NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating on the following series of bonds issued by the State of Connecticut Health and Educational Facilities Authority on behalf of Stamford Hospital (Stamford):
--$45,600,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds Series 2016K.
In addition, Fitch has affirmed at 'A' the rating on the following series of bonds:
--$250,000,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds series 2012J;
--$110,015,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds series 2010I.
The Rating Outlook is Stable.
Stamford plans to issue approximately $45.6 million fixed rate series 2016K bonds, which are expected to price the week of June 6, 2016. Proceeds will be used to reimburse the system for expenses associated with the Campus Modernization Project currently under way. The series 2016K bonds will have final maturity in 2046 with principal payments due in the last four years; proposed principal will be wrapped around exiting debt, resulting in aggregate level debt service until 2042 and then dropping significantly to under $13 million for the last four years. Pro-forma maximum annual debt service (MADS), provided by the Underwriters, was estimated at $27.5 million. A debt service reserve fund will not be funded in connection with the series 2016K bonds.
SECURITY
Debt payments are secured by gross revenues of the obligated group, which consists of Stamford Hospital (Stamford), Stamford Health Inc. (the parent), and Stamford Health Medical Group (SHMG), a physician multispecialty practice. The obligated group accounted for 99.6% of system revenues in fiscal 2015 (year-end Sept. 30).
KEY RATING DRIVERS
LEADING MARKET SHARE: Stamford Hospital is the leading provider in the affluent primary service area (PSA) with close to 79% inpatient market share in the PSA, supported by a robust and growing ambulatory presence with outpatient services generating 63% of system net patient revenues.
MAJOR CONSTRUCTION NEARING COMPLETION: The major portion of the $450 million Campus Modernization Project, the construction of a 12-story patient tower, is close to completion. Construction is on time and slightly under budget, with occupancy of the new 180-bed all private room patient tower scheduled for September 2016.
LOWER THAN ORIGINALLY PROJECTED PROFITABILITY: Stamford's profitability over the last two years was lower than projected due to the impact of the Connecticut hospital tax enacted in 2011. Profitability is showing improvement through the second quarter of the current fiscal year ended March 31, 2016 (the interim period), as compared to the same period in the prior year, with operating and operating EBITDA margins reported at 5.1% and 10.6%, respectively, consistent with Fitch's 'A' category medians. The coming on line of the new patient tower in fiscal 2017 will initially depress operating margins, but the operating EBITDA margin is expected to remain solidly at 11% or better going forward.
ELEVATED DEBT BURDEN: The system has an elevated, but moderating debt burden as a result of the large 2012 issuance, with only negligible impact on leverage of the new debt from the 2016 issuance. The system's pro-forma maximum annual debt service (MADS) is still elevated at 4.9% of revenues, but MADS coverage by EBITDA improved to 2.3x through the second quarter of fiscal 2016. Minimal facility capital needs subsequent to the completion of the new tower, debt composition that is virtually all fixed rate, a relatively conservative investment asset allocation and absence of swap exposure partially offset the still high leverage position.
MIXED LIQUIDITY: The reimbursement of project expenses from the current debt issuance is expected to increase cash and unrestricted investments to $352.7 million, equal to 255 days cash on hand (DCOH), better than Fitch's 'A' category median. However, pro-forma cash to debt continues to be weak at under 85%.
RATING SENSITIVITIES
NEED TO MAINTAIN PROFITABILITY: Fitch believes that Stamford Hospital management will continue to manage expenses and grow revenues, aided by the various strategic investments being implemented, to generate profitability resulting in stronger coverage consistent with the rating category.
Credit Profile
Stamford Hospital (Stamford) is a 305-bed (300 operated) acute care facility located in the city of Stamford, CT. With the completion of the new patient tower, Stamford will not increase its bed capacity - rather it will transfer beds from units that will be relocated from the existing facility to the new patient tower. Stamford provides a comprehensive array of secondary and tertiary services, including Level II Trauma and open-heart surgery (in collaboration with the New York Presbyterian Healthcare System/Columbia University Medical center) to 30 communities in southern Fairfield County in Connecticut and adjoining areas in Westchester County in New York. In addition to inpatient care, the system operates several outpatient facilities in the primary and secondary service areas, the largest of which is the Tully Center in Stamford. Stamford had total revenues of $540.4 million in 2015.
Leading Market Share and Strategic Investments
Stamford's volumes have been relatively stable on the inpatient side, with continued robust outpatient utilization. The system's market share of the PSA increased to 78.9% in 2015 from 76% in 2012, and the increase was particularly notable in the secondary service area, where it jumped to 15.1% from 12.1% and shown growth in all of the SSA communities, even in Greenwich, where it has the closest competitor - Greenwich Hospital (Fitch rated 'AA-', July 2014). This was accomplished by Stamford continually recruiting physicians to SHMG, its closely aligned multispecialty practice organization with 117 physicians, who directly or indirectly account for 35% of consolidated net revenues, and by expansion of its outpatient locations. Stamford has been expanding its outpatient footprint, which in addition to the large Tully Health Center, with 162,000 outpatient visits annually, includes two urgent care centers, nine ambulatory and physical therapy centers, as well as 23 locations of the SHMG.
A letter of intent was recently signed with the New York City based Hospital for Special Surgery (HSS) to enter into a collaborative relationship potentially utilizing some of the shelled in capacity in the new patient tower. While details of the relationship would be fully available only once a definitive agreement is signed later this spring, Stamford expects the collaboration to leverage HSS's reputation, bringing HSS's successful care protocols and strong quality outcomes to area patients, facilitating the capture of the significant orthopedic outmigration volume to New York City.
Based on the various strategic investments being implemented, management projects an incremental 5% increase in volumes in the first full year of the operations of the new patient tower.
Construction Project Update
The occupancy of the 12-story new state-of-the art patient tower adjacent to the existing hospital, which will have 180 private rooms and two shelled in floors for future strategic use, is scheduled for September 2016. The construction is 75% complete and to date $345.5 million of the $450 million have been spent, with the project on time and slightly under budget. Stamford internal reserves and philanthropic sources will fund the still approximately $100 million to be spent to finalize the project, with some work continuing into next year. The new money in the current financing is reimbursement for expenses Stamford incurred for the project and will be added to reserves available to pay for the completion of the project. A developer funded 97,000 square foot medical office building is being constructed next to the new patient tower, to which it will be connected via a walkway. Stamford affiliated physicians will occupy two thirds of the space and the ground lease gives Stamford the option to purchase the MOB at future dates.
The fundraising goal for the project was $150 million and to date $100 million has been raised, while the campaign is still in its quiet phase. Based on Stamford's fundraising history and its location in a very favorable demographic area, Fitch believes that the fundraising goal is reachable.
Lower Than Initially Projected Profitability
The implementation of the Connecticut hospital tax and the corresponding reduction in uncompensated care pools and Medicaid supplemental payments beginning in 2011 has had a negative impact on Stamford's operating results with the impact gradually increasing to an expected $31.6 million in the current fiscal year from $8.1 million in 2013. As a consequence, the operating results lagged the original projections; operating income was $8.6 million in fiscal 2014 and $15 million in 2015, equal to operating margins of 1.6% and 2.8%, and operating EBITDA margins of 7.7% and 8.6%. Management has been focused on tight expense control, which included a small layoff last year and elimination of some positions, as well as a pension holiday on the system's defined contribution pension plan impacting fiscal 2016.
Results are stronger through the second quarter of fiscal 2016, with the system reporting operating income of $14.2 million, equal to an operating margin of 5.1% and operating EBITDA margin of 10.6%, both better than Fitch's 'A' category medians of 3.6% and 10.3%, respectively, and it is likely that fiscal 2016 operating income will exceed the conservatively budgeted $6 million, which includes full interest payments on the new tower. The increased debt service cost related to the new tower will depress operating margins over the near term, but operating profitability is expected to return to stronger levels by 2018-2019 based on additional revenues generated from the strategic investments, projected to increase by over 20% over the next three years.
Elevated Debt Burden
The system has a very conservative debt profile, with 98% of its pro-forma debt in fixed rate mode and no exposure to swaps. Coverage of pro-forma MADS was a relatively light 1.9x in 2015, but has improved to 2.3x through the interim period. MADS as percent of revenues is still elevated at 4.9% compared to the category median of 2.8%. Somewhat offsetting the elevated debt position will be an updated facility, which will need minimal investments over the medium term. The capital budget for the next three years is $30 million per year, which is roughly 60% of depreciation expense. This does not include, however, any capital investment for the HSS collaboration, or the cost of a replacement IT platform, which may be 2-3 years off.
DISCLOSURE
Stamford covenants to provide timely annual quarterly financial and operating data to MSRB's EMMA system.
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
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