NEW YORK--()--Fitch Ratings has affirmed its 'A+' rating on approximately $1 billion of debt issued by the New York City Health and Hospitals Corporation (HHC) consisting of following series:
--$528.3 million series 2010A
--$188.0 million series 2008A
--$174.1 million series 2008B, C, D and E (variable)
--$132.3 million series 2003A
--$1.6 million series 2002A
The Rating Outlook is Stable.
The bonds are a general obligation of the HHC and are secured by a pledge of healthcare reimbursement revenues of HHC, which include all revenues derived from provision of patient care, but exclude premium revenue from MetroPlus (HHC's Medicaid managed care organization) and monies provided by the city for capital programs.
Pledged funds flow through an exceptionally strong lockbox structure, with first dollars sequestered on a monthly basis for debt service needs before remaining funds go to HHC for operations. Bond documents and related statute require the maintenance of debt service reserve funds in the amount of maximum annual debt service (MADS), and the city is required to replenish draws on such funds (subject to appropriation), in the event HHC is not able to restore the funds to required levels.
KEY RATING DRIVERS
LOCK BOX STRUCTURE PROTECTION: Although lockbox revenue streams are vulnerable to local, state and national changes in health policy and the quality of the relationship between HHC and NYC, the robust coverage of debt service by lockbox revenues, 57.6x in fiscal 2012 (year ended June 30), is viewed as a primary credit positive.
UNCERTAINTY REGARDING SUPPLEMENTAL PAYMENTS: Although lockbox revenue streams cover pro forma debt service greatly in excess of requirements, major revenue components are vulnerable to local, state and national changes in health policy and reimbursement mechanisms. While the current magnitude of the coverage provides a high degree of cushion against volatility, the uncertainty of funding levels and distribution formulas as the industry moves through healthcare reform remains a significant credit concern.
ESSENTIAL COMPONENT OF NEW YORK CITY INFRASTRUCTURE: Further credit strength is placed on New York City's commitment in support of HHC as the provider of essential health care services to New York City's Medicaid and indigent care population through a system of 11 hospitals and a network of outpatient facilities throughout the five boroughs. This support currently includes operating subsidies and capital contributions to implement HHC's ongoing facilities renewal program, which was launched in 1998.
LINKAGE TO NEW YORK CITY RATING: Due to HHC's reliance on direct and indirect support from New York City to sustain its long term financial viability and on New York City's debt service reserve replenishment requirement, HHC's rating is closely linked to Fitch's 'AA' rating on New York City's general obligations (see Fitch Rates $825MM New York City GO's 'AA ', Outlook Stable, Sept. 27, 2012). The city's additional obligation to replenish the bonds' debt reserve fund, subject to appropriation, adds further support to the rating.
ENTERPRISE IMPROVEMENT AND RESTRUCTURING INITIATIVES: As a response to the challenging environment with expected reduction in supplemental payments and fiscal challenges facing New York City, HHC has been implementing a number of efficiency and cost containment efforts. Since 2011 NYCHHC staffing was reduced by 3,000 FTE's, primarily through attrition and realignment of services, resulting in savings of $141.8 million.
WHAT COULD TRIGGER A RATING ACTION
NEED FOR CONTINUED NEW YORK CITY SUPPORT: New York City's ability to continue to support HHC at levels needed to maintain financial and operational stability is a key rating driver.
WIDENING GAP BETWEEN RECEIPTS AND DISBURSEMENTS: The expected reduction in supplemental payments and uncertainty regarding the implementation of health care reform is a concern going forward.
The 'A+' rating reflects the strength of the lockbox structure and the magnitude of pledged receipts that are available for debt service, the support the city provides HHC, and the effectiveness and essentiality of HHC's operations. Credit concerns, which include HHC's difficult payor mix and the expected reduction in supplemental payments starting with 2014, uncertainty regarding the implementation of certain changes in health care reform and the ability of New York City to continue to support its operations at historical levels, are mitigated by the robust coverage of debt service by lockbox cash-flow and the city's debt service reserve replenishment obligation. HHC had 57.6x coverage of maximum annual debt service by lock-box revenues for the year ended June 30, 2012.
Financial performance has improved slightly over the last two fiscal years as a result of a concerted effort to implement a number of initiatives directed at costs containment and improved efficiency launched in 2010. Operating losses were reduced to $446.5 million in fiscal 2012 (negative operating margin of 5.8%) from $747.8 million in fiscal 2010 (negative operating margin of 10.8 %). Unrestricted cash and investments improved to $1.1 billion million from fiscal 2010's $656 million, which equates to 55.1 days cash on hand DCOH, up from fiscal 2010's 34.5 DCOH. Following on a commitment to reduce FTE's by 3,700 by 2014, to date 3,035 FTE' were eliminated, resulting in savings of $141.8 million. The staff reduction was accomplished primarily through attrition and was designed not to affect the bedside.
HHC's performance relies heavily on supplemental Medicaid payments, as well as funding sources that result from close cooperation with, and facilitation by, the state and the city. For the most recent fiscal year, third party payments, which include Medicaid Upper Payment Limit (UPL) and Disproportionate Share Hospital (DSH) payments were slightly higher than in the prior year, offsetting a reduction in Medicaid fee for service payments. The combined UPL and DSH payments are expected to remain relatively level for the current fiscal year, but will decrease starting with 2014, resulting in growing revenue shortfalls. HHC is planning to partially offset these with the savings from the restructuring program, and projections show significantly diminishing, but still positive closing cash balance for the 2013 - 2016 projection period.
HHC is planning a bond issuance for the middle of its 2013 fiscal year to refund the series 2003 bonds. The issuance may include a portion of new money to fund a new electronic medical record, equipment purchases and a number of smaller projects at HHC. The current rating does not incorporate the new issuance.
HHC's rating and Outlook are closely related to that of New York City. Fitch expects that the size of the system and its critical importance in providing services for the uninsured and indigent populations will continue to secure support to maintain sufficient pledged revenues flowing through the lockbox. In addition, the strength of the lockbox coverage provides a level of rating stability that would likely remain intact even if when HHC experiences what is an expected reduction in supplemental payments.
Serving the five boroughs of New York City, HHC is the largest municipal hospital system in the country, and comprises 11 acute care teaching hospitals, four long-term care facilities, six diagnostic and treatment centers, more than 60 community health clinics, a large Medicaid managed care organization and a certified home health care agency. HHC had total revenues of approximately $7.7 billion in fiscal 2012. As per its continuing disclosure agreement, HHC agrees to provide annual audited and quarterly financial statements 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' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria'(July 23, 2012);
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria