Fitch Ratings has upgraded to 'A-' the rating on the following series of bonds issued by the Dormitory Authority of the State of New York on behalf of NYU Hospitals Center (NYUHC) as part of its ongoing surveillance:
-- $45 million revenue bonds series 2000D;
-- $94.6 million revenue
bonds series 2006A;
-- $152.8 million revenue bonds series 2007A;
--
$89.4 million revenue bonds series 2007B;
-- $128.5 million revenue
bonds series 2011A.
The Rating Outlook is revised to Stable from Positive.
SECURITY
Bond payments are secured by a mortgage and gross revenue
pledge of NYUHC, which is the sole member of the Obligated Group. The
Fitch report financial ratios are based on the combined financial
performance of NYU Hospitals Center and the CCC550 Insurance, Inc., its
captive insurance company.
RATING RATIONALE
SUSTAINED STRONG OPERATING PERFORMANCE: The
upgrade is supported by NYUHC's third year of strong operating
performance with operating margin in fiscal 2011 of 9.7% and operating
EBITDA margin of 14.4%, both well exceeding the 'A' rating category
medians. Operating results were achieved based on strong revenue growth
as well as continued improvements in productivity and expense and
revenues cycle management, aided by the issuer's robust IT systems.
REVISION
OF PLAN OF FINANCE: The new plan of finance replaces what was initially
a large, $600 million bond issuance in 2013 or 2014 for the Kimmel
Pavilion with construction loans using draws on lines of credit, subject
to New York State Department of Health (NYSDOH) Certificate of Need
(CON) review, which would be permanently financed with smaller bond
issues over the 2014 to 2017 construction period.
LIQUIDITY
EXPECTED TO IMPROVE: While liquidity at 94.6 days cash on hand (DCOH)
and cash equal to 69% of debt (including temporarily restricted funds
earmarked for the Campus Transformation Project) is weaker than the
category medians, the projected continuation of the historically strong
operating cash flow, coupled with the new plan of finance, allows for
further build-up of cash with unrestricted cash equal to debt by 2013.
EXCELLENT
COVERAGE OF DEBT: Coverage of maximum annual debt coverage (MADS) at
2011 fiscal year end of 4.3 times (x) was better than the 'A' category
median. Impressively, the organization covers the projected MADS of $110
million based on 2011 net available for debt service, for the entire
Campus Transformation Project projected to be between $850 million-$900
million, at an adequate 2.0x.
CONTINUED FUNDRAISING SUCCESS: A
recently announced $50 million gift will help create a new 160,000
square foot state-of-the-art pediatric hospital on the Medical Center's
main campus, which will be the only all-private bed pediatric facility
in Manhattan. A total of $204 million was raised last year from NYUHC's
large and loyal philanthropic community.
CREDIT SUMMARY
The upgrade to 'A-' is based on management's
execution on its strategic plan to significantly improve operations
which has resulted in three years of excellent operating profitability
and the expectation that these operating results will continue.
Operational improvements have been supported by strong physician
recruitment, investments in key service lines (especially on the
outpatient side), the implementation of an advanced IT system that has
led to significant operational efficiencies, and improved quality and
safety metrics.
Following a strong fiscal 2010 (operating income of $166.8 million), fiscal 2011 produced another year of robust operating results with operating income of $167.2 million, equal to an operating margin of 9.7% and operating EBITDA margin of 14.4%, exceeding Fitch's 'A' category medians of 2.6% and 9.4%, respectively. Net patient revenues increased by 9.3% in fiscal 2011, despite NYUHC losing the equivalent of 4-5 days of revenue in August due to the evacuation of the hospital for Hurricane Irene. NYUHC has yet to receive any proceeds from business interruption insurance. Management reports that preliminary fiscal 2012 first quarter results are consistent with fiscal 2011 performance. Fitch expects NYUHC's operating performance to remain at these levels through 2017.
Admissions increased by a modest 1.4% in fiscal 2011, but outpatient volumes were strong. Cancer Center visits were up by 9.2% and emergency department visits by 8.6%.. The solid utilization trends are a result of a strategy focused on high-margin services, such as cardiology, neurology and oncology and high-end pediatric services, specialties for which NYUHC has aggressively recruited physicians and invested capital. A net of 250 physicians were added to medical staff over the last two years. Musculoskeletal services, also targeted for growth, will be greatly advanced by a new Musculoskeletal Institute, funded with proceeds of the series 2011A bond issue (see Fitch's new issue report dated Dec. 17, 2010, titled New York State Dormitory Authority (NY) (New York University Hospitals Center) Revenue Bonds Series 2011A) and expected to open in the spring of 2012 near the main campus. Revenue growth is also supported by the expansion of NYUHC's ambulatory network, with a third Queens ambulatory facility about to open. Approximately 50% of NYUHC's revenues are now generated from outpatient services.
