TEXT-Fitch rates Winthrop-University Hospital, N.Y. revs 'BBB+'
Sept 25 - Fitch Ratings has assigned a 'BBB+' rating to the expected issuance of the following series of bonds issued on behalf of Winthrop-University Hospital (WUH): --$132,000,000 Nassau County Local Economic Assistance Corporation Revenue Bonds (Winthrop-University Hospital Association Project), Series 2012. The Rating Outlook is Stable. The series 2012 bonds will be all fixed rate. Proceeds from the bonds will be used to refinance WUH's share of bonded debt of Winthrop South Nassau University Health System (WSNUHS), fund the construction of a new research building, and pay for the cost issuance. Maximum annual debt service (MADS) is $20.4 million, including the new issuance, TELP borrowings, commercial loans, capital leases, and mortgage, and MADS was provided by the underwriter. MADS is not level and average debt service over the amortization of the bonds is approximately $12 million. Total long-term debt after issuance will be $200.6 million. Bonds are expected to sell via negotiation the week of Oct. 1. Security Debt payments are secured by a mortgage on the core acute care facilities and fixtures and a pledge of gross receivables of the obligated group, which is composed of Winthrop-University Hospital (WUH). Currently, a debt service reserve fund will not be funded. KEY RATING DRIVERS NEW OBLIGATED GROUP: With this debt issuance, WSNUHS will be split into two separate obligated groups (OG): one based on the credit profile of WUH and the other based on the credit profile of South Nassau Communities Hospital. The corporate parent of the two entities will not change. The current debt issuance will represent all the outstanding bonded debt of WUH, as any prior debt of the former OG will be refunded. The 'BBB+' rating is based on the consolidated results of Winthrop-University Hospital. IMPROVED OPERATING PERFORMANCE SUSTAINED: Since 2008, when WUH broke even on operations, it has averaged a 2.1% operating margin and a 6.8% operating EBITDA margin which compare well with Fitch's 'BBB' medians. Six-month 2012 interim (June 30, 2012) results for the hospital only show a 2.4% operating margin and a 6.1% operating EBITDA margin. MANAGEABLE DEBT BURDEN: A key credit strength at the current rating level is WUH's manageable debt burden. At June 30, 2012, pro forma MADS as a percent of revenue was 1.9% and pro forma debt to EBITDA was 3x, compared to medians of 3.3% and 4.4x, respectively. Pro forma MADS coverage has averaged 2.7x over the last three years and was at 3.2x in the six-month 2012 interim period. All debt is fixed and no major debt issuance is expected over the next two to four years. LEADING INPATIENT MARKET SHARE: WUH maintains a leading 16% inpatient market share in Nassau County, NY, a fragmented and competitive service area, and is a provider of tertiary and quaternary services in its primary service area. LIQUIDITY RELATIVE TO OPERATING EXPENSES WEAK: At June 30, 2012, days cash on hand (DCOH) was at 49.5 days (adjusting for a $25 million draw on a line of credit), well below the median of 128.6 days. Liquidity relative to debt was stronger with WUH's pro forma cushion ratio 6.4x and cash to debt at 108.1%, which compare more favorably to Fitch's 'BBB' medians. Thinner liquidity is due in part to robust capital spending (which has averaged 146% of depreciation each of the last four years). WUH plans to reimburse itself $14 million for prior capital expenditures, with proceeds from the current debt issuance of $5.3 million and a New York State TELP loan of $8.7 million, which is expected to close in October. This should help liquidity, adding about 10 DCOH. But Fitch expects DCOH to continue to significantly trail the median over the medium term, especially given WUH's pension funding requirements. Deterioration in liquidity could pressure the rating. LIHN PARTICIPATION A CREDIT STENGTH: As health care reform progresses toward reimbursement mechanisms that will be tied to quality and efficiency metrics, Fitch believes WUH 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. CAPACITY CONSTRAINTS A CONCERN: WUH operates at approximately 90% inpatient capacity and has limited physical space in which to grow without significant capital investment. Mitigating this concern is the continued migration of services to the outpatient setting, efficiency initiatives to create more inpatient capacity, and the freeing up of some clinical space with the centralizing of WUH's research program at the new research building when complete. Nevertheless, WUH as a provider of tertiary and quaternary services plans to continue to grow its inpatient volumes and capacity is a concern. CREDIT PROFILE WUH is a 591-licensed bed tertiary medical center located in Mineola, NY. Total operating revenue in 2011 was $942.1 million. The 'BBB+' rating reflects WUH's sustained operating improvements, good market position, participation in LIHN, and manageable debt burden. Credit concerns include low liquidity relative to expenses, capacity constraints at the main hospital, and a competitive service area. Through the six-month interim period, WUH's 2.4% operating margin ($12.3 million in operating income), for the hospital only, is solid for the 'BBB' category, remains consistent with the last two years of audited results, and represents the sustaining of operational improvements and growth initiatives that WUH put in place in response to negative operating margins in 2005 and 2006. Fitch expects WUH's current level of operating performance to continue over the medium term. After a period of steady inpatient volume growth, inpatient utilization fell by approximately 9% year over year in the interim period, due mostly to the migration of certain services to the outpatient setting. But total volumes remained strong, especially emergency room visits, which WUH views as a key indicator for volume levels. In addition, WUH had utilization growth in orthopedic surgery, robotic surgery, and total inpatient operating room procedures. WUH's Medicare case mix index continues to increase, reflecting a higher patient acuity, and WUH continues to grow its tertiary service lines, becoming one of only a small group of hospitals across the country to offer Transcatheter Aortic Valve Replacement, a less invasive cardiac procedure for patients too frail to undergo open-heart surgery. Additionally, WUH is a Level 1 regional trauma center and has a regional perinatal center. WUH's growth of higher level tertiary services and the recruitment of physicians in these service lines is a credit strength of WUH, especially as inpatient volumes for lower level tertiary care continue to migrate to the outpatient setting. WUH's ability to sustain this is a key rating driver. While DCOH is very thin for the rating level, it has remained relatively consistent over the last few years. Fitch expects WUH's liquidity to remain stable. WUH's investment allocation is aggressive at 65% equities; however, that represents its long-term investments. The majority of WUH's unrestricted liquidity is in cash and cash equivalents, approximately $77 million in 2011. WUH has a conservative debt structure with nearly all fixed rate debt and no swaps, lending further stability to its liquidity position. WUH's market share has also been stable over the past several years, in spite of operating in competitive service areas. Its role as an academic health center and its geographic position in a densely populated area just across the Queens border in Nassau County (GO bonds rated 'A+', Negative Outlook by Fitch) both position WUH favorably. The service area has good wealth characteristics reflected in the composition of WUH's payor mix, with Blue Cross and managed care a solid 46.3% of discharges. However, Medicaid is elevated at 14.8% of discharges. In recent years WUH has had success in acquiring group practices throughout Long Island, including a large multispecialty practice with 29 physicians in Garden City. Nevertheless, Nassau County is a competitive service area with two formidable systems: Catholic Health Services of Long Island (revenue bonds rated 'A-'), which is a LIHN member, and North Shore Long Island Jewish Health System (revenue bonds rated 'A-', Positive Outlook). Both systems have various hospitals located throughout the service area. The capital project being funded by the 2012 debt issuance is the construction of a new research building with a total estimated cost of $85 million. The building, which will centralize most of WUH's research program, will have clinical space for diabetes services, which ties into WUH's research focus, and have educational and shelled space as well. The additional square footage provided by the research building and the shifting of certain research and clinical programs and staff will free up some capacity in other buildings and at the main hospital. The new building will significantly increase WUH's visual presence on a main street in Mineola, which should benefit the main hospital which is set back a few blocks embedded within residential streets. The Stable Outlook reflects Fitch's expectation that WUH's current level of operating performance will continue. Fitch analyzed projections which show WUH sustaining current levels of operating performance, which Fitch believes is very achievable. WUH has put in place a number of initiatives around revenue growth and cost and efficiency savings, including initiatives around length of stay and improved coding. It has maximized other revenue opportunities such as converting outpatient clinics and offices to hospital-based providers. These, coupled with the support provided by the LIHN network, should enable WUH to continue to produce 2% operating margins and coverage above Fitch's 'BBB' median. Liquidity is not expected to grow as the pension liability will continue to weigh on the balance sheet. WUH 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 Goldman Sachs. 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