TEXT-Fitch rates NYC Health and Hospitals Corp 2013A revs 'A+'

Thu Feb 21, 2013 12:14pm EST

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Feb 21 - Fitch Ratings has assigned an 'A+' rating on the expected issuance
of approximately $110 million of debt issued by the New York City Health and
Hospitals Corporation (NYHHC). In addition, Fitch affirms the following parity
debt issued by NYHHC at 'A+':

--$528.3 million series 2010A
--$188.0 million series 2008A
--$174.1 million series 2008B, C, D and E (variable)
--$132.3 million series 2003A

The Rating Outlook is Stable.

Proceeds from the 2013 series A bonds will be used to refund the series 2003A
bonds and a portion of the series 2008A bonds and pay for the cost of issuance.
Maximum annual debt service (MADS), which was provide by the underwriter, is
expected to lower to $86 million from $93 million. The series 2013A bonds are
expected to sell the week of March 18 via negotiation and will be issued as
fixed-rate bonds.

SECURITY

The bonds are a general obligation of the NYHHC, which include all revenues
derived from provision of patient care, but exclude premium revenue from
MetroPlus (NYHHC's Medicaid managed care organization) and monies provided by
the city for capital programs. Pledged funds flow through an exceptionally
strong lockbox structure, with first dollars sequestered on a monthly basis for
debt service needs before remaining funds go to NYHHC for operations. Bond
documents and related statute require the maintenance of debt service reserve
funds in the amount of MADS, and the city is required to replenish draws on such
funds (subject to appropriation), in the event NYHHC is not able to restore the
funds to required levels.

KEY RATING DRIVERS

LOCK BOX MAIN CREDIT STRENGTH: The first revenues received by NYHHC beginning on
the fifteenth of each month are set aside by the bond trustee in a lockbox for
debt service payments. Monthly revenues are not made available to NYHHC until
the revenues received cover the debt service payment. In fiscal 2012, NYHHC had
64x patient service revenues to pro forma debt service. Fitch views this lockbox
structure as a major credit strength.

CHALLENGING OPERATING ENVIRONMENT: As New York City's (NYC) safety net hospital
system, with over 60% of gross revenues composed of Medicaid and approximately a
third of its patients uninsured, NYHHC is reliant on a number of city, state,
and federal revenue sources to offset the cost of care to these lower reimbursed
and indigent patient populations. The legislative stress to cut spending to
these funding programs and their vulnerability to other policy changes,
especially as health care reform moves forward, are Fitch's main credit
concerns.

ESSENTIALITY OF SERVICES: Fitch views as a credit strength the vital role that
NYHHC plays in NYC's health care infrastructure, believing this essentiality
helps NYHHC secure sufficient levels of funding from city, state, and federal
sources. NYHHC not only serves the most medically and economically vulnerable
populations both in an inpatient and outpatient setting (NYHHC recorded
approximately five million outpatient visits in fiscal 2012), NYHHC operates six
of NYC's 15 trauma centers, accounts for over one third of all NYC's inpatient
psychiatric admissions, is the inpatient provider for the corrections
system and provides the sexual assault response team for all NYC emergency
rooms.

MANAGEMENT TEAM A STRENGTH: NYHHC has a seasoned management team in place that
has produced stable financial performance, completed or is near completing major
capital modernization projects at seven of 11 of its acute care hospitals,
received federal approval as an accountable care organization, maintained
productive relationships with key stakeholders, including NYC officials, and
implemented an enterprise-wide process improvement tool that has led to enhanced
quality and approximately $487 million in system wide savings.

LINKAGE TO NYC RATING: NYHHC's rating is closely linked to Fitch's 'AA' rating
on NYC's general obligation bonds (see Fitch Rates New York City GO's 'AA ';
Outlook Stable, Dec. 6, 2012) as NYC provides significant financial support to
NYHHC, mostly through funds that NYC provides for matching federal supplemental
funding programs. This support has ranged from $1.3 billion to $2 billion a year
over the last four fiscal years and is expected to remain at approximately $1.7
billion annually through fiscal 2017. In addition, NYC has provided $2.1 billion
in capital funds to NYHHC over the past 14 years. Further linking the ratings is
NYC's obligation to replenish the bonds' debt service reserve fund, subject to
appropriation, should NYHHC deplete it. To date, NYHHC has never had to tap its
debt service reserve fund to make bond payments.

RATING SENSITIVITIES

CONTINUED NEW YORK CITY SUPPORT: Changes to the levels of support that NYC
provides to NYHHC would affect the rating.

SUPPLEMENTAL PAYMENT UNCERTAINTY: National health care reform and financial
pressure on other funding programs will cause changes in NYHHC revenue sources
over the next few years. The uncertainty surrounding these programs is a credit
concern and a material drop or disruption in the revenue flow from these sources
could lead to negative rating pressure. However, Fitch believes that NYHHC's
essentiality, especially in providing health care to indigent and uninsured
populations, positions it well to continue to access funds as the various
supplemental programs are restructured.

CREDIT PROFILE

The 'A+' rating reflects the strength of the lockbox structure, NYC's support of
NYHHC, strong management team, and the essentiality of NYHHC's operations.
Credit concerns include NYHHC's challenging operating environment and stress on
revenues from changes expected in supplemental payments starting in 2014,
uncertainty regarding the implementation of other parts of health care reform,
and the ability of NYC to continue to provide support at historical levels.
Mitigating some of the concern is the patient service lockbox revenue to annual
debt service ratio which was 58x at June 30, 2012 (64x based on proforma MADS),
as well as the city's debt service reserve replenishment obligation.

In spite of a challenging operating environment, NYHHC management has been
focused on efficiency, savings, and growth through the use of an enterprise-wide
process improvement tool. Approximately 90% of the system facilities are using
the tool, with 1,197 rapid improvement events conducted, and 22% of staff
engaged in the process tool. To date, NYHHC estimates that the process
improvement has yielded $304.2 million in financial benefits, composed of a cost
savings of $24.5 million and new revenue of $279.65 million. The cost
containment initiatives have helped financial performance, which improved
slightly over the last two fiscal years. Operating losses were reduced to $446.5
million in fiscal 2012 (negative operating margin of 5.8%) from $747.8 million
in fiscal 2010 (negative operating margin of 10.8%).

Unrestricted cash and investments improved to $1.1 billion from fiscal 2010's
$656 million, which equates to 55.1 days cash on hand (DCOH), up from fiscal
2010's 34.5 DCOH. NYHHC's performance relies heavily on supplemental Medicaid
payments, as well as funding sources that result from close cooperation with,
and facilitation by, the state and the city. For the most recent fiscal year,
third party payments, which include Medicaid Upper Payment Limit (UPL) and
Disproportionate Share Hospital (DSH) payments were slightly higher than in the
prior year, offsetting a reduction in Medicaid fee for service payments. The
combined UPL and DSH payments are expected to remain relatively level for the
current fiscal year, but will decrease starting in 2014, resulting in growing
revenue shortfalls. NYHHC is planning to partially offset these with the savings
from the restructuring program, and projections show significantly diminishing,
but still positive closing cash balance for the 2013 - 2016 projection period.
Additionally, various alternative funding sources are being explored by NYHHC to
replace the DSH funding.

NYHHC sustained material damage at two of its acute care hospitals, Bellevue and
Coney Island, during Hurricane Sandy, and both hospitals were closed for a
period of time. The hospitals have restored most services with Bellevue fully
operational as of February 7 and Coney Island expected to return to full
operations by early March. NYHHC estimated costs and damages of $973 million in
total, with about 65% of that for permanent construction to mitigate future
events. NYHHC has submitted and gotten approval for $137.5 million of FEMA
claims related to emergency protective measures, and NYC has committed to
advance $710 million of funding to meet NYHHC's cash flow needs for recovery and
capital rebuilding. A larger request for funding is pending at FEMA and NYHHC is
looking into other sources to help recover a portion of the lost revenue. While
the disruption in service and building damage did affect NYHHC's utilization and
performance through the first six months, Fitch is not concerned about any
longer term impact on NYHHC's financial performance or credit rating given its
importance to the city.

NYHHC's rating and Outlook are closely related to that of New York City. Fitch
expects that the size of the system and its critical importance in providing
services for the uninsured and indigent populations will continue to secure
support to maintain sufficient pledged revenues flowing through the lockbox. In
addition, the strength of the lockbox coverage provides a level of rating
stability that would likely remain intact even when NYHHC experiences its
expected reduction in supplemental payments.

Serving the five boroughs of New York City, HHC is the largest municipal
hospital system in the country, and comprises 11 acute care teaching hospitals,
four long-term care facilities, six diagnostic and treatment centers, more than
70 community health clinics, a large Medicaid managed care organization and a
certified home health care agency. HHC had total revenues of approximately $7.1
billion in fiscal 2012. As per its continuing disclosure agreement, HHC agrees
to provide annual audited and quarterly financial statements to the MSRB's EMMA
system.


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);
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
FILED UNDER:
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