sept. 30, 2016, outstanding debt totaled $2.6 billion and is 100% fixed rate with no swaps. MSKCC has a $400 million bullet maturity in 2042, a $400 million bullet maturity in 2052, and a $550 million bullet maturity in 2055. Fitch does not view these bullets as a concern given MSKCC's access to the capital markets and management's plan to repay the debt.
DISCLOSURE
MSKCC has covenanted to provide annual financial information within 165 days of fiscal year-end and quarterly information within 60 days of quarter-end to the MSRB's EMMA system.
Debt rated by Fitch:
--$550 million Memorial Sloan Kettering Cancer Center taxable bonds series 2015
--$400 million Memorial Sloan Kettering Cancer Center taxable bonds series 2012A
--$262.3 million New York State Dormitory Authority revenue bonds series 2012-1
--$84.2 million New York State Dormitory Authority revenue bonds series 2012
--$400 million Memorial Sloan Kettering Cancer Center taxable bonds series 2011A
--$368 million New York State Dormitory Authority revenue bonds series 2008A-1 and A-2
--$137 million New York State Dormitory Authority revenue bonds series 1998 (insured: MBIA Insurance Corp.)
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=1014886
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014886
Endorsement Policy
https://www.fitchratings.com/regulatory
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