TEXT - Fitch affirms Pennsylvania's Einstein Healthcare revs
Feb 6 - Fitch Ratings has affirmed the 'BBB+' rating on the following Pennsylvania Economic Development Financing Authority's (PA) health system revenue bonds issued on behalf of Einstein Healthcare Network (EHN, formerly Albert Einstein Healthcare Network): --$123.7 million Pennsylvania Economic Development Financing Authority health system revenue bonds, series 2009A. The Rating Outlook is Stable. Additionally, Einstein Medical Center Montgomery (EMCM), an affiliate of EHN, has approximately $314.9 million of Federal Housing Administration (FHA) insured mortgage revenue bonds, series 2010 outstanding. The FHA bonds are non-recourse to the EHN obligated group and are not rated by Fitch. In total, EHN system had outstanding debt of approximately $438.2 million as of Dec. 31, 2012 (six-months interim period; unaudited). SECURITY The bonds are secured by a gross revenue pledge, lien on property of the obligated group, and a debt service reserve fund. SENSITIVITY/RATING DRIVERS MIXED FINANCIAL PROFILE: EHN's financial profile has mixed indicators when compared against Fitch's 'BBB' category medians. Specifically, Fitch views the organization's balance sheet as satisfactory, while operating profitability and all-in debt service coverage ratios compare unfavorably. NEW HOSPITAL COMPLETE: Construction of EMCM was successfully completed on time and below budget in Sept. 2012. The facility has observed greater than anticipated volumes since opening and serves as EHN's major inpatient facility in the northwest portion of its service area. Fitch analysts toured the new facility and view it favorably. GOOD GROWTH STRATEGY: Management's strategy to grow inpatient and outpatient services into the northwest portion of EHN's service area is viewed favorably, which should grow market share in a better payor mix environment and allow the organization to continue serving its challenged downtown service area. HIGH MEDICAID LOAD: EHN has a very high Medicaid patient load, which accounted for approximately 34.5% of gross revenues through Dec. 31, 2012 and is reflective of the main facility's (Einstein Medical Center (EMC)) challenging service area in North Philadelphia. DECLINING INPATIENT ADMISSIONS: Inpatient admissions continued to fall for EMC for the fourth consecutive year. The inpatient utilization drop is primarily due to unfavorable service area economic factors hindering patient usage as well as the system recording an increased amount of observation encounters. Specifically, observation encounters rose to 4,740 through Dec. 2012, which is up from 3,412 in Dec. 2011. AFFIRMATION OF 'BBB+' RATING The rating affirmation of 'BBB+' is supported by EHN's strong market position and good growth strategy in a better payor mix environment, manageable capital plans, and satisfactory liquidity position. EHN continues to have a strong market presence in the greater Philadelphia area at 17.2%, which is tied in the market along with Temple University Health System (revenue bonds rated 'BBB-'; Stable Outlook by Fitch). Along with the organization's top market position, Fitch views favorably management's strategy of expanding services into the northwest portion of its service area, which should improve EHN's payor mix and profitability over the long-term. At Dec. 31, 2012 EHN had $375.9 million of unrestricted cash and investments, which equaled 131.9 days cash on hand, 22.9x cushion ratio (obligated group only maximum annual debt service - MADS), and 85.8% cash to debt. Fitch views EHN's liquidity position as satisfactory for the rating level as days cash on hand and cash to debt are near the 'BBB' medians of 138.9 days and 82.7%, respectively, while cushion ratio compared well against the median of 9.4x. In Sept. 2012, EMCM was completed on time and under budget. The facility is expected to finish fiscal 2013 with $143.2 million in net patient service revenue (nine months of operations) and achieve a 4.6% operating margin by fiscal 2018 (near breakeven in FY2015). The facility is already ahead of its volume projections, which is expected to grow further as EHN begins to capture previously out-migrating services in this market. Overall, Fitch believes the new facility will be integral as EHN improves its overall payor mix and financial profile. EHN's capital plans are manageable as management plans to spend approximately $363.5 million on various routine and clinical information system needs from FY13 - FY18. Management indicated that the system has no near-term plans for any additional borrowing. Additionally, EHN is embarking on a $100 million capital campaign that extends through 2016, which will help fund the system's capital needs. To date, EHN has received $82 million in commitments. KEY CREDIT CONCERNS Fitch's main credit concerns include EHN's weak profitability, all-in debt service coverage metrics, and challenged service area characteristics highlighted by serving a large Medicaid population. EHN's consolidatedprofitability metrics have historically been weak with a 0.2% operating margin ($2 million operating income) in fiscal 2012 and 1.7% operating margin ($15 million operating income) in fiscal 2011. In addition, EHN is highly dependent on supplemental funding (Medicare and Medicaid disproportionate share funding), which totaled approximately $66 million a year in fiscal 2011 and 2012. Through the six months ended Dec. 31, 2012, EHN had an operating loss of $18.6 million (negative 3.5% operating margin) due to increased depreciation and interest expense related to EMCM, larger than anticipated start-up costs associated with EMCM as well as increased close-down costs from the unoccupied former Montgomery Hospital. Additionally, increased observation encounters are having a significant drain on operating profitability. Management expects to meet its fiscal 2013 budget of negative $18.3 million in operating losses. EHN's projected operating margin remains weak over the near term, but steadily improves to almost 2% in fiscal 2018. Maximum annual debt service (MADS) of $39.3 million includes the non-recourse FHA debt and results in weak coverage for the rating level with 1.7x coverage by EBITDA and 1.3x coverage by operating EBIDTA (fiscal 2012), compared to the respective 'BBB' category medians of 2.8x and 2.5x. However, debt service coverage on an obligated group basis was stronger, reflective of a lighter debt burden - $16.4 million. This represented 1.6% of revenues in 2012 and coverage by EBITDA and operating EBITDA was a good 4.2x and 3.3x, respectively. STABLE OUTLOOK The Stable Outlook reflects Fitch's expectation that EHN will maintain its current balance sheet levels and improve its profitability once EMCM's operations reach a steady state. Fitch expects EHN to capitalize on the strategy of expanding its market presence into the northwest portion of its service area, which should improve profitability over the long-term. If EHN is not able to meet its budgeted goals or the financial profile significantly deteriorates from current levels, negative rating pressure may be warranted. CREDIT PROFILE EHN operates Einstein Medical Center - Philadelphia, a 509-bed tertiary teaching hospital in northern Philadelphia; EMCM, a new 146-bed facility in East Norriton Township; Elkins Park Hospital, a 66-bed general hospital; and MossRehab, a nationally recognized inpatient rehabilitation hospital located in nearby Elkins Park. Additionally, EHN operates several other ambulatory and specialized facilities. In fiscal 2012, EHN had total revenues of $1.03 billion. DISCLOSURE EHN provides annual and quarterly disclosure to the MSRB's EMMA system. Overall, Fitch views EHN's disclosure favorably, which consists of a balance sheet and statement of profitability and loss, cash flow statement, and utilization information. Management was candid and timely in its responses to Fitch during the credit review process.