NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on the following Build NYC Resource Corporation bonds issued on behalf of New York Methodist Hospital (NYM):
-- $32,000,000 Tax-Exempt Revenue Refunding Bonds, Series 2014 (The New York Methodist Hospital Project)
The Rating Outlook is Stable.
SECURITY
Pledge of gross receipts and a mortgage.
KEY RATING DRIVERS
LARGE CAPITAL PROJECT UNDERWAY: NYM is moving forward on constructing a $400 million ambulatory care building to be located across from its main hospital. The project is being funded primarily with debt and equity and a small amount of philanthropy. NYM is expected to borrow $315 million of the funds from the New York Presbyterian Hospital (NYPH). NYM is currently very lightly leveraged but the additional debt will bring NYM's coverage and debt metrics more in line with the 'A-' rating level.
SOLID FINANCIAL PERFORMANCE: Over the last three years, NYM has averaged a 6.4% operating margin and a 9.1% operating EBITDA margin. Over this time most volume figures, including inpatient admissions and surgeries, have shown growth. NYM was designated a Level II trauma center in 2015 and that should help inpatient volumes as most of NYM's admissions come from the emergency department. Three-month 2016 results show inpatient volume up 5.2% year over year, with financial results remaining steady.
NYPH RELATIONSHIP TIGHTENING: NYM is in the process of becoming an indirect subsidiary of NYPH. A certificate of need (CON) has been submitted to New York State seeking approval for this transition. NYM has benefited from its relationship with NYPH, and will be even further integrated into the NYP enterprise. There is the potential to merge the NYM and NYPH obligated groups. The loan to NYM from NYPH for the ambulatory care building is expected to occur after the process of NYM becoming an indirect subsidiary is completed.
SUSTAINED LIQUIDITY GROWTH: Strong cash flow and investment returns from NYM's captive insurance company have helped increase NYM's unrestricted cash and investments by 53% over the last three audited years. At March 31, 2016, NYM had $468.6 million of unrestricted cash and investments, up from $285 million at Dec. 31, 2013.
RATING SENSITIVITIES
SUSTAINED LEVELS OF CASH FLOW: New York Methodist Hospital (NYM) needs to maintain solid cash flow given the additional debt and construction risk on the ambulatory care building. There could be positive rating pressure should NYM successfully execute its ambulatory care building and gain benefits from the expected closer alignment with New York Presbyterian Hospital.
CREDIT PROFILE
NYM is a non-for-profit acute care community and teaching hospital that operates 651 beds and is located in Brooklyn, NY. Total operating revenue in fiscal 2015 (December 31st year end) was $991.6 million.
Physician Billing Issue
In April 2016, NYM on behalf of a professional corporation self-disclosed to the United States Department of Health and Human Services, Office of Counsel to the Inspector General, Office of the Inspector General (OIG), a compensation and billing issue involving one of its physician groups. The letter was submitted to OIG's self-disclosure program, which is meant to encourage providers to disclose issues before a government-initiated investigation occurs. NYM and the professional corporation were accepted into the self-disclosure program and the issue has been corrected. However, the amount to be repaid is still being determined as is any potential penalty. The potential liability and the uncertainty around the payments are a concern; however, NYM's self-disclosure, its acceptance into OIG's self-disclosure program, and the correction of the issue mitigate the concern slightly, and Fitch believes that the final resolution of the issue should not affect NYM's current rating.
Sizable Capital Project Underway
The ambulatory care project involves the construction of a 400,000 square foot building that will be located across the street from NYM's hospital. The building will house a number of services lines, including, but not limited to, women's health, oncology, orthopedics, and neurology and the building will have additional operating rooms as well. NYM has CON approval for the project and demolition of the existing apartment buildings on the construction site is underway. Construction of the project is expected to take three years.
Fitch knew about this project in its initial rating of NYM two years ago, and the cost, funding, timing, and NYM's financial performance have largely met Fitch's expectations. The initial 'A-' rating had factored in a large debt issuance and equity draw down. While many of NYM's ratios, especially debt coverage and leverage metrics, are currently in the 'AA' category, the additional debt and project risk make NYM's overall financial and credit profile consistent with the 'A-' rating level.
Pro forma coverage using a $20 million maximum annual debt service (MADS) figure shows debt service coverage of 5.1x in fiscal 2015, relative to Fitch's 'A' median of 4.2x, and MADS as a percent of revenue of 2.2%, relative to a median of 2.8%. The $20 million MADS assumes approximately $315 million in debt at a 4.09% interest rate, plus NYM's current MADS of $3.9 million. The actual debt service and amortization are still to be determined between NYPH and NYM.
Separately, Fitch views NYM's project as strategically sound. Outpatient volumes at NYM are growing as are outpatient services across the sector, with many procedures and services migrating to outpatient from inpatient. The new ambulatory care building will move a number of strategic service lines to a state of the art facility, with additional parking available. This will free up space in NYM's main campus and allow NYM to reconfigure and grow inpatient services and redesign patient flow.
Improved Financial Profile
Over the last three years and through the three month interim period, most of NYM's financial ratios and volume metrics have been on a positive trend. NYM's operating EBITDA has increased each year, growing from $69.9 million in 2013 to $89.2 million in 2015. Supporting the operating performance has been growth in most volumes, including inpatient volumes, and that growth has continued through the three month interim period.
The strong operating performance, and good returns in NYM's captive insurance company, has led to a sharp growth in unrestricted cash and investments, which has built up NYM's balance sheet. During this period, days cash on hand grew from a weak 81.2 days at year end 2010, to a solid 206.2 days at March 31, 2016. This compares to Fitch's 'A' median of 205.3 days. Given NYM's light leverage, liquidity to debt is very strong, but will normalize once NYM takes on the additional debt for the outpatient project.
Disclosure
NYM covenants to provide through EMMA yearly audited financial statements within 150 days after the fiscal year's end and quarterly statements with balance sheet, income statement and management analysis and discussion, within 60 days after the end of the fiscal quarter.
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
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010124
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010124
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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