News Column

Fitch Rates New York Methodist (NY) 2014 Revs 'A-'; Outlook Stable

August 8, 2014

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.

Security

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. 31, 2010.

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.

RATING SENSITIVITIES

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 project.

Credit Summary

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.

Disclosure

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=848294

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Fitch Ratings

Primary Analyst

Gary Sokolow, +1 212-908-9186

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analysts

Dmitry Feofilaktov, +1 212-908-0345

Analyst

or

Committee Chairperson

James LeBuhn, +1 312-368-2059

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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