Fitch Rates Memorial Sloan Kettering Cancer Center Series 2015 Rev Bonds 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'AA' rating to the $550 million Memorial Sloan-Kettering Cancer Center (MSKCC) taxable bonds, series 2015. In addition, Fitch affirms the 'AA' rating on MSKCC's outstanding debt listed at the end of the press release.

The Rating Outlook is Stable.

The proceeds from the series 2015 taxable fixed-rate bonds will be used to fund a portion of MSKCC's capital plan. The bonds are expected to price the week of January 12.

SECURITY

The bonds are unsecured obligations. There are funding events that would trigger springing collateral including a gross revenue and mortgage pledge of certain entities.

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, which has been nearly met with 97.9% of the goal raised within 85% of the projected time as of Sept. 30, 2014.

SOLID BALANCE SHEET: Liquidity ratios compare favorably to Fitch's 'AA' category medians; however, unrestricted cash and investments are temporarily inflated by $800 million of taxable bond proceeds that are considered part of unrestricted cash and investments until the funds are spent on capital. Fitch's adjusted pro forma cash-to-debt metric is somewhat weaker than the 'AA' median; however, Fitch does not expect a further decline in balance sheet metrics.

MAJOR CAPITAL SPENDING: MSKCC has been executing a clinical growth strategy with a significant investment in additional outpatient capacity and regional sites with the largest investment in a 760,000 square foot (sf) ambulatory care facility on E. 74th St. to capture growing demand. The remaining spend on its major capital projects total $1.6 billion and most of the funding will be from debt already issued. No additional debt is expected and Fitch believes MSKCC's debt capacity is limited at the current rating level.

STRONG OPERATING CASH FLOW: MSKCC's operating performance remains strong due to a diversified revenue base with solid growth in patient revenue as well as research and royalty revenue. Given MSKCC's fundraising capabilities, the organization has a policy of supporting operations with a portion of investment income. Operating revenue includes contributions and investment returns allocated to operations. Operating cash flow has been robust and exceeds Fitch's 'AA' category medians.

RATING SENSITIVITIES

MAINTAINING BALANCE SHEET STRENGTH: Fitch expects that MSKCC will maintain balance sheet metrics in line with the 'AA' category medians as it completes its major capital projects. If there is a material weakening in liquidity metrics, downward rating pressure could occur.

CREDIT PROFILE

MSKCC is the oldest and largest independent academic medical center exclusively focused on cancer care, research, and education. MSKCC and Affiliated Corporations (consolidated entity) include the Cancer Center, Memorial Hospital for Cancer and Allied Diseases (473 operated beds), Sloan Kettering Institute for Cancer Research, SKI Realty, and MSK Insurance. Fitch's analysis is based on the consolidated entity. Total revenue in fiscal 2013 (Dec. 31 year end) was $3 billion.

PREEMINENT ORGANIZATION

The affirmation of the 'AA' rating reflects MSKCC's strong clinical reputation as a leading provider of cancer care services, excellent philanthropic support, and strong demand. The organization has higher five-year survival rates compared to other institutions and over 30% of patients are from outside New York State. Management is implementing a growth strategy to expand its capacity regionally as well as grow its reach nationally through affiliations with other healthcare providers and globally through the development of a cancer diagnostic and treatment tool. MSKCC has formed a cancer alliance and the first member to join is Hartford Healthcare and management expects the alliance to grow over the next few years.

MAJOR CAPITAL PROJECTS

MSKCC is in a period of heavy capital investment and recent projects that have been completed include a 100,000 sf ambulatory facility in Harrison, NY that opened in October 2014. The remaining spend on major capital projects include the 760,000 sf ambulatory care facility on E. 74th St ($1.038 billion - opening in 2019), an ambulatory surgery expansion on East 61st street ($96 million - opening in 2016), laboratory medicine building ($111 million - opening in 2016), two additional regional sites in Monmouth, NJ ($162 million - opening in 2016) and Nassau, NY (opening to be determined) and the expansion of other regional outpatient centers. This is the last bond issuance for the capital plan and bond proceeds available for capital totals $1.44 billion. The projects are generally on budget and any cost overruns or extended delays that would cause stress on the balance sheet could result in negative rating pressure.

SOLID BALANCE SHEET

Unrestricted cash and investments totaled $4.2 billion at Sept. 30, 2014 and have increased from $2.9 billion at Dec. 31, 2010. The growth has been driven by good investment returns, taxable bond proceeds ($800 million series 2011 and 2012) and continued philanthropic support. In addition, in 2013 MSKCC sold some property that generated approximately $240 million ($90 million of proceeds were designated as permanently restricted for an endowment for research). MSKCC had 554.9 days cash on hand and 204.5% cash-to-debt at Sept. 30, 2014 compared to the 'AA' category medians of 277.1 and 178.5%. A pro forma cash-to-debt metric incorporating the spend-down of the taxable bond proceeds on capital and the issuance of the series 2015 bonds (net of principal payments over the next five years during capital spending) is 143%. A further weakening from this level could result in downward rating pressure.

DEBT BURDEN

MSKCC's debt burden is high; 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. In addition, MSKCC's 10-year projection includes $476 million of principal repayment. Given the number of bullet maturities in MSKCC's debt profile, average annual debt service is approximately $187 million. Management expects to have an internal sinking fund for bullet maturities and does not expect to refinance these.

STRONG PROFITABILITY

Total operating revenue in 2013 of $3 billion was composed of $2.4 billion hospital care and medical practice revenue, $202 million of grants and contracts, $165 million of contributions allocated to operations, $151 million related to royalty income, $82 million of investment returns allocated to operations, and $57 million of other income. Operating cash flow has been very strong with operating EBITDA margins of 15.5% for the nine months ended Sept. 30, 2014, 14.8% in 2013, and 12.9% in 2012, compared to the 'AA' category median of 11%. Strong profitability has been mainly driven by strong growth in outpatient volume in addition to continued focus on costs.

DEBT PROFILE

Total debt outstanding after the series 2015 issuance is approximately $2.6 billion and is 100% fixed rate with no swaps. MSKCC has a $400 million bullet maturity in 2042, $400 million bullet maturity in 2052, and this financing is expected to have a $300 million bullet maturity in 2044 and $250 million bullet maturity in 2064. Fitch does not view these bullets as a concern given the strength of the balance sheet and management's plan to repay the debt.

DISCLOSURE

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.

Outstanding Debt:

--$400,000,000 Memorial Sloan-Kettering Cancer Center (NY) taxable bonds series 2012A

--$262,265,000 New York State Dormitory Authority (NY) (Memorial Sloan-Kettering Cancer Center) revenue bonds series 2012-1

--$89,525,000 New York State Dormitory Authority (NY) (Memorial Sloan-Kettering Cancer Center) revenue bonds series 2012

--$400,000,000 Memorial Sloan-Kettering Cancer Center (NY) taxable bonds series 2011A

--$414,970,000 New York State Dormitory Authority (NY) (Memorial Sloan-Kettering Cancer Center) revenue bonds series 2008A-1 andA-2

--$215,085,000 New York State Dormitory Authority (NY) (Memorial Sloan-Kettering Cancer Center) capital appreciation bonds series 2006-1 and 2006-2

--$141,400,000 New York State Dormitory Authority (NY) (Memorial Sloan-Kettering Cancer Center) revenue bonds series 1998 (insured: MBIA Insurance Corp.)

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

Applicable Criteria and Related Research:

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 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=943755

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Contacts

Fitch Ratings
Primary Analyst
Emily Wong
Senior Director
415 732 5620
or
Secondary Analyst
Stephen Friday
212 908 0384
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312 368 2059
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Emily Wong
Senior Director
415 732 5620
or
Secondary Analyst
Stephen Friday
212 908 0384
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312 368 2059
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com