NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the issuance of up to $750 million of the New York and Presbyterian Hospital Taxable Bonds, series 2015 issued on behalf of the New York and Presbyterian Hospital (NYP).
The Rating Outlook is Stable.
NYP expects to issue $750 million of taxable fixed-rate bonds to be structured as a bullet maturity. The maturity term is still to be determined but is expected to be at a minimum 30 years. Proceeds from the bonds will be used for general corporate purposes. Maximum annual debt service (MADS) of $125 million was provided by the underwriter and assumes interest only on yearly debt payments. Bonds are expected to sell via negotiation the week of January 19.
SECURITY: The series 2015 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).
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 the 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 the six campuses, a medical staff of nearly 5,000 physicians, and a large outpatient physician base.
SOLID FINANCIAL PROFILE: NYP's sizable revenue base (approximately $4 billion in net patient service revenue in 2013) and strong financial profile is commensurate with many of Fitch's 'AA' category medians. Over the last four audited years, NYP has generated operating EBITDA margins of between 10.9% and 12.5%, which exceed the 'AA' category median. Strong profitability resulted in solid historical coverage of pro forma MADS of 4.2x in fiscal 2013 and 4.8x through the nine-month interim period ended Sept 30, 2014.
BENEFITS FROM LARGER HEALTH SYSTEM: The 'AA' rating also takes into account the benefits of NYP being part of the larger non-obligated NYP Health System (NYPHS) as well as supporting organizations, including the New York-Presbyterian Fund, Inc. (the Fund), which is a related foundation, three real estate companies, and a network of approximately a dozen other affiliate, sponsored, or subsidiary hospitals and healthcare organizations. Fitch believes these additional entities strengthen NYP's credit profile by deepening its clinical presence across the greater New York City region and providing additional financial resources. In 2013 the Fund received over $300 million in gifts and pledges, and at Dec. 31, 2013 held $$495 million in unrestricted cash and investments and an additional $1 billion in temporarily restricted funds.
TIGHTENING HOSPITAL RELATIONSHIPS: Over the next few years, NYP is planning to tighten its ties with certain hospital affiliates. One of the first of these is Hudson Valley Hospital Center (HVHC), which recently received regulatory approval and will be integrated into NYP in January 2015. HVHC will not part of the OG. Fitch is concerned about the potential dilutive effect of bringing additional hospitals into NYP and NYP's ability to maintain its highest quality and safety standards across a geographically broader base. However, NYP has longstanding relationships with some of these hospitals, which offsets some of these concerns.
CONTINUED FINANCIAL STRENGTH: The New York City health care market is extremely competitive and the continued industry trend of lower inpatient volumes has only intensified the competition. Although Fitch believes NYP and NYPHS are positioned well to handle this competitive stress, failure to sustain current levels of operational performance, liquidity, and capital spending could result in downward rating pressure.
Created in January 1998 through the merger of New York Hospital and The Presbyterian Hospital, NYP is a not-for-profit corporation that operates at six campuses - Weill Cornell; Milstein Columbia; Morgan Stanley Children's Hospital; Lower Manhattan; Westchester; and Allan Hospital - in Manhattan and Westchester County, NY. NYP has several non-obligated affiliated entities that include: the Fund, 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.; along with NYPHS. In addition, 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.
For purposes of its financial analysis, Fitch is using the audited results of NYP but also factors in the qualitative and strategic benefit of the larger NYPHS system when evaluating NYP's credit profile. In 2013, NYP had 112,220 discharges and total operating revenue of $4.3 billion.
STABLE FINANCIAL PROFILE
Over the last four audited years, NYP's operating margin and operating EBITDA margins have remained fairly steady ranging between 3.4% and 5% and 11% and 12.5% respectively, relative to Fitch 'AA' medians of 3.9% and 11%. Operational performance remained consistent through the nine-month 2014 interim period with an operating margin of 5.3% and an operating EBITDA of 12.1%.
The stable operating performance has been supported by good revenue growth (patient service revenue has grown 7.5% per year over the last four audited years) and consistent support from NYP's affiliated entities. This financial support includes transfers from the real estate entities. In 2013 and 2012, these transfers totaled approximately $58.5 million and $52.8 million, respectively, and were included in operating income. Total operating income was $202.1 million in 2013 and $193.4 million in 2012.
