Fitch Rates Barnabas Health's (NJ) Series 2014A Revs 'A-'; Upgrades Outstanding

NEW YORK--()--Fitch Ratings assigns an 'A-' rating to the $127.5 million New Jersey Health Care Facilities Financing Authority series 2014A bonds issued on behalf of Barnabas Health.

In addition, Fitch upgrades to 'A-' from 'BBB+ the ratings on the following series issued on behalf of Barnabas Health by the New Jersey Health Care Facilities Financing Authority, the New Jersey Economic Development Authority, and Saint Barnabas Corp.:

--$105.5 million series 2012A

--$81.2 million series 2012

-- $324.2 million series 2011A

-- $35.6 million series 2011B*

-- $43.0 million series 2011C*

-- $63.0 million series 2006A fixed rate bonds

-- $111.3 million series 2006B

-- $44.8 million series 1998B

-- $60.4 million series 1997A

* Underlying rating. Letter of Credit provided by JPMorgan Chase.

The Rating Outlook is Stable.

The series 2014A bonds are expected to be issued as fixed rate and bond proceeds will be used for a current refunding of the GNMA Collateralized Taxable Revenue Bonds series 2012, issued by Jersey City Medical Center, Inc. (JCMC), which became an affiliate of Barnabas Health (Barnabas) effective June 1, 2014 and will join the Barnabas obligated group with the series 2014A issuance. The series 2014A has a 2044 final maturity and maximum annual debt service (MADS) of $83,224, provided by the underwriters, occurs in 2016. A debt service reserve fund will not be funded in connection with the series 2014A bonds.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group, which represented approximately 92.7% of the consolidated revenues in fiscal 2013, and mortgages on the system's acute care facilities, which will include JCMC.

KEY RATING DRIVERS

STRONG MARGINS AND SOLID MADS COVERAGE: The upgrade to 'A-' is based on the system's continued solid operating results in fiscal 2013 (year-end December 31) and through the nine months ended Sept. 30, 2014 (the interim period), combined with coverage of pro-forma debt consistent with Fitch's 'A' category median. Operating results include JCMC starting with June 1, 2014.

JCMC ACQUISITION: Fitch views the acquisition of JCMC, located in Jersey City, as a near term challenge, given its unfavorable payer mix and reliance on supplemental payments. However, based on JCMC's small revenue size relative to the system and the number of initiatives undertaken by Barnabas management to improve its operating profile, Fitch does not expect the acquisition to have a negative impact on system profitability and debt metrics.

SIGNIFICANT MARKET PRESENCE: Barnabas Health is the state's largest healthcare system and its market coverage was enhanced with the recent acquisition of JCMC. The system now includes seven acute care hospitals (approximately 2,730 operated acute care beds), numerous ambulatory locations, and over 4,000 active physicians. Barnabas' market share of New Jersey admissions of 14.5% is nearly double that of its next largest competitor.

GROWING BUT MODEST LIQUIDITY: Barnabas Health had unrestricted cash and investment of $1.14 billion at Sept. 30, 2014, equal to 159.5 days cash on hand (DCOH), 13.7x cushion ratio and 92.3% cash to debt, lower than the 'A' medians. The system completed its obligations with the U.S. Department of Justice (DOJ) by making its final payment on Oct. 1, 2013 (total of $24 million paid in 2013), which together with the strong operating cash-flow and curtailment of the pension plan funding implemented in 2013, will enable the system to further continue to build its liquidity even while making some deferred capital investments.

SOLID DEBT SERVICE COVERAGE: The strong operating results have produced solid coverage of pro-forma MADS of 3.6x in fiscal 2013 and 5.5x through the interim period. MADS includes a proposed increase in a 2013 bank loan to $80 million to include funding of the outstanding pension liability for JCMC. Pro-forma MADS continues to be a manageable 2.9% of system revenues, but debt to capitalization is only slowly moderating (61.6% through the interim period).

RATING SENSITIVITIES

NEED TO FURTHER BUILD THE BALANCE SHEET: Fitch expects Barnabas to use the expected increase in cash flow to continue to grow liquidity and strengthen its balance sheet metrics.

INTEGRATION OF JCMC: The strong management practices, which resulted in the operational improvement over the last several years, will need to be applied to JCMC in order to bolster its profitability given the uncertain future of the levels of supplemental payments.

CREDIT PROFILE

Barnabas Health consists of seven free-standing acute care hospitals, two children's hospitals, a free-standing psychiatric hospital, and various other health care entities concentrated in northeastern and coastal New Jersey, with corporate headquarters located in West Orange. Barnabas Health had total revenues of $2.6 billion in 2013 (Dec. 31 year end).

OPERATING IMPROVEMENT MAINTAINED

Repeating the strong performance of the prior two fiscal years, the system reported operating income of $142.3 million in 2013 (year-end Dec. 31) on revenues of $2.6 billion, exceeding the $118.5 million operating budget. The fiscal 2013 performance translated into an operating margin of 5.5% and operating EBITDA margin of 10.9%, both metrics favorable to Fitch's 'A' category medians of 2.5% and 9.5%, respectively. The operating margin would have been a still solid 4.6% even when adjusting for a couple of one-time items totaling $24.1 million (meaningful use EHR funds and a DSH reserve). The strong operating performance was achieved despite generally declining volumes - 5% overall, though volumes were stable at Saint Barnabas Medical Center (Saint Barnabas) and Monmouth Medical Center, which are major contributors to system profitability. Contributing to the operating results was management ability to further reduce FTE's, resulting in annualized savings of $13.1 million, recruit 70 additional physicians, improve collection rates and negotiate rate increases.

Operating results through the third quarter of fiscal 2014

(including the results of JCMC starting June 1st), show the solid operating performance was maintained, with operating income of $118.8 million, slightly ahead of budgeted $103.1 million and equal to operating and operating EBITDA margins of 5.5% and 10.7%. JCMC alone is already outperforming its breakeven budget through the third quarter with operating income of $2.6 million. Further improvement in JCMC's results are expected from the extension of Barnabas's rates to JCMC managed care contracts, consolidation of back office functions, supply chain savings, and elimination of overhead -- totaling $9.6 million in first year. Barnabas management is in the process of implementing 75 separate revenues enhancement and expense reduction initiatives and projects a 4% operating margin for JCMC for fiscal 2014 (covers seven months of JCMC operations from June 1 to Dec. 31, 2014).

The robust operating performance resulted in solid coverage of MADS in 2013 of 3.6x by EBITDA, in line with Fitch's 'A' category median of 3.8x, and coverage of MADS was 5.3x through the 2014 interim period. MADS as percent of revenues has declined slightly to 2.9%, slightly better than the 3.1% 'A' median. However, the systems' debt to capitalization, while moderating, is still very high at 61.6%.

JCMC ACQUISITION

Fitch views the integration of JCMC into the system as presenting a challenge. The 239-bed hospital has a 20% market share of its primary service area, a challenging payor mix with over 60% Medicaid, high reliance on supplemental payments and a slim fund balance. Barnabas is a beneficiary of substantial supplemental payments; in 2013 New Jersey charity funding for Barnabas amounted to $98 million and JCMC alone received $58 million, more than 10% of its revenues. Charity and hospital support funding appears stable for the next state fiscal year, but given New Jersey's budget issues, the system is vulnerable to cuts in state support funding, as well as reimbursement reductions, which are even more critical for JCMC.

The reliance on the state charity funding may be reduced somewhat as a result of Medicaid expansion and a portion of the funding is being replaced with the federally funded Delivery System Reform Incentive Payment. However, given JCMC's small revenue base, relative to the overall system, identified expense savings and potential revenue enhancements from reducing outmigration to New York hospitals, Fitch views the negative impact on system profitability and debt profile as benign. JCMC has a facility newly constructed in 2004 and consequently relatively modest capital needs, estimated at between $20 - 40 million in the near term.

IMPROVING LIQUIDITY

The system's' unrestricted cash and investments have increased to $1.1 billion at Sept. 30, 2014 from $644 million four years ago, but liquidity metric still remain below the 'A' category medians. Liquidity relative to expenses was 159.5 days cash on hand (DCOH), cushion ratio 13.7x and cash equal 92.3% of debt, compared to Fitch's 'A' medians of 199.6 DCOH, 17x cushion ratio and 131% cash to debt, respectively. Liquidity build-up will continue to remain a key credit focus given the system's need to invest in programs and fund physician integration strategies in what is expected to be a tougher reimbursement environment. More cash-flow is now expected to be available now that the system completed its repayment of the $265 million DOJ penalty and no longer needs to make large contributions to the defined benefit pension plan.

Fitch views the past history of suppressed capital spending, which averaged 80% of depreciation, as a credit concern. The system's average age of plant is high at 18 years. However, now that the DOJ payments and the pension funding ended, more cash-flow can be directed to capital spending which is budgeted to equal approximately 130% of depreciation over the next two years. There are no immediate large capital needs, the only exception is the potential $170 million expansion at Saint Barnabas to convert a large portion of the Medical Center to all private rooms, add additional operating rooms, provide space for the expansion of the NICU and expand space for certain outpatient services. The current plan is to raise $100 of the project costs from philanthropy, of which half has already been raised, with the remainder either debt financed or generated from operating cash. Management has stated that if sufficient fundraising levels will not be achieved, the project could be downsized.

TRANSFORMATION OF KIMBALL MEDICAL CENTER: As planned, in order to stem the losses at Kimball Medical Center (Kimball) in Lakewood, management took the step in the spring of 2014 to reduce the inpatient bed capacity, at Kimball and merged Kimball with Monmouth Medical Center in Long Branch (Monmouth). Kimball will continue to operate an emergency department and 100 beds were redirected to sub-acute services. Management projects to realize approximately $10 million annually from the realignment of bed capacity.

DEBT PROFILE

The execution of the series 2011A, B and C bond financing produced a much more conservative debt structure, reducing exposure to bank renewal risk, eliminating failed auction rate bonds and reducing accretion from capital appreciation bonds. Variable rate debt will represent only roughly 13% of total debt post issuance and the system has no exposure to interest rate swaps. The two 2011 variable rate issues have letters of credit from JPMorgan with three year repayment terms which have been extended to November 2016. Concurrently with the series 2014A Barnabas is planning to restructure a 2013 Credit Agreement to increase the par amount to $80 million from the currently outstanding $53 million. The 2013 loan was used for partial funding of the Barnabas defined benefit pension liability; the plan was terminated effective Dec. 31, 2013 and is now fully funded. Approximately $27 million of the increased par will be used to fund up the pension liability of the JCMC defined benefit pension plan, which was frozen effective Dec. 31, 2011. The pro-forma MADS used in Fitch's calculation assumes the full impact of the increase in the pension loan.

DISCLOSURE

Barnabas Health covenants to disclose to bondholders on a quarterly basis.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 16, 2014);

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

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

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

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=913194

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Contacts

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

Contacts

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