TEXT-Fitch rates North Shore-LIJ, NY taxable revs
Sept 6 - Fitch Ratings has assigned an 'A-' rating to approximately $135 million taxable fixed-rate revenue bonds series 2012B expected to be issued by the North Shore-Long Island Jewish Health System (NSLIJ). Fitch also affirms the following parity debt issued by the NSLIJ Obligated Group at 'A-': --$48,930,000 Dormitory Authority of the State of New York revenue bonds, series 2012A; --$386,385,000 Dormitory Authority of the State of New York revenue bonds, series 2011A; --$235,615,000 Dormitory Authority of the State of New York revenue bonds, series 2009A; --$125,000,000 Dormitory Authority of the State of New York revenue bonds, series 2009B-D; --$60,890,000 Dormitory Authority of the State of New York revenue bonds, series 2009E; --$147,445,000 Dormitory Authority of the State of New York revenue bonds, series 2007A; --$52,270,000 Dormitory Authority of the State of New York revenue bonds, series 2007B; --$116,955,000 Dormitory Authority of the State of New York revenue bonds, series 2005; --$26,585,000 Dormitory Authority of the State of New York revenue bonds, series 2003; --$38,580,000 revenue bonds, series 1998*. *The rating for this series is an underlying rating. The Rating Outlook is Positive. The $135 million fixed-rate series 2012B bonds will be issued as taxable bonds. A portion of the proceeds, $35 million, will be used to finance swap termination payments on swaps related to the 2009 B, C, and D bonds which were converted to fixed rate in July 2012, and $100 million will be applied toward NSLIJ's general corporate purposes. The bonds have final maturity in December 2042. The series 2012B issuance will increase maximum annual debt service (MADS) to $132.4 million from the current $123.9 million. The series 2012B will have covenants and disclosure matching existing NSLIJ OG bond issues. SECURITY Bonds are secured by revenue pledge of the obligated group (OG) and by mortgages on primary health care facilities of the NSLIJ OG. KEY RATING DRIVERS SOLID OPERATING PERFORMANCE: The improvement in operating results which started with fiscal 2010 has been maintained through the six-month period ended June 30, 2012 (the interim period) with operating and operating EBITDA margins of 2.3% and 7.6%, respectively. Operating metrics are slightly lower than Fitch's 'A' rated category medians as management continues to tackle the higher than initially anticipated losses at Lenox Hill Hospital (Lenox Hill). MANAGEABLE DEBT BURDEN: Coverage of MADS by EBITDA of 3.9x through the interim period and pro forma MADS as a percentage of revenues at 2% continue to be favorable to Fitch's 'A' category medians despite the issuance of $135 million of new money in the current financing. The low debt burden is a key credit strength mitigating operating results and certain liquidity metrics that are on the lower end of the 'A' category. LARGE INTEGRATED SYSTEM: With the addition of Lenox Hill and the expansion of the OG in 2011 by including all of the material system components, NSLIJ has now matured into a large, integrated health system reflected by revenues of $6.3 billion in 2011. The system has an expansive clinical footprint that covers most of Long Island and large portions of New York City and a highly functioning senior management team that has standardized clinical and financial operations across the system. LIQUIDITY SLOWLY IMPROVING: Cash and unrestricted investments, equal to $1.7 billion through the interim period, reflect strong cash flows. However, days cash on hand (DCOH) remains low for the category at 101 days. SLOWER LENOX HILL TURNAROUND: Management is working at bringing the operating losses at Lenox Hill under control, but based on the year-to-date operating loss of $7.1 million, breakeven operations, contrary to expectations, are not realistic until fiscal 2013 at the earliest. WHAT COULD TRIGGER AN UPGRADE: Further improvement in operating performance leading to further growth in liquidity while maintaining moderate debt burden and solid debt service coverage. CREDIT PROFILE The affirmation of the 'A-' rating and maintenance of the Outlook at Positive reflect the sustained solid operating performance in fiscal 2011 and for the interim period despite the challenge of integrating Lenox Hill into the system, which is taking longer than was initially anticipated, as well as the system's strong coverage of debt and moderate debt burden. Fitch believes that the system's operating platform should enable NSLIJ to sustain current levels of operations, which should be sufficient to produce debt service coverage above the 'A' medians, as well as continue to grow NSLIJ's liquidity. Positive rating action may be warranted should this forward trajectory continue. As part of the system strategy to regionalize the network and provide a full continuum of care, in July 2012 NSLIJ, a subsidiary of the system parent, became the sole member of the Long Island Home in Amityville, a 233-bed behavioral health hospital and a 320-bed skilled nursing facility. SOLID OPERATING PERFORMANCE For fiscal 2011, NSLIJ recorded operating income of $134.2 million on revenues of $6.3 billion, equal to an operating margin of 2.1% and operating EBITDA margin of 7.3%, as compared to the 'A' rating category medians of 2.6% and 9.4%, respectively, and a bottom line of $189.1 million. The stable level of operating profitability was maintained for the six-month interim period with NSLIJ posting operating gains of $77.3 million, equal to an operating margin of 2.3% and operating EBITDA margin of 7.6%. The solid operating results were achieved despite slightly lower inpatient volumes and continuing losses at Lenox Hill. SLOWER LENOX HILL TURNAROUND Reasons for the persistent Lenox Hill