NYUHC's liquidity metrics are weak relative to the category medians, but are projected to improve based on the continuation of solid operating cash flow. Unrestricted cash and investments were reported at $384.4 million at FYE 2011, equal to 94.6 DCOH, 7.4x cushion ratio and 69.3% cash to debt, as compared to Fitch's 'A' category medians of 194.1 DCOH, 15.4x cushion ratio and 113.8% cash to debt. Fitch has included in the cash number $58.5 million of temporarily restricted funds which are donor restricted monies but earmarked for portions of the Campus Transformation Project. Not included in cash are approximately $115 million of construction monies from the 2007A and 2011A series to fund the Musculoskeletal Institute and the emergency department modernization.
Cash reserves did not increase during the most recent fiscal year despite robust profitability as a result of heavy investment in facilities (over $200 million), a $45 million contribution in support of the New York University School of Medicine (SOM), and a $22 million pension contribution (the frozen defined benefit pension plan is now 90% funded). Fitch expects cash to grow over the next several years with cash doubling by 2013, projected at that time to equal 113% of debt.
A major credit concern is NYUHC's sizeable $1.5 billion Campus Transformation Project, which will require the issuance of approximately $850 million-$900 million of debt. The Project includes a new patient tower (Kimmel Pavilion), the construction of an energy plant, and a new Science Center for translational medicine. A recent revision in the plan of finance will switch the responsibility of issuing the debt for the energy plant, part of the first phase of the Project, to the SOM. NYUHC will in turn issue the debt for the Science Center ($365 million) and as part of the agreement to assume the funding of the Science Center will no longer need to make transfers to the SOM past 2015.
The new plan of finance, subject to NYSDOH CON review, uses short-term, low-interest lines of credit for construction that will be refinanced permanently in tranches. While Fitch is concerned about the use of the lines of credit, these concerns are mitigated by the potential benefits of this approach. First, NYUHC has developed a preliminary draw schedule that limits the line of credit draws to no more than $150 million-$250 million outstanding at any time. Fitch believes this is a manageable amount given NYUHC's liquidity. Moreover, the tranched approach minimizes capitalized interest (which should help balance sheet and capital ratios), reduces interest rate risk by spreading bond issuance over several periods, and helps smooth the timing of the arrival of philanthropic dollars for the project.
Fitch notes NYUHC would cover the projected $110 million of MADS for the entire Project, based on 2011 results, at an adequate 2.0x coverage. That MADS is not expected to occur until 2018. Coverage of current MADS was a very strong 4.3x in 2011, better than the 'A' category median of 2.6x, and MADS at 3% of revenues is slightly better than the median of 3.3%.
The project is to a significant degree dependent on philanthropic support. Fitch views NYUHC's ability to generate fundraising dollars, which is conducted in conjunction with the SOM, as a major credit strength, evidenced by the recent announcement of a $50 million gift for the Pediatric Institute. A total of $204 million was raised last year from philanthropy and a total of $550 has already been raised toward the Projects.
NYUHC is exploring a possible partnership with Continuum Partners, a three-hospital New York City based system which includes Beth Israel, and St. Luke's Roosevelt Hospital and the New York Eye an Ear Infirmary. In Fitch's view, there are potential synergies to be realized from combining an academic medical center, such as NYUHC, which focuses on tertiary and quaternary care, with Continuum's significant ambulatory network presence in New York City. NYUHC's management anticipates that the relationship would provide significant potential benefits to both parties. Specific details as to the nature of the potential relationship are not available at this time. Fitch will continue to monitor the situation and evaluate the potential rating implications as necessary.
NYUHC is an academic medical teaching hospital in New York with two main campuses. NYUHC had 37,929 adult discharges and total revenues of approximately $1.7 billion in fiscal 2011. NYUHC covenants to disclose annual and quarterly information 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', dated June 20, 2011.
--'Nonprofit Hospitals and
Health Systems Rating Criteria', dated Aug. 12, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Nonprofit
Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Primary Analyst:
Eva Thein, +1-212-908-0674
Senior
Director
Fitch, Inc.
One State Street Plaza
New York, NY
10004
or
Secondary Analysts:
Gary Sokolow, +1-212-908-9186
Director
or
Committee
Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Media
Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com