The strong support from affiliates, which accounts for approximately one quarter of NYP's operating income, helps reduce the pressure on NYP's clinical operations. However, NYP's thinner margins from its clinical operations is a credit concern for the rating level, especially given NYP's high level of federal supplemental support from Medicare and Medicaid Disproportionate Share programs, the Upper Payment Limit program, and Medical Education funding programs. Total supplemental funding from these various programs is expected to be approximately $350 million in 2014.
A key rating driver moving forward will be NYP's ability to grow its clinical revenue and maintain current levels of financial performance. Fitch notes positively NYP's high Medicare CMI of 2.0, its recruitment of specialty physicians, and favorable payor mix (approximately 53% of gross revenues come from commercial and managed care payors), all of which should have a positive impact on performance. However, the continued support of the affiliates will be necessary to maintain the rating, unless NYP's underlying financial operating performance improves.
Liquidity has shown solid growth through the historical period, increasing from $1.1 billion at year-end 2010 to $2.2 billion at the nine-month 2014 interim period. At Sept. 30, 2014, NYP had 200.1 days cash on hand, a 17x pro forma cushion ratio, and 194.1% cash-to-debt (not including the 2015 bonds). An additional $1.6 billion of temporarily restricted and unrestricted cash and investment resides at the Fund. 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 2013, the Fund released approximately $78 million in assets for capital expenditures to NYP, separate from other funds it transferred to NYP.
The 2015 taxable bonds will be an unsecured corporate obligation. NYP's current long-term debt totals $1.2 billion, with all but $94 million Federal Housing Administration (FHA) insured fixed-rate debt. The FHA debt is secured by a mortgage and a pledge of revenues. 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 the 2015 bonds. As part of the 2015 debt issuance, NYP will covenant not to issue additional FHA debt.
Pro forma MADS of $125 million assumes a $750 million bond issue and a bullet maturity with interest-only payments over the life of the bonds. NYP's debt is front-loaded, with NYP paying approximately $94 million in principal in 2014, $63 million in 2015, and approximately $45 million a year after that. NYP's debt service will halve in 2026. Coverage of pro forma MADS by EBITDA of 4.2x in 2013 was adequate for the rating level, compared to a median of 5.4x, and improved to 4.6x in the nine-month 2014 interim period. NYP's debt burden remains relatively manageable as reflected in MADS as a percent of revenue of 2.9% relative to a median of 2.6%.
SIZABLE CLINICAL FOOTPRINT
Fitch views NYP's large clinical footprint and solid reputation in the very competitive and fragmented New York City market as credit strengths. NYP maintains its clinical presence in the greater New York City region through its six campuses, large physician base, outpatient locations and academic affiliations. NYP maintains an excellent reputation in its service area and was the sixth-highest nationally rated hospital and the highest rated New York City Hospital in U.S. News and World Report's 2014-15 list of best hospitals.
In addition, NYP maintains a variety of relationships with a number of hospitals, which helps extend its clinical presence in service areas well beyond its six campuses. Approximately 50% of NYP's inpatient admissions in its primary service area come from outside Manhattan. At the core of these various hospital relationships are NYP's sponsor hospitals, which have a fairly close clinical relationship with NYP and include hospitals in Brooklyn, Queens, and Westchester. Fitch notes this established network of hospitals as a credit positive, believing it gives NYP a competitive edge relative to other New York City academic medical centers, many of which are just beginning to form such relationships, whether by affiliation or acquisition, in order to grow their clinic footprint.
NYP is moving forward to bring some of the sponsored hospitals into NYP, using what NYP calls an 'Active Parent Model.' These hospitals will be consolidated into NYP but not be a part of the OG. This will further tighten the relationship with these hospitals, enabling NYP to directly reach additional community physicians and a larger patient base. However, Fitch is concerned about the potential financial dilution of these hospitals on NYP's consolidated performance and of the larger NYPHS resources, as well as the ability of NYP to export its level of performance in terms of reputation, quality, and safety. Mitigating this concern is that NYP plans to consolidate these hospitals one at a time and has a fairly close clinical relationship with many of these facilities, with some using NYP's clinical protocols and already having a number of NYP physicians practicing at their hospitals.
NYPs long-term capital plan which began in 2012 and extends through 2019 totals approximately $3.4 billion. The largest project will be a 750,000 square foot, $1.1 billion ambulatory care center that will be built at the Weill Cornell Campus, is expected to be completed in early 2018. 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 $2.3 billion from operations (depreciation is currently about $255 million a year), approximately $575 million in philanthropy and the remainder from debt, including the 2015 taxable series, which Fitch views as reasonable.
NYP covenants to disclose annual and quarterly information to the MSRB's EMMA system or through any other publicly accessible system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria