NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has assigned an 'A-' rating to the expected issuance of
the following Build NYC Resource Corporation bonds issued on behalf of
New York Methodist Hospital (NYM):
--$32,000,000 tax-exempt revenue refunding bonds, series 2014 (The New
York Methodist Hospital Project)
The Rating Outlook is Stable.
The series 2014 bonds are expected to be issued as fixed rate. Proceeds
will be used to refund NYM's outstanding series 2004 bonds, which
constitutes all of NYM's long-term debt. NYM is contemplating two
amortization schedules. Maximum annual debt service (MADS), which was
provided by the underwriter, is expected to fall to either $3.3 million
or $2.8 million from $4 million depending on the final amortization
schedule. The bond will sell via negotiation the week of August 18.
Obligated group pledge of gross receipts and a mortgage. Fitch does not
expect there to be a debt service reserve fund.
KEY RATING DRIVERS
IMPROVED FINANCIAL PERFORMANCE: Over the last three years, New York
Methodist Hospital (NYM) has averaged a 4.3% operating margin and a 7.8%
operating EBITDA margin, after posting 2.3% and 6.5% margins,
respectively, in 2010. During this time, most volume figures, including
inpatient admissions and surgeries, have increased, and patient service
revenue has grown approximately 7% a year. Six-month 2014 results show
continued strength in financial performance, with a 5.9% operating
margin and an 8.5% operating EBITDA margin.
SUBSTANTIAL LIQUIDITY IMPROVEMENT: The strong cash flow, coupled with
gains released from its captive insurance company, have helped increase
NYM's unrestricted cash and investments by 265% over the last 3 1/2
years, to $339.8 million at June 30, 2014, from $128.2 million at Dec.
NY PRESBYTERIAN HEALTH SYSTEM RELATIONSHIP: Fitch views NYM's
sponsorship relationship with the New York Presbyterian Health System
(NYPHS) as a credit strength. The relationship provides NYM with the
benefits of scale for contracting and group purchasing, enhances NYM's
ability to recruit and retain physicians and expand tertiary services,
and helps NYM's overall market position in the very fragmented and
competitive New York City market.
COMMUNITY PHYSICIAN ALIGNMENT STRATEGY: Fitch also views positively
NYM's strategy in working with community physicians and smaller
physician practices throughout Brooklyn. The strategy has expanded NYM's
patient base in key Brooklyn neighborhoods, while enabling community
physicians to remain independent. NYM's outpatient presence is anchored
by 20 NYM operated outpatient sites located throughout Brooklyn, its
primary service area.
LARGE CAPITAL PROJECT COMING: NYM is moving forward on the building of a
sizable ambulatory care building within the next two years that is
anticipated to cost approximately $400 million which will be located
across from the main hospital, on land already owned by NYM. Fitch
anticipates that the project will be funded by a mix of debt, equity,
and philanthropy. Currently, NYM is very lightly levered and has sizable
debt capacity at the current rating level. The final financing for the
project has yet to be determined, and Fitch expects to have more clarity
on the financing over the next 12 to 15 months.
SUSTAINED LEVELS OF CASH FLOW: NYM needs to maintain its recent
improvements in cash flow and continue to build its balance sheet in
order to fund the ambulatory care building at the current rating level.
A fall-off in cash flow or a flattening of cash growth would be a credit
concern; a continuation of the current operating trends over the next
two years would increase NYM's financial flexibility heading into the
NYM is a non-for-profit acute care community and teaching hospital that
operates 591 beds and 60 bassinets and is located in the Park Slope
section of Brooklyn, NY.
The 'A-' rating reflects a material improvement to NYM's overall
financial profile in the last three years, a trend of positive volume
growth, and a good market position, supported by its sponsorship
relationship with NYPHS. Credit concerns include operating in a very
fragmented and competitive New York City service area and a sizable
capital project expected to be financed in the next 12 to 15 months.
Improved Financial Profile
Over the last three years and through the six-month interim period, most
of NYM's financial ratios and volume metrics have been on a positive
trend. Its operating margin has steadily improved from 2.3% in 2010 to
5.9% in the six-month 2014 interim period, with NYM's EBITDA increasing
to $107.9 million in 2013 from $49.1 million in 2010. Supporting the
operating performance has been growth in most volumes through the
historical period, including inpatient volumes, and that growth has
continued through the six-month interim period with inpatient admissions
growing by 2.1% and outpatient surgeries growing by 7.1% year over year.
The strong operating performance has led to a sharp growth in
unrestricted cash and investments, which has built up NYM's balance
sheet. During this period, days cash on hand grew from a weak 81.2 days
at year end 2010, to a solid 165.2 days at June 30, 2014. This compares
to Fitch's 'A' median of 196.3 days. Currently NYM is very lightly
leveraged, so liquidity relative to its debt is very strong with a
100.3x cushion ratio and 817.9% cash to debt.
Liquidity growth has also been helped by gains from NYM's captive
insurance company. A combination of a reduced risk profile and good
unrealized investment returns has allowed NYM to dividend back $42.2
million ($29 million in 2013 and $13.2 million in 2012) over the last
two audited years. For analytical purposes, Fitch has included these
amounts in non-operating revenue, viewing them as non-recurring gains.
Fitch does not anticipate that NYM will continue to derive such strong
gains from the captive insurance company and views NYM's current
liquidity position as adequate to absorb a change in NYM's risk profile
or weaker investment returns.
NYM maintains an active defined benefit plan, which was 94.4% funded as
of Dec. 31. 2013; up from 77.3% at Dec. 31, 2011. NYM has been
contributing to the plan and expects it to be 100% funded by the time
the outpatient building construction begins, in order to reduce stress
on its liquidity during this time.
Good Market Position
Underpinning the financial performance and volume growth is a good
market position, supported by an excellent location in one of Brooklyn's
more desirable neighborhoods, continued physician growth, and its
sponsor relationship with NYPHS.
NYM has an 11.1% inpatient market share (2013 data) in its primary
service area of Brooklyn, which is second only to Maimonides Hospital
with a 12.8% market share. However, NYM has the largest market share in
terms of commercially insured patients in Brooklyn. The New York City
market is a very fragmented and competitive market, with a number of
high performing hospitals and academic medical centers vying for
patients in Brooklyn. Outmigration of patients to Manhattan is one of
NYM's largest competitive stresses. Fitch views NYM's relationship with
NYPHS as critical in sustaining NYM's ability to compete effectively.
The relationship provides NYM with the scale of a larger hospital
system, has helped NYM grow tertiary services through NYPHS physicians
and other collaborative clinical initiatives, enables NYM to offer its
own physicians the opportunity of an academic appointment, and it aligns
NYM with what otherwise would be a potentially formidable competitor.
NYM has grown its physician staff by 4% over the last two fiscal years,
and as of Dec. 31, 2013 had 336 employed physicians and 806 staff
physicians. Fitch believes the core group of employed physicians should
help sustain patient volumes, especially specialty services, but that
this employed model is balanced by NYM's strategy to align with
independent physicians in Brooklyn. NYM's strategy is to build
relationships with these community physicians, especially in strategic
growth areas, by providing a range of services, including backoffice
functions and access to IT, as well as establishing a welcoming
environment for independent physicians at its hospital, with
hospital-based physicians mixing well with the community physicians. The
ability to grow its community physician base and to create alignment
will be critical in NYM's ability to continue to grow patient volumes.
NYM already has a sizable clinical footprint in Brooklyn with 20
operated outpatient sites located throughout the borough.
However, the competition for Brooklyn patients will pressure NYM to
continue to grow services. Recently NYU Medical Center (general revenue
bonds rated 'A-' by Fitch) announced that it will be opening a
freestanding emergency department and plans to open a larger outpatient
facility as part of the redevelopment of the former Long Island College
Hospital site. Mount Sinai Medical Center (general revenue bonds rated
'A') already operates an outpatient site in the same downtown Brooklyn
neighborhood, which is a growing and well-insured area.
Debt Profile/Capital Plans
NYM is very lightly leveraged with only $39 million in long-term debt,
all fixed rate, and NYM is refinancing that debt with this bond issue
for net present savings. Currently all of NYM's debt metrics exceed
Fitch's 'AA' medians. However, NYM is undertaking a sizable capital
project within the next two years that will require a large debt
issuance which is incorporated into the current rating assignment.
The project will involve the construction of a 400,000 square foot
outpatient building that will be located across from NYM's hospital and
house a number of services lines, including but not limited to women's
health, oncology, orthopedics, and neurology as well as additional
operating rooms. NYM recently received Board of Standards and Appeals
approval for certain variances for the project and is moving forward on
a feasibility study and submitting a certificate of need to New York
State for approval. The feasibility study will analyze the best mix of
services to be located in the building so the final layout and services
to be moved to the building are still to be finalized. However, Fitch
views the strategic justification for the project as reasonable.
NYM's volumes are growing as are outpatient services across the sector.
The new outpatient building, which will connect to the main hospital via
underground passageways, will move a number of important and lucrative
service lines to a state of the art facility that will also have
additional parking. This will free up space in NYM's main campus and
allow NYM to reconfigure and grow inpatient services and redesign
patient flow in certain areas.
The project is expected to cost approximately $400 million and will be
funded by a mix of debt, equity, and philanthropy, with debt expected to
be between $250 million and $300 million. The financing is expected to
occur in the next 12 to 18 months. The magnitude and scope of the
project from financing to construction to its opening are major credit
concerns. However, Fitch believes that NYM's light debt burden and the
trajectory of its financial improvements enable it to undertake the
project and maintain the current rating; that would change should NYM's
operations slide or cash growth flatten. Fitch believes NYM's good
market position, physician strategy, and NYPHS relationship should help
sustain the recent performance levels. Additionally, any additional
growth in unrestricted cash and investments, even modest, would reduce
the amount of debt needed to fund the project.
Separately, NYM's low debt burden and restrained spending on capital -
capital spending as a percentage of depreciation has averaged 67.4% over
the last four fiscal years, much below Fitch's 'A' category median of
114.2% - might indicate deferred capital needs. However, Fitch toured
the hospital and found it adequate with newer parts of the campus
blending well with older parts and a mix of private and shared inpatient
rooms. NYM has made strategic investments over the years. It is a HMSS 6
level hospital for IT and is positioned well to attest to third stage
meaningful use. Other strategic capital investments include a Da Vinci
robot and a recently opened state-of-the-art operating room with the
capacity to do Transcatheter aortic valve replacement, or TAVR.
NYM covenants to provide through EMMA yearly audited financial
statements within 150 days after the fiscal year's end and quarterly
statements with balance sheet, income statement and management analysis
and discussion, within 60 days after the end of the fiscal quarter.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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Source: Fitch Ratings