NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following series of bonds issued on behalf of the Catholic Health Services of Long Island Obligated Group (CHSLI).
--$91,389,000 series 2014B;
--$85,516,000 series 2014A;
--$254,198,000 series 2011;
--$33,600,000 series 1999B.
The Rating Outlook is Stable.
Pledge of gross revenues and mortgage on the CHSLI's obligated group's (OG) hospital facilities. The OG includes five of the system's six hospitals (St. Joseph is not a member of the OG) and accounted for 79% of the consolidated system assets and 85% of consolidated revenues in fiscal 2014. Fitch's analysis is based on the results of the consolidated system.
KEY RATING DRIVERS
IMPROVED OPERATING PERFORMANCE: CHSLI finished fiscal 2014 (year-end Dec. 31, draft audit) with operating income of $12.2 million, a 0.6% operating and 6% operating EBITDA margin, still somewhat lagging Fitch's 'BBB' medians, but vastly improved compared to the 2013 loss of $22.9 million. The turnaround was supported by solid volumes driven by investment in physician recruitment and retention and new programs. Both Good Samaritan Hospital (Good Samaritan) and St. Francis Hospital (St. Francis), which together historically account for over 50% of consolidated system revenues, recorded stronger operating results in fiscal 2014.
MODERATING DEBT BURDEN: Driven by return to positive operations in 2014, CHSLI's coverage of maximum annual debt service (MADS) improved to 3.2x from 2.5x in the prior year. CHSLI has a modest debt burden as measured by MADS as a percent of revenue, which at 2.5% is better than the 'BBB' median.
SOLID LIQUIDITY: Fitch views CHSLI's solid balance sheet metrics as major credit strength. Liquidity has been maintained with 160.8 days cash on hand (DCOH) at Feb, 28, 2015 and cash equals to 159 % of long term debt.
COMPETITIVE MARKET: CHSLI's market share has returned to the pre 2013 level of 23.5%, which is second to a strong competitor, North Shore Long Island Jewish Health System (NSLIJHS rated 'A', Stable Outlook). with a 32.4% market share. The competitive environment places added pressure on CHSLI to make strategic investments in order to maintain its market position.
MAINTAIN OPERATIONAL IMPROVEMENTS: Fitch expects CHSLI to maintain the improved operating performance, supported by investments in programs and physician recruitment, as well as recent strategic affiliations.
CHSLI is an integrated healthcare system comprising six acute care hospitals, three nursing homes, certified home health and long-term home health care programs, a hospice service and a network of services for the mentally and developmentally disabled, all based on Long Island. The system has 1,928 licensed acute care beds (1,725 operated) and 790 licensed nursing home beds, and reported revenues of $2.14 billion in fiscal 2014 (year-end Dec. 31).
STABILIZED OPERATING PERFORMANCE
The system operating performance improved materially in fiscal 2014, with operating income of $12.2 million (0.6% operating margin), reversing a sizeable 2013 loss of $22.9 million. The improved year-end performance reflected a combination of the positive impact of growth initiatives coupled with solid expense management. Revenues increased by 4.4%, driven by solid volumes, and management continued to closely manage expenses, which increased by a moderate 2.7%. The interim results for the two months ended Feb. 28, 2015 show CHSLI with an operating loss of $5.5 million, tracking budget, and compared to a loss of $10.2 million for the same period in the prior year.
The investment in physician recruitment and alignment and new programs is paying off in stronger volumes. Admissions increased by 1.3% in 2014 and the positive trend continued through the two-month interim period ended Feb. 20, 2015 with a further 3.8% increase. Major gains were recorded by Good Samaritan, which had a 13% increase in admissions. A new open heart program at the Good Samaritan campus launched in 2014, operated under the auspices of St. Francis, a nationally recognized institution for excellence in treating cardiac patients, performed 256 procedures in its first year. St. Francis, historically a major margin contributor which performs in excess of 1,100 open hearts annually, likewise had a strong year, particularly benefiting from a 13% increase in ambulatory surgery volume and a 7% increase in its ED visits.
While there remain challenges at a couple of the system hospitals, Fitch views the turnaround at CHSLI's two main hospitals as a critical step forward in stabilizing CHSLI's overall financial profile and believes that CHSLI's strategy for the other system hospitals, which includes cost reductions, redesign of services, and physician recruitment, should help reduce losses. Management has also undertaken a number of asset monetization efforts; a dialysis program was sold for $16 million last year and there is a pending sale of Sienna Village senior low-income apartments in Smithtown.
Management budgeted a slim 0.5% operating margin for fiscal 2015, consistent with the most recent fiscal year, which Fitch believes is achievable. The system recently entered into a partnership with Beacon Health Partners (Beacon), a 400-strong physician group with over 100 practices in Nassau, Suffolk and Queens Counties and has enrolled over 100 additional physicians into the Beacon ACO. Through the ACO and ACO-like contracts CHSLI and Beacon already manage 80,000 lives and the plan is to eventually manage in excess of 300,000 lives.
At Feb. 28, 2015, the system reported $918.3 million of unrestricted cash and investments, equating to 160.8 days cash on hand (DCOH), cushion ratio of 17.1x and cash equal to 159% of debt, all better than the 'BBB' medians of 145 days, 10.5x and 93.6%, respectively. The favorable cash-to-debt ratio was maintained as the system issued $82 million of new debt in Sept. 2014 for various corporate purposes, of which $74.4 million is still unspent and available towards 2015 projects and programs. The system has a capital budget of approximately $153 million for this year, equating to 150% of depreciation, with the bulk of the monies slated for Good Samaritan and St. Francis.
The system had 3.2x coverage by EBITDA of its $53.8 million MADS in 2014, an improvement over the 2.5x coverage in the prior year and better than Fitch's 'BBB' median of 2.6x. Operating EBITDA coverage of 2.4x was consistent with the 'BBB' median. The system has a conservative debt structure with 91% of its debt fixed rate. At 2014 year-end CHSLI had $23 million drawn on a line of credit, which expired in January 2015. The full amount was repaid on Jan. 28, 2015 and the line of credit was replaced with a fixed-rate 10-year term loan in the amount of $35 million with interest rate set at 2.45%.
CHSLI covenants to provide annual and quarterly disclosure of the obligated group's financial information on EMMA. Disclosure includes an income statement, balance sheet, and utilization statistics.
For more information, see Fitch's rating action commentary 'Fitch Rates Catholic Health Services of Long Island, NY's 2014 Revs 'BBB+'; Outlook to Stable' dated May 2, 2014' and 'Fitch Rates Catholic Health Services of Long Island, NY's 2014 Revs 'BBB+'; Stable Outlook' dated August 27, 2014,' both available at 'www.fitchratings.com.'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria,' May 30, 2014
--'Revenue-Supported Rating Criteria,' June 16, 2014
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria