Fitch Rates New York and Presbyterian Hospital 2016 Taxable Revs 'AA'; Affirms Outstanding

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the expected issuance of $850 million of The New York and Presbyterian Hospital (NYP) taxable bonds, series 2016). In addition, Fitch also affirms the 'AA' rating on $750 million of NYP series 2015.

The Rating Outlook is Stable.

The $850 million of taxable bonds will be issued as fixed-rate and be structured as a bullet maturity. The maturity terms are still to be determined. Proceeds from the bonds are for general corporate purposes, but NYP plans to use the proceeds to refund various series of debt, including debt of its regional hospitals, and may provide funding for New York Methodist's (NYM) outpatient capital project. Maximum annual debt service (MADS) of $199.5 million was provided by the underwriter and assumes full amortization of both the 2015 and 2016 taxable debt. Bonds are expected to sell via negotiation the week of June 20.

SECURITY: The series 2016 taxable bonds will be an unsecured obligation of NYP and will not be secured by a pledge of or lien on any revenue or property of the Obligated Group (OG), of which NYP is the only member.

KEY RATING DRIVERS

LARGE ACADEMIC MEDICAL CENTER: Fitch views NYP's sizable clinical footprint, strong reputation, and solid market position as key credit strengths that support a stable operating platform and help NYP compete in a very fragmented New York City health care market. NYP has two main tertiary campuses in Manhattan, two Ivy League academic affiliations, over 2,500 licensed inpatient beds across six NYP campuses, a large outpatient platform, and three regional hospitals managed under an active parent model.

BENEFITS FROM LARGER HEALTH SYSTEM: The 'AA' rating takes into account the benefits of the larger non-obligated NYP Health System (NYPHS), of which NYP is part of, as well as other supporting organizations, which add to NYP's clinical presence across the region and provide additional financial resources. These entities include three real estate companies, a network of approximately a dozen other affiliate, sponsored, or subsidiary hospitals and healthcare organizations, and the New York-Presbyterian Fund, Inc. (the Fund), which is a related organization that held approximately $512 million in unrestricted cash and investments and $1.2 billion in temporarily restricted funds as of March 31, 2016.

GOOD FINANCIAL PROFILE: NYP's sizable revenue base (approximately $6 billion in net patient service revenue in 2015) and financial profile are consistent with the rating category. Over the last four audited years, NYP has generated operating EBITDA margins of between 10.3% and 12.5%, which compare well to the 'AA' category median of 11.5%. Pro forma maximum annual debt service (MADS) was 3.4x in fiscal 2015 and 4.3x through the three-month interim period ended March 31, 2016, below the median of 5.7x.

FLEXIBLE CAPITAL POSITION: With this second taxable bond issuance, NYP is positioning itself to refund its Federal Housing Administration (FHA) debt as individual series become callable. As a result, pro forma MADS of $199.5 million is frontloaded and will steadily decline leveling off at $95.1 million in 2024. This coupled with NYP's ability to secure strong philanthropic support for large capital projects, including support from its board, should keep the need for debt manageable. NYP has raised $1.6 billion of a $2 billion capital campaign.

REGIONAL HOSPITAL STRATEGY: Since Fitch last rated NYP, Hudson Valley Hospital Center (HVHC) and New York Hospital Queens (Queens) have been consolidated into NYP (for financial reporting purposes), after Lawrence Hospital was added in July 2014. These hospitals are being managed under an active parent model and are not part of the OG. Fitch anticipates NYM joining the consolidated group by the end of the calendar year. NYP has been executing on a longer-term strategy focused on service lines, community physician alignment, quality and patient satisfaction, and capital needs at these regional hospitals.

RATING SENSITIVITIES

CONTINUED FINANCIAL STRENGTH: Fitch expects stable performance from New York and Presbyterian Hospital (NYP) as it continues to integrate the regional hospitals, with continued support from the New York-Presbyterian Fund and NYP's real estate entities.

CREDIT PROFILE

Created in January 1998 through the merger of New York Hospital and The Presbyterian Hospital, NYP is not-for-profit corporation that operates at six campuses: Weill Cornell, Milstein, Morgan Stanley Children's Hospital, Lower Manhattan, Westchester, and Allen Hospital, in Manhattan and Westchester County, New York. NYP is the primary clinical teaching facility for The Joan and Sanford I. Weill Medical College of Cornell University and the Columbia University College of Physicians & Surgeons.

NYP has three non-OG regional hospitals that are operated through an active parent model. NYP also has several non-obligated affiliated entities that include: New York-Presbyterian Fund, Inc. , whose main function is to provide philanthropic support to NYP and other healthcare-related charitable organizations; three real estate holding companies: Royal Charter Properties, Inc., Royal Charter Properties - East, Inc., and Royal Charter Properties - Westchester, Inc.; and NYPHS.

For purposes of its financial analysis, Fitch uses the audited results of NYP, which includes the regional hospitals. In 2015, NYP had total operating revenue of approximately $6 billion.

STABLE FINANCIAL PROFILE

Over the last four audited years, NYP's operating margin and operating EBITDA margins have remained fairly steady ranging between 3.8% and 4.9% and 10.3% and 12.5%, respectively, relative to Fitch 'AA' medians of 4.9% and 11.5%. Operational performance remained consistent through the first three months of 2016, with an operating margin of 5.7% and an operating EBITDA of 11.9%.

The stable operating performance has been supported by good revenue growth, helped in part by the addition of the regional hospitals and consistent support from NYP's affiliated entities. This financial support includes transfers from the real estate entities, which in 2015 and 2014 were approximately $46.5 million and $45 million, respectively, and were included in operating income. These transfers have been consistent, and the real estate entities may distribute excess revenue over expenses to NYP after funding their capital needs. NYP's operating income was stable year over year at $226.4 million in 2015 and $225.9 million in 2014.

NYP has had a strong start to 2016. The first-quarter (1Q) operating margin was 5.7% and most volume indicators showed growth, including inpatient admissions, which were up 4.1% at the NYP hospitals. As a result pro forma coverage was good at 4.3x.

In 2015, NYP received approximately $427 million (about 7% of operating revenue) in federal supplemental support from Medicare and Medicaid Disproportionate Share programs, the Upper Payment Limit program, and Medical Education funding programs, and expects approximately $433.6 million in 2016. Fitch views the support NYP receives from the larger NYPHS system as critical in offsetting concerns regarding the potential reduction in supplemental funding, while also helping to reduce the pressure on NYP's clinical operations in the very competitive New York City regional market.

Solid Liquidity

Liquidity remains good for the rating level. At March 31, 2016, NYP had $3.2 billion in unrestricted cash and investments, which equated to 193.7 days cash on hand and 159.1% cash to debt. Unrestricted liquidity includes proceeds from the $750 million taxable series 2015 bond issue, and NYP will initially add the $850 million series 2016 to the balance sheet as well, but the funds are expected to be spent over time.

An additional $1.7 billion of temporarily restricted and unrestricted cash and investments resides at the Fund, a portion of which sits on NYP's balance sheet. While the assets of the Fund are not specifically pledged to the debt or NYP, Fitch views the Fund's liquidity as a credit strength given the tight governance relationship between NYP and the Fund, with overlapping board members, and the Fund's historical support of NYP. In 2015, the Fund released approximately $105 million in assets for capital expenditures to NYP, separate from other funds it transferred to NYP.

REGIONAL HOSPITAL UPDATE

A key strategic focus for NYP has been the formal migrating of regional hospitals from affiliates to fully managed by NYP under an active parent model. Lawrence, HVH, and Queens are now under this model, and NYM is expected to reach this status by year's end. A governance structure is in place with boards at each of these hospitals remaining in place, but the NYP board through controlled subsidiaries has reserve powers.

In the near term, the hospitals will likely be slightly dilutive to NYP's performance as they are integrated into the larger system. NYP has key initiatives at these hospitals focused on quality and safety, physician alignment, and service lines.

In 2015, NYP opened a cath lab at Lawrence Hospital which has been very successful and plans an oncology expansion at Lawrence in 2016. However, in 2015, Lawrence had a negative 4% operating margin on $250 million of revenue, while Hudson Valley had a positive 5.4% operating margin on $174 million of revenue, and Queens had a breakeven margin on $733 million in revenue.

NYM will likely transition to the active parent model by year's end. NYP has had a long-term relationship with NYM. Fitch currently rates NYM 'A-'/Stable Outlook and NYM has historically had strong operating margins. NYP is considering using $315 million of the 2016 taxable bonds to help fund an outpatient building that will be constructed across from NYM's main inpatient building.

Overall, Fitch views the regional strategy as an important component of NYP's longer term financial health. It materially expands NYP's presence across New York City in the boroughs of Queens and Brooklyn, and the Northern service area of Westchester County and the lower Hudson Valley. It should help bring higher-end tertiary and quaternary referrals to NYP's academic medical centers, help keep more care in the local communities, and longer term it could serve as a solid base of patients as healthcare reform moves towards population health.

DEBT PROFILE

The 2016 taxable bonds will be an unsecured corporate obligation. NYP's current long-term debt totals $2.1 billion. After issuance, total debt will be approximately $2.7 billion as Fitch expects NYP to use a portion of the taxable proceeds to refund debt, specifically various series of the regional hospitals. The vast majority of NYP's debt is fixed.

Approximately $1.2 billion of the debt, including debt of the regional hospitals, is FHA insured fixed-rate debt. The FHA debt is secured by mortgages, and in the event of a default under the FHA mortgage agreements, the FHA mortgagees are entitled to exercise certain rights. At the direction of HUD, the FHA Insured Indebtedness could be accelerated and the lien of the mortgages could be foreclosed. The proceeds of any such foreclosure would be applied to the payment of the FHA Insured Indebtedness prior to the payment of other bonds. As part of the 2015 debt issuance, NYP covenanted not to issue additional FHA debt, with the exception of FHA refinancing debt.

Pro forma MADS of $199.5 million is conservative as it assumes amortization of the two taxable series, even though they are bullet maturities with interest-only payments. NYP's debt amortization is frontloaded and debt service drops to $189.7 million in 2019, $186 million in 2020, and steadily declines till leveling off at $95.1 million in 2024.

Coverage of pro forma MADS by EBITDA of 3.4x in 2015 was adequate for the rating level, compared to a median of 5.7x, and improved to 4.3x in 1Q16. NYP's debt burden was elevated as reflected in MADS as a percent of revenue of 3.4% relative to a median of 2.4%. Fitch expects this number to moderate quickly as debt service drops and NYP's revenues continue to grow.

CAPITAL PLANS

NYP's long-term capital plan which began in 2012 and extends through 2019 totals approximately $3.9 billion. The largest projects are a $1.1 billion ambulatory care center and a $300 million Women & Newborns Hospital that combined will be 750,000 square-feet and built at the Weill Cornell Campus. The projects are expected to be completed in mid-2018 and late 2020, respectively.

Other projects include a $90 million renovation of the Columbia campus emergency department, and major investments in information technology and infrastructure. NYP anticipates financing approximately $2.4 billion from operations (depreciation is currently about $255 million a year), approximately $975 million in philanthropy and the remainder from already issued debt, which Fitch views as reasonable.

DISCLOSURE

NYP covenants to disclose annual and quarterly information to the MSRB's EMMA system or through any other publicly accessible system.

Applicable Criteria

Not-for-Profit Hospitals Rating Criteria (pub. 04 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874120

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1006265

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006265

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1 212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
James LeBuhn
Senior Director
+1 312-368-2059
or
Committee Chairperson
Emily Wong
Senior Director
+1 415-732-5620
Additional information is available at www.fitchratings.com
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1 212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
James LeBuhn
Senior Director
+1 312-368-2059
or
Committee Chairperson
Emily Wong
Senior Director
+1 415-732-5620
Additional information is available at www.fitchratings.com
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com