Fitch Upgrades South Nassau Communities Hospital's (NY) Rating to 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded to 'A-' from 'BBB+' the rating on the approximately $92.7 million series 2012 bonds issued by Nassau County Local Economic Assistance and Financing Corporation NY on behalf of South Nassau Communities Hospital (South Nassau).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross receivables of the obligated group, and a mortgage on the main hospital facility. South Nassau is the only member of the obligated group.

OUTLOOK

The Outlook is Stable.

KEY RATING DRIVERS

SIGNIFICANT REDUCTION IN LEVERAGE: The upgrade to 'A-' is largely driven by South Nassau's significant reduction in leverage. South Nassau's maximum annual debt service (MADS) was cut in half as the institution paid off all of their leases in December 2013 with a line of credit, which was then repaid in March 2014 with proceeds from a grant from the New York State Department of Health. MADS coverage through the six month interim period ended June 30, 2014 was 5.4x and MADS is a very light 1.7% of revenues, both better than Fitch's 'A' category medians.

PURCHASE OF LONG BEACH MEDICAL CENTER ASSETS: South Nassau is expecting shortly to close on purchase of the assets of Long Beach Medical Center (Long Beach), which closed following major damage from Superstorm Sandy and will not be rebuilt. The transaction will enable South Nassau to be eligible to receive approximately $160 - 175 million of FEMA monies, which can then be used to towards providing regional health care.

IMPROVED LIQUIDITY METRICS: Cash and unrestricted investments increased to $167.1 million through the interim period, equivalent to 175.6% cash to debt and an 22.5x cushion ratio, both exceeding the 'A' rating medians, but days cash on hand (DCOH) of 153.4 days are lower than the 'A' median of 199.2DCOH.

SLIM BUT ADEQUATE OPERATING PERFORMANCE: The operating loss in 2012 was reversed in fiscal 2013, partially due to a temporary increase in revenues from the operations of the gamma knife, lower pension costs and other cost cutting initiatives. Through the interim period, operating performance is slimmer and is budgeted for near breakeven for fiscal 2014. However, operations are sufficient to produce coverage consistent with Fitch's 'A' category.

RATING SENSITIVITIES

MAINTAIN MODERATE LEVERAGE: Fitch expects South Nassau to maintain its current balance sheet strength and to continue to generate sufficient cash flow to enable South Nassau to produce capital ratios consistent with Fitch's 'A' category.

RECEIPT OF FEMA FUNDS

The current rating action does not assume the receipt of FEMA monies. Fitch will assess the credit impact of the potential receipt of FEMA funds once the asset purchase of Long Beach is completed and the FEMA monies are received.

CREDIT PROFILE

South Nassau Communities Hospital (SN) is a 435 bed (358 operated) acute care hospital, located in Oceanside, on the south shore of Long Island. Its service area includes Nassau County and parts of eastern Queens County. Total operating revenue in 2013 (Dec. 31 fiscal year end) was $412.2 million.

DEBT REDUCTION

A major factor in the upgrade to 'A-' is the recent significant reduction in south Nassau's debt load, which Fitch views as a major credit positive. Management used a draw on a $21 million line of credit to pay off all outstanding short term debt in December 2013, which had the effect of reducing MADS to $7.4 million from $15.2 million. The line of credit draw was subsequently repaid with proceeds of a grant. The institution's series 2012, its only currently outstanding debt, is fixed rate and South Nassau has no swaps. Coverage of MADS though the six months interim period ended June 30, 2014 was a robust 5.4x and MADS is a very light 1.7% of revenues, both of which are favorable to the 'A' category medians of 3.8x and 3.1%, respectively.

LONG BEACH TRANSACTION

South Nassau management has worked closely with the New York State Department of Health (DOH) and other State representatives and regulators to address the closure of Long Beach Hospital, which sustained irreversible damage in Superstorm Sandy and will not be rebuilt. In February 2014 South Nassau signed a purchase agreement to acquire the physical assets and up to maximum $1 million of unpaid employee obligations of Long Beach, which had filed for voluntary bankruptcy. In March 2014 South Nassau received a $22 million grant from the New York State Department of Health 'Health Care Efficiency and Affordability Law for New Yorkers' (HEAL NY) Capital Grant Program intended to help facilitate the purchase of the long Beach assets and to provide services to the Long Beach area. The grant proceeds were used to repay the draw on the line of credit.

On May 22, 2014, the bankruptcy court approved the asset purchase for $11.8 million and the transaction is expected to close before calendar 2014 year end. The purchase of Long Beach's assets has enabled South Nassau to be eligible to receive what are expected to be between $160-175 million of FEMA funds related to the Long Beach damages sustained in the storm. The FEMA regulations allow for the funds to be used for delivery of medical services in the region and are not specifically pledged to the rebuilding of Long Beach. South Nassau is already operating an urgent care center at the Long Beach site and may open a free standing emergency department at that location, but no plans are being made to rebuild the facility at its old location.

SLIM BUT ADEQUATE PROFITABILITY

After a $4 million loss from operations in 2012 which was impacted by Sandy, fiscal 2013 ended with a $6.2 million operating gain, equal to an operating margin of 1.5% and operating EBITDA margin of 8.7%. The $10 million turnaround benefited from $5 million of additional revenues from operations of the gamma knife, as NYU Langone Medical Center's (NYU, rated 'A-'; Stable Outlook by Fitch) gamma knife operations were temporarily shut down due to Sandy. NYU and South Nassau are two of only three area hospitals with this capability in the New York metropolitan area. The overflow, however, ended in April of 2014, as NYU's resumed operations of its gamma knife. South Nassau froze their defined benefit plan effective December 31, 2013 and their fiscal 2013 pension expense was $17 million lower than in the prior year. Operations also benefited from a supply chain initiative that was initiated in 2012 with the help of consultants, with potential annual savings of between $5-10 million and approximately $6 million realized to date in 2014.

Operating results are slimmer through the interim period ended June 30, 2014, with operating income of $0.9 million (0.4% operating margin). The lower profitability reflects the impact of the two midnight rule, the lower gamma knife revenues and softening in inpatient admissions, though South Nassau's admissions decline is lower than the market, case mix index has increased and outpatient surgery was up both last year and year to date.

Management is budgeting to end the 2014 fiscal year with a $1 million, essentially breakeven operating income. While this is a decline from historical levels, cash flow should be sufficient to produce solid coverage given the reduced leverage position.

IMPROVED LIQUIDITY MEASURES

Liquidity measures have been on an upward trend and unrestricted cash and investments were reported at $167.1 million at June 30, 2014. Cash to debt, which was less than 100% in 2012, is now equal to 175.6%, better than the 'A' median of 131.2%, as is the cushion ratio of 22.5x, as compared to 17x median. Only DCOH at 153.4 days are unfavorable to the 'A' rated median of 199.2 days, but exceed the 'BBB' category median of 145 DCOH. The liquidity figures do not include any of the FEMA monies.

LIHN PARTICIPATION A CREDIT STRENGTH

Long Island Health Network (LIHN), formed in 1998, is a network of 10 Long Island hospitals. The member hospitals represent 50% of the Long Island healthcare market, have in excess approximately $4 billion of revenues and all contracts are negotiated though LIHN. The network also acts as a countervailing force for its members to the dominant Long Island network of the North Shore Long Island Jewish Health System (NSLIJ). The joint venture involves clinical integration, using established clinical guidelines and protocols for a majority of discharges throughout the network (based on Best Practices) and uses a clinical information system with benchmarking capabilities across the network to monitor resource utilization, quality, etc. LIHN has established a population health initiative which covers its 50,000 employees and dependents. LIHN is organizing a Physician Hospital Organization (PHO), which is expected to have 1,500 to 2,000 physicians.

MAINTAINING MARKET SHARE

South Nassau operates in a service area that is competitive and fragmented, with two dozen hospitals, many of which are owned by two larger competitors: Catholic Health Services of Long Island (CHS) (rated 'BBB+'; Stable Outlook by Fitch) and NSLIJ (rated 'A', Stable Outlook by Fitch). Nevertheless, South Nassau has been able to increase its market slightly over the last two years, both as the result of an expanding array of services being provided with the effect of decreasing the outmigration of patients to NYC, but also benefiting from the closure of two area hospitals including Peninsula Hospital in Far Rockaway in the spring of 2012 and Long Beach after Superstorm Sandy in October 2013. In the Nassau County service area, South Nassau's share rose to 11.2% in 2013 from to 10.3% in 2011.

REVISED MASTER FACILITY PLAN

Management revised its previously planned $350 million capital plan to a more manageable $75 million. The renovations of two wings of the hospital funded with the proceeds of the series 2012 bonds started in June 2013, but progress was slowed due to Sandy delays. The project involves renovations of portions of the existing hospital which would allow for conversion of 38 rooms to 24 private rooms and of an existing 38-bed medical surgical unit to a 20-private-bed transitional unit. Management expects completion of construction by November of the current year.

Disclosure: South Nassau covenants to provide annual audited financial statements 150 days after the fiscal year end and quarterly unaudited financial statements 60 days after the quarter end to EMMA.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria'(May 30, 2014);

--'Revenue-Supported Rating Criteria' (June 16, 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

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=886236

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Eva Thein, +1-212 908-0674
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jennifer Kim, +1-212-908-0740
Associate Director
or
Committee Chairperson
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Eva Thein, +1-212 908-0674
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jennifer Kim, +1-212-908-0740
Associate Director
or
Committee Chairperson
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com