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Fitch Affirms Winthrop-University Hospital, NY Revs at 'BBB+'; Outlook Revised to NegativeNEW 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 and Financing Corporation revenue bonds (Winthrop-University Hospital Association Project), series 2012. The Rating Outlook is revised to Negative from Stable. 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 WEAKER OPERATING PERFORMANCE: The Negative Outlook reflects a weaker operating performance over the last 18 months, coupled with $60 million in additional debt since Fitch's last rating action. Since year-end 2012, when Winthrop University Hospital (WUH) had a 1.2% operating margin and a 5.3% operating EBITDA margin, WUH's operating margin has fallen below 1% and its operating EBITDA below 5%. INPATIENT VOLUME DROP: Pressuring operations have been a drop in inpatient volume and an increase in observation stays. The drop in inpatient volume is consistent with the drop in inpatient volume across the service area, and WUH has not lost market share. However, operating income has been impacted, especially by the increased observation stays. ADDITIONAL DEBT: WUH issued an additional $60 million in debt to fund the build out of the research center, an information technology upgrade, and to supplant equity WUH had planned to contribute to the research center before operations weakened. Maximum annual debt service (MADS) increases to $23.1 million from $20.4 million, but its front loaded as MADS is in 2015 and then drops to back to $20.1 million. MANAGEABLE DEBT BURDEN: A key credit strength at the current rating level is WUH's manageable debt burden. In spite of the weaker performance, pro forma MADS coverage was at 2.5 times (x) at June 30, 2014, relative to Fitch's 'BBB' median of 2.6x. Pro forma MADS as a percent of revenue was 2%, comfortably below the median of 3.6%. LIQUIDITY A CREDIT CONCERN: After steadily growing its liquidity over the last three audited years, unrestricted cash and investments fell by 6% from December 2013 to June 30, 2014. The flattening of cash growth coupled with the new debt has weakened WUH's balance sheet, with days cash on hand, the cushion ratio, and cash to debt, all trailing the 'BBB' category medians. Any further deterioration in WUH's balance sheet would likely result in a downgrade. ADDITIONAL CREDIT STRENGTHS: Fitch views WUH's leading inpatient market share, 16% in Nassau County, NY, its level of tertiary services (its Medicare CMI is at 1.9), and its participation in LIHN, a network of 10 Long Island hospitals that share data on quality and cost, negotiate payor contracts as a single entity, all provide WUH with qualitative strengths that offset concerns about the near term pressure on operations. RATING SENSITIVITIES IMPROVED PERFORMANCE: A further deterioration in operating performance or liquidity would lead to a downgrade. Separately, Fitch expects WUH performance to strengthen closer to historical levels over the next three years, as revenue producing initiatives come on line, including a new Cyberknife location in Manhattan. However, the heavy capital spend and training costs related to the IT upgrade could pressure operation in the next two years. Failure to improve operations back to historical levels over the medium term could lead to downward rating pressure. CREDIT PROFILE WUH is a 591-licensed bed tertiary medical center located in Mineola, NY. Total operating revenue in 2013 was $1.1 billion. Weaker Financial Performance After finishing 2012 with a 1.2% operating margin and a 5.3% operating EBITDA, WUH's operating performance has softened with WUH finishing 2013 with a 0.7% operating margin and a 4.4% operating EBTIDA margin. Six month 2014 results show a 0.9% operating margin and a 4.9% operating EBTIDA margin. The weaker performance has been largely driven by lower inpatient volumes due in part to the transition of short stay patients to an outpatient setting. Overall, WUH's market share has remained stable and WUH's drop in inpatient volume through the six month interim period is in line with the overall contraction of inpatient admissions across Nassau County. Fitch does not expect the operating margin to weaken further which would likely lead to a downgrade. Over the next two to three years, Fitch expects WUH's operating performance to remain stable and to begin to strengthen as WUH works through a number of capital projects, including a large IT upgrade and the finishing and opening of its new research building. After steadily growing its liquidity, capital spending and weaker cash flow flattened cash growth. At June 30, 2014, WUH had 58.6 days cash on hand, a pro forma cushion ratio of 7.7x, and pro forma cash to debt of 69.1%, all materially weaker than their respective 'BBB' medians, but in line with historical levels. Additional Debt Fitch views negatively WUH's issuance of additional debt. The need for debt is driven by WUH's scaled back equity contribution to the research center due to the impact on cash flow and liquidity of Medicare RAC audits and the 'two midnight' rule, as well as to help smooth the timing of philanthropy, with approximately $20 million of pledged funds expected to come in over the next five years. The borrowed funds will also be used to cover the costs of a major upgrade of WUH's IT systems. WUH is borrowing $60 million via a private placement and a bank loan, both with T.D. Bank. The bank loan is for $20.2 million, has a 10-year term, a 20-year amortization, and an interest rate 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%. While the additional debt is a concern and increases WUH's leverage in the near term, MADS of $23.1 million occurs in 2015 and then drops to $20.1 million in 2016. Six month interim figures show MADS coverage at 2.5x, which compares well to the 'BBB' category median. Good Market Position WUH's market share has also been stable over the past several years, in spite of operating in competitive service areas. Its role as an academic health center and its geographic position in a densely populated area just across the Queens border in Nassau County (GO bonds rated 'A' with a Negative Outlook) position WUH favorably. Nevertheless, Nassau County is a competitive service area with two formidable systems: Catholic Health Services of Long Island (revenue bonds rated 'BBB+', Stable Outlook by Fitch), which is a LIHN member, and North Shore Long Island Jewish Health System (revenue bonds rated 'A', Stable Outlook, by Fitch). Both systems have various hospitals located throughout the service area. Disclosure WUH discloses annual and quarterly financial information on EMMA. 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 http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=879854 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 (News - Alert) 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. |
