NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued on behalf of Winthrop-University Hospital (WUH):
--$130,180,000 Nassau County Local Economic Assistance Corporation revenue bonds (Winthrop-University Hospital Association Project), series 2012.
The Rating Outlook is revised to Stable from Negative.
SECURITY
Debt payments are secured by a mortgage on the core acute care facilities and a pledge of gross receivables. There is no debt service reserve fund.
KEY RATING DRIVERS
IMPROVED PERFORMANCE: The revision of the Outlook to Stable reflects the recovery in WUH's operating performance, as WUH's operating margin increased to 2.1% in 2014 from a thin 0.7% in 2013. The improved performance reflects good expense management and growth in outpatient surgery. Results for the six-month interim period ended June 30, 2015 show stability in the year-over-year operating performance.
MANAGEABLE DEBT BURDEN: A key credit strength at the current rating level is WUH's manageable debt burden, with maximum annual debt service (MADS) as a percent of revenue a very modest 1.9% at June 30, 2015, relative to Fitch's 'BBB' category median of 3.6%. As a result, in spite of the relatively thin operating performance, MADS coverage has remained above the 'BBB' median of 2.5x for three out of the last four audited years, and was a solid 3.2x for the six-month interim period.
STEADY LIQUIDITY GROWTH: WUH has grown its unrestricted cash and investments by 63% since year-end 2011 to $191.6 million at June 30, 2015, from $117.4 million. While liquidity is still weak for the rating level, especially days cash on hand, which was at 59.5 days at June 30, 2015, Fitch notes the absolute growth in the unrestricted cash and investments as a credit positive.
GOOD MARKET POSITION: Factored into the rating is WUH's good market position with over 450 employed physicians, a leading 17% inpatient market share in a fragmented Nassau County (GOs rated 'A' by Fitch) market, high acuity as indicated by a 1.9 Medicare case mix, and a strong outpatient presence, including a new CyberKnife location in Manhattan.
RATING SENSITIVITIES
MAINTANENCE OF IMPROVED PERFORMANCE: Given Winthrop University Hospital's mixed financial profile at the current rating level, the improved operating performance must be maintained. A sustained fall-off in the operating performance or a material drop in liquidity could pressure the rating.
CREDIT PROFILE
WUH is a 591-licensed bed tertiary medical center located in Mineola, NY. Total operating revenue in 2014 was $1.2 billion.
Improved Financial Performance
Financial results improved in 2014 as a result of expense reduction through management of employee costs and performance improvements to WUH's malpractice self-insurance. The Negative Outlook reflected a weaker operating performance in 2013 as WUH posted a 0.7% operating margin and a thin 4.4% operating EBITDA margin. The weaker performance was driven in part by the shift in services to the outpatient setting, which is reimbursed at a lower rate.
In 2014, expense management helped blunt the financial impact of this continued shift. WUH did experience a 2.5% increase in outpatient surgery, helped by an ambulatory care center expansion and a new CyberKnife outpatient location. Overall, inpatient and short-stay admissions combined remained stable year over year.
As a result, WUH's operating margin improved to 2.1% and its operating EBITDA margin improved to 5.9%, relative to Fitch's 'BBB' category medians of 0.6% and 7.7%, respectively. Given WUH's light debt burden, MADS coverage was a solid 3.6x, above the 'BBB' category median of 2.7x. Fitch believes operational performance above a 1% operating margin and 5% operating EBITDA margin should be sufficient for WUH to produce above median-level coverage, which should help sustain the current rating.
Six-month interim results of a 0.5% operating margin and a 4.8% operating EBITDA margin are weaker than year-end performance, but are consistent with the year-over-year interim period. MADS coverage remained solid at 3.2x. In addition, volumes remained strong, with inpatient and short stays up a combined 2.5% and outpatient surgery volumes up a healthy 7.7%. Management reports good patient volumes through the summer and Fitch expects year-end financial metrics to be above the six-month interim figures.
Good Market Position
WUH's market share has increased incrementally over the last three years and was 17% in 2014, despite operating in a competitive service area. Fitch views WUH's position as an academic health center with a sizable employed physician base, and its geographic position in a densely populated area just across the Queens border in Nassau County favorably.
Debt Profile/Capital Spending
Fitch views WUH's debt structure as a credit positive, with the vast majority of WUH's long-term debt fixed rate. WUH has no swaps. In addition, MADS of $22.8 million is expected to decline to below $20 million over the next few years, and WUH is paying down approximately $10 million a year in principal.
In 2014, WUH borrowed $60 million via a private placement and a bank loan, both with T.D. Bank (rated 'AA-/F1+'; Stable Outlook). The bank loan is for $20.2 million, has a 10-year term, a 20-year amortization, and an interest rate of 4.30%. The private placement is for $39.8 million, has a 10-year term, a 22-year amortization, and interest rate of 2.99%. The 2014 debt is on parity with the WUH's other debt.
While the placements increased the risk in WUH's overall debt profile, with both debt issuances with same bank and with similar 10-year call dates, WUH was able to absorb the additional debt, and keep its debt burden manageable.
The need for the additional debt was a combination of WUH's board's decision to fully build out the research center (the original plan was to leave some shelled space), the undertaking of a major IT upgrade, and WUH's decision to scale back its equity contribution to the projects in order to preserve cash.
The research center opened in 2015 and is nearing full operations. WUH is moving forward on the IT upgrade, expecting to spend approximately $30 million on the project over 2015 and 2016, with a 'go live' date in the summer of 2016.
Disclosure
WUH discloses annual and quarterly financial information 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. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991142
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991142
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