Fitch Ratings has downgraded to 'BB+' from 'BBB-' the rating on the following revenue bonds issued by the --
The series 2005 bonds are secured by a letter of credit (LOC:
The Rating Outlook is revised to Stable from Negative.
Pledge of gross revenues excluding restricted charitable donations and grants.
KEY RATING DRIVERS
GROWING OPERATING LOSSES: The downgrade to 'BB+' reflects persistent large operating losses in fiscal 2013, which weakened further through the 2014 interim period. Operating margin was negative 4.4 percent in fiscal 2013 and negative 9.6 percent through the six-month interim period. Further rating movement is precluded at this time given NJH's adequate liquidity position and coverage of debt service as calculated under the Master Trust Indenture (MTI), and the joint operating agreements (JOA) underway.
HIGHLY SPECIALIZED SERVICES: NJH is a national leader in the treatment of respiratory and related diseases with a focus on research and teaching. Over the last five years, NJH has significantly expanded its clinical capabilities to provide more comprehensive care to its patients with the majority of its services currently provided in an outpatient setting.
ADEQUATE BALANCE SHEET: Liquidity and leverage indicators are satisfactory at the 'BB+' rating. However, a sizable line of credit is utilized for operating expenditures, diluting NJH's overall balance sheet position.
JOA WITH EXEMPLA ST. JOSEPH HOSPITAL: In
ADEQUATE MTI COVERAGE OF DEBT: The Stable Outlook is predicated upon Fitch's expectation that NJH will continue producing sufficient net income available for debt service as calculated under the MTI. Inability to do so could lead to further negative rating action.
SUCCESSFUL EXECUTION OF JOA: Fitch believes the JOA with ESJH will provide growth opportunities in NJH's clinical business, and can lead to increased revenue growth. Effective execution leading to improved operating profitability could result in a return to the investment-grade rating category.
NJH is a national referral medical institute engaged in patient care, medical research, and teaching, primarily in the areas of respiratory, cardiac, allergic, and immunologic medicine. NJH only has 46 licensed beds and the majority of its services are provided on an outpatient basis. The medical staff currently provides inpatient care at
Increasing Operating Losses
Operating profitability further weakened in fiscal 2013 with a negative 4.4 percent operating margin compared to negative operating margins of 4 percent in 2012 and 1.5 percent in 2011. Deterioration in profitability accelerated through the six-month interim period ended
Historically, NJH's highly profitable clinical operations, along with philanthropic contributions, have offset substantial operating losses incurred by the organization's research activities. Losses from research activities exceeded
Management is projecting profitability to improve in fiscal 2014, supported by enhanced clinical operations and philanthropic contributions. However, due to heightened expenditures in physician investments and timing of certain funds released from restriction, net income was negative through the six-month interim period and will likely remain weak through the end of fiscal 2014.
Philanthropy activity has been solid, with annual fundraising levels of over
Joint Operating Agreement with
Fitch believes this opportunity should yield clinical and financial advantages to NJH, as the organization had initially planned to build an inpatient tower to expand inpatient capabilities. This JOA will provide the physical capacity needed for NJH. Additionally, NJH should be able to capitalize on revenue growth opportunities by having access to a larger network and develop a continuum of care. Research should benefit as well through increased access to patients and clinical trials.
NJH management indicated the transaction is currently undergoing due diligence review, with the goal of signing a definitive agreement in the first quarter of calendar year 2014. NJH is expected to continue operating outpatient and some inpatient programs on its existing campus and begin admitting patients at the new facility in
10-Year Strategic Plan
NJH is continuing its strategic plan begun in 2007, which focuses on clinical and research capabilities as well as philanthropy. NJH has increased the depth and breadth of services offered over the last several years, and the JOA with ESJH is consistent in executing existing goals.
In addition, NJH is partnering with
Weak Debt Metrics
Total outstanding debt as of
Fitch used a maximum annual debt service (MADS) of
While debt service coverage metrics calculated per Fitch's definition are concerning, the MTI allows for inclusion of certain displacements of restricted funds in net income available. In addition, coverage is tested only on bonded debt. MADS coverage calculated under the MTI using a MADS of
Modest Capital Needs
Routine capital expenditures are around
NJH covenants to disclose audited financial statements within 150 days of the end of the fiscal year. Quarterly unaudited financial information is disclosed within 45 days of the close of the first three quarters of the fiscal year and within 90 days of the close of the fourth quarter. Financial statements are posted to the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'fitchratings.com'.
--'Revenue-Supported Rating Criteria',
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria',
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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Fitch Ratings has downgraded to 'BB+' from 'BBB-' the rating on the following revenue bonds issued by the