operating losses ($19.8 million in 2011 and $7.1 million year to date) include slowing volumes and physician turnover. Management has made changes in the leadership of a couple of clinical departments and is continuing to recruit high-caliber physicians for the institution. Fitch continues to believe that the Lenox Hill acquisition was an important strategic gain for NSLIJ, providing the system a significant foothold in Manhattan, while expanding and strengthening its presence in key areas of Queens. While management does not expect the institution to achieve breakeven performance before 2013 or 2014, Fitch believes that over time Lenox Hill's operating performance will improve to the level of the system's financial results. LIQUIDITY SLOWLY IMPROVING NSLIJ's liquidity is still low for the rating category, but the system's unrestricted cash and investments have doubled since 2008 as a result of robust operating cash flow. Unrestricted cash and investments through the interim 2012 period were reported at $1.7 billion, equal to 101 DCOH, cushion ratio of 12.8x and 104% cash to pro forma long-term debt, all of which are weaker than Fitch's 'A' category rated medians of 191 DCOH, 16.3x cushion and 116.4% cash to debt. Reducing cash by the $110.5 million of draws on a line of credit at June 30, 2012, would reduce DCOH to 94.5 days. NSLIJ uses the lines of credit to fund construction costs of projects for which it will eventually issue debt and to bridge the receipt of capital pledges. Maintaining liquidity will remain crucial as the system executes its capital plan, given that 56% of the system's large capital budget needs to be generated from operations. Management recognizes that the execution of the full capital plan requires operating in the 2% range going forward and is committed on scaling back the capital plan should the required level of profitability not be achieved. The fiscal 2012 budget is for $126 million operating profit (1.9% operating margin), which is likely to be achieved based on the year-to-date profitability. MANAGEABLE DEBT BURDEN The system's expansion and updating of existing facilities requires robust capital spending. NSLIJ's six-year capital plan launched in 2010 calls for the system to spend $3.3 billion on capital projects. The August 2011 transaction (see the Fitch new issue report dated Aug. 26, 2011) provided $141 million of new-money project funds and an additional approximately $300 million is expected to be issued in the next 12-24 months. Capacity for the remaining debt will be created over the next couple of years as NSLIJ pays down approximately $50 million of principal each year on its current long-term debt, keeping its debt burden relatively unchanged, and management is committed to pull back on capital plans should financial results weaken. Coverage of MADS on a pro forma basis including the $135 million 2012B series is 3.9x, and MADS as percent of revenues is a very low 2%. Following the issuance of the series 2012B bonds, NSLIJ will have 90% of its debt as fixed rate. The remaining three swaps with a notional par of $96.3 million had a negative $9 million mark-to-market at June 30, 2012 and no collateral posting was required at that time. CONSTRUCTION UPDATE The 242,500 square foot Katz's Women's Hospital (Women's Hospital)/Zuckerberg Pavilion at the Long Island Jewish Medical Center (LIJMC; 95 private beds), funded with proceeds of the series 2009 borrowing, opened on time and on budget in January 2012. Construction of the Zucker Hillside Psychiatric Hospital, funded with proceeds of the 2011 transaction, is well underway and is expected to be completed in early 2013. The system broke ground for a $120 million expansion of the Cohen Children's Hospital (Cohen Children's; 50 beds, 100,000 square foot pavilion) at LIJMC, with majority of the construction costs funded from philanthropy, with cash and pledges of $90 million already raised. Interim financing for Cohen Children's is provided via line of credit draws, which will be repaid from fundraising proceeds and the facility will open in late spring of 2013. The ability to raise funds from philanthropy has been a strength of the system, with in excess of $300 million raised or contributed over the last three years, including $54 million of the value of the land and the O'Toole building in Greenwich Village (formerly part of St. Vincent's Hospital), which will be renovated at a cost of approximately $125 million and converted to a state of art ambulatory facility with a free-standing emergency department. The Positive Outlook is based on Fitch's expectation that the system will be able to sustain the recent levels of operating performance and that the improved cash flow will enable the system to address its capital needs without impairing the debt metrics. Additionally, Fitch believes that management will be able to successfully integrate Lenox Hill into the system and reduce the losses, as has been demonstrated with past acquisitions. With corporate headquarters in Great Neck, NY, NSLIJ includes five tertiary-care teaching hospitals - North Shore University Hospital-Manhasset (804 certified beds), Long Island Jewish Medical Center (983 bed), Staten Island University Hospital (714 beds), Lenox Hill Hospital (652 beds) and Southside Hospital (341 beds); six community hospitals; two long-term care facilities; and other health care related entities including effective July 2012 the Long Island Home. The obligated group covenants to provide bondholders with annual and quarterly financial disclosure as well as operating statistics. Current financial disclosure for the OG is excellent and includes a balance sheet, income statement, utilization statistics, cash flow statement and management discussion and analysis.