Fitch Affirms Palisades Medical Center (NJ) Revs at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB' rating on the following revenue bonds issued by the New Jersey Health Care Facilities Financing Authority on behalf of the Palisades Medical Center Obligated Group (PMC):

--$46,265,000 series 2013 revenue and refunding bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross receipts pledge of the obligated group (OG), a first mortgage on both the medical center and the long term care facility and a debt service reserve fund. The OG consists of PMC, Palisades General Care, Inc. (PGC), which operates the Harborage, a skilled nursing facility, and Palisades Medical Associates.

KEY RATING DRIVERS

STABLE PROFITABILITY: PMC's operating margin (adjusted for one-time items) has averaged 1.3% over the past four years, and was equal to Fitch's 'BBB' median at 1.1% in 2014. Operating margin dropped slightly in the three-month interim period (ended March 31, 2015) to 0.7%, but was in line with 0.9% through last year's interim period. PMC's historically solid debt service coverage mitigates any concerns about its modest profitability.

SOLID VOLUMES: PMC has exhibited solid year-over-year volume growth in outpatient services, which is expected to be further bolstered with the opening of a new 60,000 square-feet medical office building (MOB) on its campus in March of 2015. While some inpatient volumes were flat to down in 2014, the rate of volume decline was below the statewide average. Furthermore, PMC's leading market share of over 30% continued to grow in 2014.

MANAGEABLE DEBT BURDEN: PMC's maximum annual debt service (MADS) equated to a light 2.4% of total 2014 revenues, comparing favorably to Fitch's 'BBB' category median of 3.6%. MADS coverage by EBITDA of 3.7x also compared well to Fitch's 2.6x median in the same year.

HACKENSACK AFFILIATION: PMC and Hackensack University Health Network (HUHN; rated 'A-', Outlook Stable by Fitch) have signed a definitive affiliation agreement under which PMC will become a full member of HUHN. Under the terms of the agreement, HUHN will replace Palisades Healthcare Systems, Inc. (PHS) as the sole corporate member of PMC, all other members of the OG, as well as certain non-OG subsidiaries. The transaction is expected to be finalized by early 2016 and is viewed favorably by Fitch.

RATING SENSITIVITIES

STABLE PERFORMANCE EXPECTED: Fitch expects Palisades Medical Center to continue producing stable operating results and robust debt service coverage going forward. Additionally, most of Palisades Medical Center's large capital projects are behind them, and Hackensack University Health Network's capital commitment should allow Palisades Medical Center to conserve its liquidity and grow its cash position over the medium term.

CREDIT PROFILE

PMC is a 202-bed acute care hospital located in North Bergen, NJ. PGC is a 249-bed skilled nursing and assisted living facility adjacent to the hospital. In 2014, PMC reported total operating revenues of $181.9 million.

HACKENSACK AFFILIATION

A collaborative partnership agreement, to improve services and quality of care, has been in place between PMC and HUHN since 2012. As of Sept. 10, 2014, both systems have signed a letter of intent to further their affiliation; to date, a definitive agreement has been signed, under which PMC will become a full member of HUHN. In replacing PHS as the sole corporate member, HUHN will have oversight of the composition of the PMC board of governors and executive team. The current executive team is expected to remain in place post-transaction.

PMC stands to benefit from the relationship with greater access to strategic and medical expertise, as well as an up to $50 million capital commitment from HUHN. HUHN is expected to provide $25 million for capital expenditures to PMC over the next five years, plus a guarantee of an additional $25 million for routine capital expenditures should PMC's cash flows be unable to cover them. The OG is expected to remain intact and will remain obligated on all outstanding debt. There is no commitment of a full asset merger at this time. Fitch would view the formal completion of the affiliation positively as it would enable PMC to further expand its clinical service lines, grow its market share and better position itself for any population health management initiatives in the future.

STABLE PROFITABILITY

PMC's operating and operating EBITDA margins of 1.1% and 6.5%, respectively, were in line with Fitch's 'BBB' medians of 1.1% and 7.9% in 2014. Profitability has historically been in line with Fitch's medians and Fitch views favorably the stable year over year operating results which have produced solid debt service coverage.

Profitability continues to be supported by solid volumes, strong outpatient growth and an increasing medical staff. PMC's active medical staff has grown from 359 physicians at 2012 year-end to 462 physicians through the first quarter of 2015. Management expects physician and outpatient growth to continue, fueled by the opening of a new MOB, as well as the benefits from the pending Hackensack affiliation.

MANAGEABLE DEBT BURDEN

PMC's debt burden remained manageable through the first quarter of 2015 with MADS as 2.3% of total annualized revenues. MADS coverage was slightly lower through the interim period at 2.8x, but was still above Fitch's median of 2.6x, and was equal to 2.8x through the same period in the prior year.

PMC's debt to capitalization ratio of 110.6% continues to lag materially behind Fitch's median of 44.9%. The outsized ratio is due to PMC's negative unrestricted net assets position, which results from a $53.3 million pension liability. PMC's defined benefit plan has been frozen to new members since 2006, and the large pension liability is the result of a lower actuarial discount rate and the implementation of new mortality tables in 2014.

MIXED LIQUIDITY

PMC's $53.9 million in unrestricted liquidity at Dec. 31, 2014 was solid relative to debt with 113.5% cash to debt and a 12.6x cushion ratio. Both metrics compared well to Fitch's 'BBB' category medians of 93.6% and 10.5x, respectively. However, days cash on hand (DCOH) of 114.1 was weaker than the 'BBB' category median of 145 days.

PMC's unrestricted cash and investments declined to $48.2 million at March 31, 2015, but still equated to a solid 103.2% cash to debt and an 11.3x cushion ratio, favorable to the 'BBB' medians. All of PMC's debt is fixed, which provides further stability to PMC's liquidity position.

DEBT PROFILE

The 2013 fixed-rate bonds are PMC's only outstanding bonds. PMC does not have any outstanding Swaps.

DISCLOSURE

Palisades covenants to provide to audited financial statements and quarterly disclosure consisting of a balance sheet, income statement, utilization statistics, and management discussion and analysis on EMMA.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

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

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 30 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985686

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-9186
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-9186
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com