NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB+' rating on the expected issuance of the following series of bonds issued on behalf of South Nassau Hospital (SN):
--$92,065,000 Nassau County Local Economic Assistance Corporation revenue bonds (South Nassau Communities Hospital Project), series 2012.
The Rating Outlook is Stable.
The series 2012 bonds will be issued as fixed-rate bonds with final maturity in July 2037. Proceeds will be used, together with released debt service reserve funds (DSRF) and an equity contribution to refund SN's share of the bonded debt of Winthrop South Nassau University Health System (WSNUHS, rated 'BBB+' by Fitch), consisting of the series 2001B and 2003B bonds, and to fund approximately $29 million of new money projects. The refunding of the series 2001B and 2003B bonds is estimated to generate approximately $6.8 million of present value savings. Maximum annual debt service (MADS) of $13.9 million, which includes SN's capitalized leases and a TELP loan, occurs in 2015 and debt service drops gradually to under $4 million in 2019. A debt service reserve for the series 2012 bonds will not be funded. The bonds are expected to sell via negotiation the week of October 8.
Debt payments are secured by pledge of gross receivables of the obligated group, which is composed of South Nassau Communities Hospital (SN) and a mortgage on the main hospital facility. Initially, SN will be the only member of the obligated group under the new Master Trust Indenture.
KEY RATING DRIVERS
NEW OBLIGATED GROUP: The proposed financing will separate Winthrop South Nassau University Health System (WSNUHS) into two separate obligated groups with South Nassau Communities (SN) Hospital and Winthrop University Hospital (WUH, rated BBB+ by Fitch) each refunding all of their existing respective debt issued under WSNUHS. The 'BBB+' rating is based solely on the results of SN.
STANDSTILL AGREEMENT: SN and WUH have signed a three-year agreement to continue to be governed under the current corporate parent, which retains significant reserve powers, and not to disaffiliate during the standstill period nor enter into affiliation discussions with other parties without first seeking the approval of the parent.
WEAKER OPERATING PERFORMANCE: After a strong fiscal 2010, fiscal 2011 and the six-month interim period ended June 30, 2012 have produced somewhat weaker results due to lower inpatient volumes, investment in physician alignment, higher bad debt expense, increased FTEs due to 2010 volume growth, and a salary increase which had been deferred in the prior year.
INCREASING MARKET SHARE: SN's market share of its competitive and fragmented service area has consistently been increasing and at close to 16% is the result of expanding array of services being provided with the effect of decreasing the outmigration of patients to New York City, and the closure of some area hospitals.
ADEQUATE LIQUIDITY: Cash and unrestricted investments of $115.4 million through the interim period, equal to 110.8 days cash on hand (DCOH), 8.3x cushion ratio and 84% cash to pro-forma debt are within the 'BBB' median range and SN has no current draws on their lines of credit.
LIHN PARTICIPATION A CREDIT STRENGTH: As health care reform progresses toward reimbursement mechanisms that will be tied to quality and efficiency metrics, Fitch believes SN is well positioned through its participation in LIHN, a network of 10 Long Island hospitals with aggregate revenues of nearly $4 billion, who share data on quality and cost, have benchmarking metrics, and negotiate payor contracts as a single entity.
LIMITED DEBT CAPACITY: SN's debt burden of the pro-forma debt, which includes $31 million of new money is manageable, but SN does not have any material additional debt capacity at the current rating level. Coverage of pro-forma MADS by EBITDA was 2.5x through the 2012 interim period and MADS represents 3.2% of revenues, as compared to the 'BBB' rating category medians of 2.8x and 3.3%, respectively.
SN is a 435-licensed bed community hospital, currently operating 397 beds, located in Oceanside, NY, on the south shore of Nassau County. Its service area includes Nassau County.and parts of eastern Queens County. Total operating revenue in 2011 (Dec. 31 year end) was $396.3 million.
The 'BBB+' rating reflects SN's solid market position, adequate liquidity, participation in the large LIHN network, and debt metrics consistent with the rating category. Concerns include a recent weakening of the operating performance and limited future debt capacity.
After solid operating results in fiscal 2009 and 2010, operating performance showed some weakening in 2011, which has continued for the six-month interim period ended June 30, 2012. For fiscal 2011 SN recorded operating income of $8.1 million, a decrease from the $16 million operating income in the prior year. The 2011 results equated to operating income margin of 2% and operating EBITDA margin of 8.6%, and while lower than in the preceding year, were still consistent with Fitch's 'BBB' rating category medians of 1.9% and 8.3%, respectively.
Recent operating results were affected negatively by investment in physician alignment strategies, slightly lower inpatient volumes after 13 years of consecutive admissions growth, the move of certain cardiac procedures to an outpatient basis, increased FTEs due to 2010 volume growth, and a salary increase, which had been deferred in the prior year.
The June 2012 interim period ended with operating income of $0.5 million, equal to an operating and operating EBITDA margins of 0.2% and 6.5%, respectively. Management is focused on maintaining profitability at a lower, but stable, level and is budgeting to end the year with operating income of $2.6 million despite cuts in Medicare and Medicaid reimbursement of approximately $3 million in the current fiscal year and an increase of $5 million in pension expense.
Due to the planned retirement of the current long-time president and CEO, a new chief executive will assume the position effective January 2013. The incoming individual has over 30 years of health care management experience, and most recently was the CEO of Richmond University Medical Center in Staten Island. Following the retirement of the institution's CFO, the hospital's Vice President of Finance was appointed to the position in March 2012.
SN operates in the relatively competitive Nassau County environment, which includes two large multi-facility systems: Catholic Health Services of Long Island (revenue bonds rated
'A-'), which is also an LIHN member, and North Shore Long Island Jewish Health System (revenue bonds rated 'A-', Positive Outlook). Despite this, SN had experienced steady and consistent growth in inpatient volume for 13 of the last 14 years.
Market share in its primary service area, from which 65% of discharges originate, increased to 36.3% from 24% between 1997 and 2010. Reasons for the robust growth included investment in tertiary services, such as cardiology, oncology and orthopedics with the effect of greatly reducing outmigration to New York City providers, expansion of the ambulatory network, as well as the closure of some area hospitals. SN's share of the combined primary and secondary service area, which includes all of Nassau County and accounts for 88% of SN's discharges, also registered a healthy increase to 15.8% from 10.2% during this period. Management reports that despite a small decline in inpatient volumes in 2011 and year to date (less than 2%), those declines are significantly lower than for Nassau County in general and that early indications point to market share still rising.
Liquidity metrics, based on unrestricted cash and investments of $115.4 million at June 30, 2012, which equated to 110.8 DCOH, cushion ratio at 8.3x and cash to pro-forma debt of 84%, are adequate for the 'BBB' category. Investment allocation is somewhat aggressive with 61% in equity securities, 25% in fixed income securities, 4% in real asset funds, 2% in natural resource funds, 6% in emerging market funds and 2% in commodities., but is acceptable given that it is all fixed-rate debt and has no exposure to derivative instruments. Fitch views as positive the board's goal of maintaining DCOH at a minimum 100 days. Fitch notes that SN has a sizeable liability related to its defined benefit pension plan, which was funded at 54% at year-end 2011. Management is planning to contribute $20 million to the plan in the current fiscal year.
SN has continued to evaluate the scope and timing of a master facility plan (MFP), which would allow it to return to the full licensed bed capacity, alleviating capacity issues, increase the number of private beds, upgrade the ICU/CCU areas and add operating rooms. In Fitch's opinion, SN does not have any material debt capacity at the current rating level and borrowing before additional debt capacity is built up would likely cause rating pressure.
Management has stated that realization of the MFP has a 5-to-10-year horizon and that no additional debt is contemplated for the next four years, other than a $10 million commercial loan planned for next year to reimburse the organization for investment in its electronic medical record. In order to increase the number of private beds, the new money in the 2012 transaction will be used for renovations within the existing hospital facility to convert 38 rooms to 24 private rooms and to convert an existing 38-bed medical surgical unit to a 20 private bed transitional unit. The organization also made a concerted effort to reduce length of stay to address capacity issues, and average length of stay was brought down to 5.5 days from 5.9 days three years ago.
The Stable Outlook reflects Fitch's expectation that SN will be able to sustain profitability at a level that will generate sufficient cash flow to enable the organization to continue to invest in its programs and facility based on further reducing outmigration for certain high-end services which are available at SN, closer physician alignment, and close monitoring of resource utilization, including staffing.
SN discloses annual and quarterly financial information on EMMA.
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.
In addition to the sources of information identified in Fitch's 'Revenue-Supported Rating Criteria', this action was informed by JPMorgan .
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
Nonprofit Hospitals and Health Systems Rating Criteria
Eva Thein, +1-212-908-0674
One State Street Plaza
New York, NY 10004
Gary Sokolow, +1-212-908-9186
Emily Wong, +1-212-908-0651
Elizabeth Fogerty, New York, +1 212-908-0526
Source: Fitch Ratings