NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to Memorial Sloan-Kettering Cancer Center's approximately $400 million revenue bonds, 2012A. In addition, Fitch affirms the 'AA' rating on Memorial Sloan-Kettering Cancer Center's (MSKCC) outstanding debt issued by the New York State Dormitory Authority.
The Rating Outlook is Stable.
Bond proceeds will be used to fund a portion of MSKCC's extensive capital plan. Total pro forma debt is approximately $2.1 billion and is 100% fixed rate.
The series 2012 bonds are expected to price the week of Nov. 26, 2012 via negotiation.
General unsecured obligation. There is if certain funding events are triggered.
KEY RATING DRIVERS
SUPERIOR CLINICAL REPUTATION: MSKCC is one of the world's premier cancer care and research institutions and is consistently ranked as one of the best cancer hospitals in terms of quality outcomes and patient satisfaction.
STRONG PHILANTHROPIC SUPPORT: MSKCC has strong fundraising abilities and philanthropy has been a consistent source of funds for operations, as well as capital needs. MSKCC is currently in a $3.5 billion capital campaign with over $2.7 billion raised to date.
SOLID BALANCE SHEET: Liquidity ratios all exceed Fitch's 'AA' category median ratios. As of September 30, 2012 (nine-month interim; unaudited) MSKCC had pro forma 538.6 days cash on hand, 30.7 cushion ratio, and 167.2% cash to debt.
SIGNIFICANT CAPITAL PLANS: MSKCC continues to be in a growth phase as it expands its ambulatory capacity and regional network due to strong demand and a shift of services to a predominately outpatient setting. MSKCC's major building program for 2012 - 2018 totals $2.2 billion, which will stress debt and liquidity ratios.
ELEVATED DEBT BURDEN: With the 2012A new debt issuance, MSKCC's debt burden is relatively high at 4.2% pro forma average annual debt service (AADS) as a percentage of total revenues through September 2012. Fitch believes the organization has limited additional debt capacity based on its current financial performance. There are no plans for additional debt in the near term.
RATING AFFIRMATION OF 'AA'
The rating affirmation of 'AA' is supported by MSKCC's strong clinical reputation as a leading provider of cancer care services, excellent philanthropic support, good growth strategy, and solid balance sheet metrics. Credit concerns include the organization's large capital plan and relatively high debt burden.
MSKCC has maintained its dominant market position in the service area as the leading provider of cancer care services in the tri-state region. A market position of approximately 15% inpatient market share in NYC of all cancer discharges has helped support solid operating profitability as MSKCC generated $103.1 million in operating income through the Sept. 2012 period (4.9% operating margin and 14.3% operating EBITDA margin). Debt service coverage (AADS) by EBITDA through the same period was a good 5.4x, which compared favorably against the Fitch 'AA' median of 4.8x.
Management is implementing a regional and ambulatory growth strategy due to strong demand for services and the shift in clinical care from an inpatient to outpatient setting.
MSKCC's major capital project is expected to cost approximately $2.2 billion from 2012-2018 and includes the construction of a 730,000 square feet ambulatory care facility ($1.2 billion), an ambulatory surgery expansion on East 61st street ($240 million), and additional regional outpatient centers in the tri state area. Management continues to expect to fund approximately $900 million from philanthropy and cash flow with the remaining amount from debt, of which $900 million has already been issued including the series 2012A transaction. Fitch notes that of the debt issued, $800 million is taxable (includes this issuance) and unrestricted cash will be temporarily inflated as these proceeds will remain in investments until construction begins (most likely in 2014 to 2018).
Fitch notes that MSKCC's building program has changed from our last review and instead of renovating the Cabrini Medical Center (MSK South), MSKCC is replacing the project with the construction of a larger ambulatory care facility on the Upper East Side in Manhattan. Management expects to generate cash flow from the sale of some of its real estate assets including the former Cabrini Medical Center.
Fitch's main credit concern is MSKCC's increasing debt burden, which is pressuring certain leverage and liquidity metrics, which Fitch views negatively. However, Fitch expects this pressure on the financial profile to be temporary until the projects funded by the additional debt are open and generate cash flow.
NEW ISSUE DETAILS
The 2012A taxable bond issuance will be issued as traditional fixed-rate bonds. The bonds will be used to fund a portion of its capital plan.
The Stable Outlook reflects Fitch's expectation that MSKCC will maintain its current balance sheet levels, while consistently generating solid profitability. Consistent profitability growth should lead to sufficient debt service coverage over the period of MSKCC's heavy capital investment. No additional debt is expected.
MSKCC includes a 514-licensed bed specialty hospital located on the Upper East Side of Manhattan, several outpatient centers (10 in New York City and 5 regional sites), an institute for cancer research and other affiliates following the mission of the prevention, treatment, and cure of cancer. In fiscal 2011, MSKCC had total revenues of $2.6 billion.
MSKCC has covenanted to provide annual financial information within 165 days of fiscal year-end and quarterly information within 60 days of quarter end 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).
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria