NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following series of bonds issued on behalf of the Catholic Health Services of Long Island Obligated Group (CHSLI).
--$80,394,000 Nassau County Local Economic Assistance Corporation series 2014;
--$48,186,000 Nassau County Local Economic Assistance Corporation series 2014B;
--$41,164,000 Suffolk County Economic Development Corporation series 2014C;
--$173,032,000 Suffolk County Economic Development Corporation series 2011;
--$60,188,000 Nassau County Local Economic Assistance Corporation series 2011;
--$31,383,000 New York State Dormitory Authority series 1999B.
The Rating Outlook is Stable.
SECURITY
Pledge of gross revenues and mortgage on the CHSLI's obligated group's (OG) hospital facilities. The OG includes five of the system's six hospitals (St. Joseph is not a member of the OG) and accounted for 80% of the consolidated system assets and 84% of consolidated revenues in fiscal 2015 (year-end Dec. 31, draft audit, in substantially final form). Fitch's analysis is based on the results of the consolidated system.
KEY RATING DRIVERS
MAINTAINING IMPROVED OPERATING PERFORMANCE: CHSLI finished fiscal 2015 (year-end Dec. 31, draft audit) with operating income of $13.1 million, a 0.6% operating and 5.9% operating EBITDA margin, consistent with Fitch's 'BBB' medians, and improved compared to the 2014 essentially breakeven performance.
GOOD VOLUMES: The results were supported by solid volumes driven by investment in physician recruitment and retention and new programs. Acute care admissions increased 1.1% system-wide and the new open heart program started at Good Samaritan Hospital (Good Samaritan) in January 2014 under the auspices of St. Francis Hospital (St. Francis) is on target with 311 procedures in 2015. St. Francis, which operates one of the country's premier cardiac programs, performed close to 1,200 open heart procedures last year.
MODERATE DEBT BURDEN: Driven by positive operations in 2015, CHSLI's coverage of maximum annual debt service (MADS) was 2.8x in 2015, consistent with Fitch's 'BBB' median of 2.7x and CHSLI's debt burden, as measured by MADS as a percent of revenue, at 2.4%, is favorable to the 3.6% 'BBB' median.
SOLID LIQUIDITY: Fitch views CHSLI's solid balance sheet metrics as major credit strength. Liquidity has been maintained with 164 days cash on hand (DCOH) at Dec. 31, 2015 and cash was equals to a solid 181 % of long term debt. Fitch does not include in unrestricted cash the proceeds from the sale of Siena Village Senior low income apartments, which are restricted for debt repayment.
COMPETITIVE MARKET: Based on solid volumes and physician recruitment, CHSLI's market share was stable at 23.5%, which is second to a strong competitor, North Shore Long Island Jewish Health System (NSLIJHS rated 'A', Stable Outlook), with a 32.5% market share. The competitive environment places added pressure on CHSLI to make strategic investments in order to maintain its market position.
RATING SENSITIVITIES
MAINTAIN OPERATIONAL IMPROVEMENTS: Fitch expects Catholic Health Services of Long Island (CHSLI) to continue to maintain the improved operating performance, supported by investments in programs and physician recruitment. Positive rating movement would require strengthening of profitability metrics leading to stronger coverage, while maintaining the solid balance sheet profile.
CREDIT PROFILE
CHSLI is an integrated healthcare system comprising six acute care hospitals, three nursing homes, certified home health programs, a hospice service and a network of services for the mentally and developmentally disabled, all based on Long Island. The system has 1,928 licensed acute care beds (1,725 operated) and 790 licensed nursing home beds, and reported revenues of $2.26 billion in fiscal 2015 ending Dec. 31 (draft audit).
STABILIZED OPERATING PERFORMANCE
The system 2015 operating performance with operating income of $13.1 million (0.6% operating margin) was a continuation of a positive operating trend after breakeven 2014, following a sizeable 2013 loss of $22.9 million. The 2015 performance reflects a combination of the positive impact of growth initiatives coupled with solid expense management. Revenues increased by 5.3%, driven by solid volumes and the system has continued to maintain the benefits of the Call to Action Plan launched in 2013 to drive $71.5 million of operating improvements.
On Feb. 26, 2016, CHSLI gave notice to withdraw from Long Island Health Network (LIHN), the clinically integrated network in which the CHSLI participates with four other Long Island hospitals. LIHN is instrumental in assisting the participants in negotiating contracts with payers. A firm time line for CHS's withdrawal has not been established. Fitch's concern regarding the loss of benefits stemming from the ability of LIHN to represent the members in contract negotiations is partially mitigated by the provision that existing contracts are locked in place until their expiration, with the two largest accounting for over 60% of managed care revenues terminating in April 2018 and December 2016, respectively. Fitch believes that CHSLI's breadth of services in its service area positions the system well to remain an attractive partner for payors.
While there remain challenges at some of the system hospitals, Fitch views favorably the stabilizing CHSLI's overall financial profile and believes that CHSLI's strategy for the other system hospitals, which includes cost reductions, redesign of services, and physician recruitment, is helping to produce positive operating results. While Good Samaritan and St. Francis Hospital, which together accounted for 57% of 2015 consolidated system revenues, recorded slightly lower operating results in fiscal 2015, the overall system performance points to less reliance on these two institutions which historically were the main drivers of profitability.
The budget for the current fiscal year, similar to 2015, is for operating margin of 0.5%, which Fitch believes is achievable. The system recently increased its ownership of Beacon Health Partners (Beacon), initially a 50/50% joint venture between CHSLI, St. John's Episcopal Hospital and physicians, to a controlling 95% interest for $7.5 million. Beacon is a 670-strong physician group with over 200 practices in Nassau, Suffolk and Queens Counties. The combined Beacon and CHSLI's own Physician Hospital Organization (PHO) network includes approximately 1,100 physicians. Beacon participates in the Medicare Shared Savings Program, as well as several pay-for-performance contracts as an accountable care organization (ACO). In total, Beacon has approximately 100,000 individuals currently under its population health program.
Management has also undertaken a number of asset monetization efforts over the last couple of years; a dialysis program was sold for $16 million in 2014 and Siena Village senior low-income apartments in Smithtown was sold to a for-profit operator in December 2015. The $62 million of sale proceeds, which are considered restricted assets, were used to defease $15 million of Siena Village debt and the remaining $43 million will be used initially to pay principal of the series 2011 bonds and the remaining portion can be applied toward defeasance of a portion of the series 2011 at the first call date in 2021.
SOLID LIQUIDITY
At Dec. 31, 2015, the system reported $965.1 million of unrestricted cash and investments, equating to 164 DCOH, cushion ratio of 18x and cash equal to 181% of debt, all favorable to Fitch's 'BBB' medians of 161 days, 11.1x and 89.5%, respectively. The unrestricted liquidity number does not include any of the proceeds of the Siena Village sale, which have been restricted to debt repayment. The system has a capital budget of approximately $132 million for this year, equating to 131% of depreciation, of which $20 million will be drawn from trusteed funds. CHSLI will also get approximately $40 million from FEMA for generator replacement and flood mitigation at their Good Samaritan and Our Lady of Consolation facilities, for which reimbursement will be received as the projects are completed.
DEBT PROFILE
The system had 2.8x coverage by EBITDA of its $53.8 million MADS in 2015, consistent with Fitch's 'BBB' median of 2.7x, as was the 2.5% operating EBITDA coverage, and MADS is a moderate 2.4% of revenues. The system has a conservative debt structure with 90% of its debt fixed rate. The system debt is somewhat front-loaded with MADS dropping materially to $20 million by 2030. Additionally, approximately $43 million of the proceeds of the Siena Village sale will be used for principal payment over the next five years and possibly for early retirement of a portion of the series 2011 bond issue in 2021. A drawn line of credit, which expired in January 2015, was replaced with a fixed-rate 10-year term loan in the amount of $35 million with interest rate set at 2.45%.
DISCLOSURE
CHSLI covenants to provide annual and quarterly disclosure of the obligated group's financial information on EMMA. Disclosure includes an income statement, balance sheet, and utilization statistics.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001409
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