Dec 5 - Fitch Ratings has affirmed the 'B' rating on the outstanding $20.1
million New Jersey Health Care Facilities Financing Authority's revenue bonds,
Deborah Heart and Lung Center (DHLC), series 1993.
The Rating Outlook is Stable.
The bonds are secured by a revenue pledge and a mortgage on DHLC's facility and
additionally benefit from a Subsidy Agreement with the Deborah Hospital
Foundation (the Foundation), which is obligated to fund DHLC's cash flow
requirements, including operating costs, capital needs and debt service
KEY RATING DRIVERS
FOUNDATION KEY CREDIT STRENGTH: The Foundation exists for the support of DHLC,
and the rating incorporates the Foundation's commitment to meet DHLC's
obligations. The Foundation contributed a total of $5.1 million to DHLC in the
2011 fiscal year.
BENEFIT OF JOINT SATELLITE EMERGENCY DEPARTMENT: DHLC continues to benefit from
the Lourdes Medical Center satellite emergency department (SED) located on its
campus, which has been a significant factor behind the 12.7% increase in
admissions for the nine-month period ended Sept. 30, 2012 (the interim period).
OPERATING LOSSES OFFSET BY FOUNDATION'S CONTRIBUTION: DHLC recorded an operating
loss of $3.1 million (negative 2.9% operating margin) for the interim period,
ahead of budget. Management expects to end the year close to the budgeted loss
of $6.9 million, before the Foundation's contribution, estimated at
approximately $4 million.
WEAK LIQUIDITY: Liquidity continues to be a major credit concern, with combined
DHLC and Foundation's unrestricted cash and investments totaling $21.7 million
through the interim period, equal to 55.9 days cash on hand (DCOH), 5.2x cushion
ratio and 99% cash to debt.
The affirmation of the rating and Stable Outlook reflect the benefits of the
additional volumes generated by the SED located on DHLC's campus and owned and
operated by Our Lady of Lourdes Health System (Lourdes), part of Catholic Health
East (rated 'A+' by Fitch), as well as the continued support of the Foundation.
A decline in DHLC's operating results and/or a material decrease in the
Foundation's fundraising ability or assets would pressure the rating.
DHLC's utilization levels registered a marked increase over the last fiscal
year, continuing to benefit from the presence of the SED. Inpatient admissions
increased by 12.7% for the interim period, cardiac catheterizations, after a 36%
increase in fiscal 2011, were level with the prior year period, and visits to
the satellite emergency department increased by 8.9%. It remains unclear as to
the impact of the two recent storms that hit the area in October and November.
While DHLC did not sustain damage other than losing power for half a day during
the second storm, patients living in the service area were affected and
management expects some volume decline affecting the fourth quarter.
DHLC's revenues increased by 3.5% through the interim period. Operating loss
through the interim period of $3.1 million was favorable to the budgeted $4.6
million, and better than the prior year loss of $5.8 million. Improved physician
documentation and case management at DHLC have muted the negative impact of
Medicare Recovery Contractor Audits (RAC) noted last year. Coverage of maximum
annual debt service (MADS) by EBITDA, based only on DHLC's performance to date
with only $0.4 million of the Foundation's contribution included, is 1.1x; DHLC
had EBITDA coverage of MADS of 1.7x in 2011, including the Foundation's transfer
of $5.1 million, and MADS equal to 2.9% of revenues.
The Foundation is likely to contribute a minimum of $4 million by 2012 fiscal
year end; the bulk of the Foundation's contribution is typically made closer to
the year-end. DHLC was approved to receive $6.8 million of New Jersey charity
funding for the State's fiscal year ending June 30, 2013, at par with the prior
The Foundation raised $4.2 million to date, though a fair amount of fundraising
comes in closer to the end of the calendar year. The Foundation expects to end
the year with d the end of the year a$9 million raised, including estates. The
Foundation has redirected its focus towards more structured development efforts,
such as corporate giving, direct mail and estates and planned giving, to replace
what had traditionally been its grassroots fundraising effort relying on a large
number of small individual supporters.
DHLC's poor liquidity is viewed by Fitch as a major credit concern. Combined
DHLC and Foundation unrestricted cash through the end of the third quarter was
$21.7 million, equating to 55.9 DCOH. This figure is not adjusted for draws on
two lines of credit aggregating $2 million. A draw of $1 million will be paid at
the end of the fiscal year, releasing $1.6 million of monies 'restricted' for
that purpose at the Foundation and thus added to unrestricted cash. The
remaining $1 million line is secured by a DHLC certificate of deposit and has
perpetually remained drawn at $1 million.
DHLC has received a Notice of Proposed Issue from the Department of the Treasury
regarding a total return swap, no longer extant, relating to the series 1993
bonds issue. DHLC is not in agreement with certain findings made by the
Department of the Treasury and had received a legal opinion from a nationally
recognized law firm prior to executing transaction. No determination as to the
final outcome can be made at this time. Fitch will continue to monitor the
situation and take rating action as necessary.
Deborah Heart and Lung Center is an 89-bed tertiary care cardiac, pulmonary, and
vascular care facility, which is located in Browns Mills, NJ (approximately 20
miles from Trenton). DHLC had total revenues of approximately $142 million in
fiscal 2011. DHLC covenants to disclose only annual audited financial
information (within 120 days) to the Municipal Securities Rulemaking Board's
EMMA system, which Fitch views negatively. However, Fitch does note that DHLC's
bond covenants date back to documents produced in 1993 when the expectations for
disclosure were not as thorough. Currently, DHLC does provide unaudited interim
quarterly and annual audited information to the trustee and the New Jersey
Health Care Facilities Authority as well as to bondholders upon request.
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', dated June 21, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated 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