As part of its ongoing surveillance effort, Fitch Ratings has affirmed the 'BBB' rating on the following outstanding debt issued by the Albany Capital Resource Corporation and the Albany Industrial Development Authority on behalf of St. Peter's Health Care Services (SPHCS):
--$34,160,000 civic facilities revenue bonds, series 2011;
--$160,340,000 civic facilities revenue bonds, series 2008A;
--$6,460,000 civic facilities revenue bonds, series 2008B;
--$19,105,000 civic facilities revenue bonds, series 2008C;
--$17,340,000 civic facilities revenue bonds, series 2008D;
--$17,340,000 civic facilities revenue bonds, series 2008E.
The Rating Outlook is Positive.
SECURITY
Debt payments are secured by a pledge of the gross revenues and a first mortgage lien on the property of the obligated group, consisting of St. Peter's Hospital only. A fully funded debt service reserve fund provides additional security.
KEY RATING DRIVERS
CATHOLIC HEALTH EAST AFFILIATION: SPHCS is a regional health corporation for Catholic Health East (CHE; rated 'A+' with a Stable Outlook by Fitch) which is a strong positive rating factor.
SOLID PROFITABILITY METRICS: SPHCS' profitability ratios have exceeded the medians for the 'BBB' category since 2008. For the nine-month period ending Sept. 30, 2011, the system produced a 3.2% operating margin and a 10.6% operating EBITDA margin which compares favorably to the medians of 1.7% and 8.5%, respectively.
SOLID COVERAGE RATIOS BUT HIGH DEBT BURDEN: For the nine-month period ending Sept. 30, 2011, SPHCS' maximum annual debt service (MADS) coverage by EBITDA was 2.9 times (x) and MADS coverage by operating EBITDA was 2.7x, which compares favorably to respective medians of 2.6x and 2.3x. However, MADS as a percentage of revenues was 3.9% through the interim period compared to the category median of 3.3%.
LIGHT LIQUIDITY METRICS: SPHCS' liquidity ratios are lower than the medians for the category but the system has steadily improved its cash position over the last three years. At the nine month period ending Sept. 30, 2011, total cash and unrestricted investments increased almost 20% from fiscal year end (FYE) Sept. 30, 2010 to $160 million, which calculates to 125 days cash on hand (DCOH), 7.7x cushion ratio and 61.8% cash to debt ratio versus the medians for the 'BBB' category of 128.6, 8.8x, and 79.8%, respectively.
CREDIT SUMMARY
The 'BBB' rating reflects the operational support stemming from its affiliation with CHE, SPHCS' consistent solid profitability trends, solid coverage ratios and a stable market position. Credit concerns include the system's high debt burden and relatively light liquidity position versus the medians for the rating category.
An additional positive rating factor is the recent merger of SPHCS, Seton Health, and Northeast Health creating St. Peter's Health Partners (SPHP). This merged entity has the potential to be the dominant health care provider in the Capital Region of New York.
Discussions with SPHCS' management indicate that at this time each entity will continue to operate as a separate organization operating under the parent organization (SPHP). While each entity will specialize in a different aspect of the health care continuum, decisions regarding location of business lines and various services are still in development. Senior management is estimating three years to achieve full integration.
The Positive Outlook reflects Fitch's expectation that SPHCS will continue to maintain its steady improvement in profitability and liquidity metrics supported by the positive benefits expected from the creation of SPHP. However, a higher rating is precluded at this time until SPHCS' management is able to provide more detail and greater clarity regarding SPHP's system integration efforts and the potential effect on SPHCS' operations.
CHE affiliation benefits
SPHCS is not a member of CHE's obligated group but as a regional health care corporation (RHC) of CHE, SPHCS derives operational and strategic benefits from its access to CHE's enterprise-wide productivity improvement programs. Fitch views favorably the mutually beneficial relationship between the two entities as a strong positive rating factor which allows SPHCS access to the expertise and advanced business practices of one of the largest health care systems in the country. As a result, SPHCS has developed into one of CHE's stronger affiliates.
St. Peter's Health Partners
St. Peter's Health Partners (SPHP) is an integrated health network created from the recent merger of SPHCS, Northeast Health and Seton Health. CHE is the sole corporate member of the new entity. SPHP is the largest comprehensive care network in the Capital Region providing the full spectrum of hospital-based services, long-term care, hospice, rehab and elderly care with four acute care hospitals and more than 1,000 physicians in its physician network at 125 locations.
Senior management has estimated that it will take approximately three years to achieve full integration of the three systems, but given the size and breadth of services within SPHP, this merger has the potential to develop into a successful coordinated care network which will encourage economies of scale and improved utilization of resources at a lower cost with better quality outcomes.
Solid financial trends
For the nine-month period ending Sept. 30, 2011, (FYE Dec. 31, 2010), SPHCS earned $12.8 million in operating income (3.2% operating margin and 10.6% operating EBITDA margin). Both profitability ratios are favorable compared to 'BBB' rating category medians of 1.7% operating margin and an 8.5% operating EBITDA margin. MADS coverage by operating EBITDA was solid at 2.7x compared to the median for the category of 2.3x, but MADS as a percentage of revenues was high at 3.9% of revenues, compared to medians for the category of 3.3%.
Strong qualitative factors
Additional credit strengths include SPHCS' strong reputation for quality, and its broad array of services. SPHCS has been designated a Magnet hospital since 2005 and has been recognized as a Top 100 cardiovascular hospital for 10 of the last 12 years SPHCS has maintained its solid market share with minimal patient disruption despite the large construction project at the hospital's main campus. Utilization trends are generally stable though outpatient numbers have declined primarily due to a shortage of primary care physicians in the service area which SPHCS is attempting to remedy through its recruitment efforts. Bad debt is less than 5% of revenues.
SPHCS' master facilities plan is essentially complete. The system is in the final phase of its multi-phase, multi-year project to modernize and enhance its Albany, NY hospital campus. In all, 600,000 square feet has been added or upgraded on the hospital's campus. This final phase of the master facility plan is estimated to cost $33 million for the renovation of existing facilities and to fund equipment costs which will be funded from the series 2011 bond proceeds.
CREDIT CONCERNS
Fitch's primary credit concerns are SPHCS' relatively light liquidity metrics coupled with a high debt burden. At the nine-month period ending Sept. 30, 2011, SPHCS had 125.2 DCOH, a 7.7% cushion ratio and 61.8% cash to debt ratio, which is light compared to the 'BBB' category medians of 128.6 days, 8.8x, and 79.8%, respectively; however, SPHCS' cash and unrestricted investments has steadily increased since FY 2008. SPHCS' debt to capitalization ratio of 52.8% is also higher than the median for the category of 48.4%.
SPHCS has $253.8 million of total long term debt outstanding at the nine-month period ending Sept. 30, 2011. All of the system's debt is fixed rate. SPHCS does not use swaps or derivatives to manage its debt portfolio but the system is responsible for a small pro rata share of CHE's swap portfolio with a mark-to-market value of $244,000 at Dec. 31, 2010.
SPHCS consists of an acute-care general hospital with 442 beds in service, a large hospice program, two nursing homes, outpatient clinics and other health care related facilities in Albany, NY. SPHCS had total revenue of approximately $514 million at FYE 2010. SPHCS' disclosure policies are very good. The system covenants to provide bondholders with annual audited financial statements including management's discussion and analysis, balance sheet, income statement, cash flow statement, and utilization statistics no later than 150 days after the fiscal year-end and quarterly disclosure 45 days after the end of the quarter.
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 20, 2011);
--Non-Profit Hospital and Health System Rating Criteria (Aug. 12, 2011).
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
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