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Fitch Upgrades St. Peter's Health Partners (NY) Bonds to 'BBB+'; Outlook Positive

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded the rating on St. Peter's Health Partners, NY's (SPHP) outstanding debt issued by the Albany Capital Resource Corporation and the Albany Industrial Development Authority to 'BBB+' from 'BBB' as follows:

--$34.1 million series 2011;

--$213.2 million series 2008A-E.

The Rating Outlook remains Positive.

SECURITY: Debt payments are secured by a pledge of gross revenues and a first mortgage lien on property of the obligated group, consisting of St. Peter's Hospital only. A fully funded debt service reserve fund provides additional security.

KEY RATING DRIVERS

COMPLETED SPHP MERGER: The rating upgrade to 'BBB+' reflects the realized benefits and financial performance of SPHP after the completed merger between St. Peter's Health Care Services, Northeast Health, and Seton Health in October 2011. Among other things the combined entity, unified under one management structure, benefits from its size (more than $1 billion in annual revenues) and scale (acute, post-acute and long-term care services) in New York's capital region, an improved market position, and solid profitability and liquidity.

CATHOLIC HEALTH EAST AFFILIATION: SPHP is a non-obligated affiliate member of Catholic Health East (CHE; revenue bonds rated 'A+'; Stable Outlook by Fitch) which provides managerial, financial, and strategic services and expertise.

SOLID FINANCIAL PROFILE: As of June 30, 2012 (six-months; unaudited), SPHP had a solid financial profile highlighted by good balance sheet metrics and operational profitability resulting in strong maximum annual debt service (MADS) coverage.

ENHANCED MARKET POSITION: Upon completion of the merger, SPHP became the market share leader with a 41.5% market share position in 2011 compared to its nearest competitor, Albany Medical Center, at (22.4%). Fitch views SPHP's market share position as a primary credit strength.

WHAT WOULD TRIGGER AN UPGRADE: Positive rating movement to the 'A' category could occur if SPHP continues on its positive financial track, and successfully consolidates/integrates key organizational functions while beginning to realize benefits of last year's merger, and creates an obligated group composed of all SPHP's major entities, which would provide additional security to bondholders.

CREDIT PROFILE

RATING UPGRADE TO 'BBB+'

The rating upgrade to 'BBB+' from 'BBB' is supported by the benefits accruing from the completed merger between St. Peter's Health Care Services, Northeast Health, and Seton Health in October 2011 to form SPHP. The organization benefits from its revenue size and the efficiencies that can be gained as a merged entity as well as the continuum of healthcare services offered and the benefits from its strong relationship with CHE.

Further, on a combined basis the organization's financial performance is improved and Fitch expects further gains as the organization implements a strategy of certain service consolidation and standardization. Specifically, through the six-month interim period (June 2012), SPHP recorded $12.5 million in operating income on total revenues of $532.6 million translating into a 2.4% operating margin and 9.9% operating EBITDA margin. These compare favorably to Fitch's respective 'A' category medians of 2.8% and 9.8%. SPHP's solid profitability metrics helped support strong MADS coverage by EBITDA of 4.1x through the same period, consistent with 'A' category median of 4.1x. SPHP's debt burden is moderate as measured by MADS as a percentage of revenue of 2.6%.

At June 30, 2012 SPHP had approximately $392.9 million in unrestricted cash and investments, which equates to 147.1 days cash on hand, 14.3x cushion ratio, and 106.1% cash to debt.

Fitch's primary credit concerns include SPHP's relatively large capital plan, the competitive service area, and risk associated with the merger's consolidation efforts. SPHP's five-year capital plan calls for approximately $515.9 million of capital expenditures for various projects. Management intends to fund a majority of capital investment from cash flow, which Fitch views as reasonable assuming expected financial efficiencies stemming from merger-related streamlining activities. SPHP's service area remains competitive with the presence of Albany Medical Center.

OUTLOOK

The Positive Rating Outlook reflects Fitch's belief that SPHP will continue to accrue benefits resultant from the organization's merger. Positive rating movement could occur if SPHP continues on its positive financial track and successfully consolidates/integrates key organizational functions. Although SPHP has a somewhat large capital plan over the medium term, Fitch believes that operational efficiencies from the merger will provide adequate operational cash flow to absorb such strategic investments.

DEBT PROFILE & DISCLOSURE

SPHP's outstanding debt profile is composed of approximately 74% fixed-rate and 26% variable-rate debt. As of June 30, 2012, SPHP had three outstanding swaps with a notional amount of $48.7 million and a market valuation of negative $5.6 million. SPHP has no collateral posting requirements on its outstanding swaps. Overall, Fitch views the organization's debt portfolio as relatively conservative.

SPHP covenants to provide bondholders with annual audited financial statements including management's discussion and analysis, balance sheet, income statement, cash flow statement, and utilization statistics no later than 150 days after the fiscal year-end and quarterly disclosure 45 days after the end of the quarter.

ORGANIZATIONAL OVERVIEW

St. Peter's Health Partners is an integrated health delivery network with a total revenue base of approximately $1 billion in fiscal 2012 (unaudited). SPHP is the largest comprehensive care network in its service area providing a full range of hospital-based services, long-term care, hospice, rehabilitation, and elderly care with four acute care hospitals and more than 1,000 physicians in its physician network.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', June 12, 2012

'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418

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Fitch Ratings
Primary Analyst
Michael Burger, +1 212-908-0555
Director
Fitch Inc.
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or
Secondary Analyst
Jim LeBuhn, +1 312-368-2059
Senior Director
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Eva Thein, +1 212-908-0674
Senior Director
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Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings