|[February 19, 2013]
Fitch Downgrades National Jewish Health's (CO) Revs to 'BBB-'; Outlook to Negative
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has downgraded to 'BBB-' from 'BBB' the ratings on $38.5
million in outstanding Colorado Health Facilities Authority revenue
bonds issued on behalf of National Jewish Health (NJH). A full list of
outstanding bonds follows at the end of this release.
The Rating Outlook is revised to Negative from Stable.
Pledge of gross revenues excluding restricted charitable donations and
KEY RATING DRIVERS:
GROWING OPERATING LOSSES: The rating downgrade reflects the increased
operating loss in fiscal 2012 (year ending June 30) to negative $7.8
million (-4% operating margin) from a $3 million operating loss (-1.5%
operating margin) in FY 2011. Moreover, through the six months ended
Dec. 31, 2012 NJH lost $5 million from operations or a negative 5.5%
BALANCE SHEET EROSION: NJH's declining cash flow combined with
investments in expanding its clinical volumes and research has caused
unrestricted cash and investments to decline to $37.5 million at Dec.
31, 2012 from $42.3 million at FYE 2012 and $49.7 million at FYE 2011.
At Dec. 31, 2012 NJH's days cash on hand (75.2), cushion ratio (7.3x)
and cash to debt (65.1%) are all weaker than Fitch's 'BBB' category
HIGHLY SPECIALIZED SERVICES: NJH is a national leader in the treatment
of pulmonary disease with a focus on research and teaching. Over the
last four years, NJH has significantly expanded its clinical
capabilities to provide more comprehensive care to its patients with the
majority of its services provided in an outpatient setting.
IMPROVING FINANCIAL PERFORMANCE: In response to the weak financial
performance, management has identified various cost saving and
structural alignment measures, particularly in research operations that
are expected to stem NJH's negative trend and improve financial
performance going forward. The Outlook revision to Negative from Stable
reflects Fitch's concerns over NJH's ability to improve profitability
over the near term. Failure to generate improved operating performance
in FY 2013 relative to FY 2012 (with a trajectory to positive operating
margins beyond FY 2013) will likely result in a rating downgrade.
Growing Operating Losses
The rating downgrade reflects steadily increasing operating losses over
the last two fiscal years and through the six month interim period
(ended Dec. 31, 2012). During Fitch's last rating action, Fitch noted
that failure by NJH to shore up profitability and improve liquidity
would result in a rating downgrade. Fitch also expected that NJH's
strategic investments will have buttressed operations and proved to be
financially accretive. However, NJH posted a negative 4% operating
margin in fiscal 2012, following a negative 1.5% operating margin in
fiscal 2011. Through the interim period, the operating loss widened to a
negative 5.5% operating margin.
The FY 2012 operating loss is a result of unprofitable research
activities and lower-than-budgeted revenue for NJH's programmatic Health
Initiatives such as smoking cessation and obesity prevention. In
response, management is realigning its research activities with a goal
of minimizing the loss from its research activities and is also working
on reducing expenses and achieving $3.5 million in annualized savings
($1.75 million in fiscal 2013).
Historically, NJH's highly profitable clinical operations, along with
philanthropic contributions, have offset substantial operating losses
incurred by the organization's research activities. NJH's 10-year
strategic plan will, over time, seek to lower and cap financial support
to no more than $20 million annually; NJH has budgeted $23 million in
support dollars for FY 2013.
Philanthropy has been solid with charitable contributions of $21.1
million in fiscal 2012, $20.8 million in fiscal 2011, and $23 mllion in
fiscal 2010. Through the six months ended Dec. 31, 2012, NJH has raised
$8.4 million. NJH is about to embark on a large capital campaign, which
will fund NJH's future expansion plans.
Balance Sheet Erosion
As of Dec. 31, 2012, NJH had $37.5 million in unrestricted cash and
investments, down from $42.3 at June 30, 2012. The declining liquidity
reflects increased patient accounts receivable and capital spending. NJH
had 75.2 days cash on hand and 65.1% cash to debt, which compare
unfavorably to Fitch's respective 'BBB' category medians of 138.9 days
and 82.7% cash to debt.
Light Debt Service Coverage
Total outstanding debt as of Dec. 31, 2012 was $57.5 million ($38.5
million bonds, $4 million capital lease, $7.4 million note payable, and
$7.6 million draw on a line of credit). Fitch is treating the draw on
the line of credit as long term debt. The bonds are 70% fixed rate and
30% variable rate. The variable rate demand bonds have a letter of
credit from UMB Bank that renews automatically (current expiration date
is March 1, 2013). The note payable is non-recourse and has a bullet
maturity ($6 million) in 2017.
Coverage of maximum annual debt service (MADS) by EBITDA was low at 1.2x
for fiscal 2012 and 1.5x for the six months ended Dec. 31, 2012. Fitch
calculates MADS at $5.2 million, which occurs in fiscal 2013 and
excludes the bullet maturity. MADS comprised $2.9 million for bonded
debt, $1.6 million for two capital leases, $555,000 for the note
payable, and $129,000 in interest payments for the line of credit. MADS
drops to $4.6 million in fiscal 2014. Although the note payable is not
on parity with NJH's outstanding debt, it has been incorporated into
Fitch's analysis. Fitch notes that debt service coverage in 2012 as
calculated under the Master Trust Indenture was 3.1x.
Routine capital expenditures are approximately $3.5 million a year and
will be funded from operations as NJH has no future debt plans, aside
from capital leases already committed.
10-Year Strategic Plan
NJH is in the fifth year of its 10-year strategic plan, which is focused
on expanding its clinical and research capabilities. NJH has increased
the depth and breadth of services offered and its medical staff
continues to grow year over year. These strategic investments have led
to significant 8.8% and 12.9% year over year growth in clinical revenue
in fiscals 2012 and 2011, respectively. Further, NJH is contemplating
ways to expand its inpatient operations and capture revenue stream
related to inpatient referrals to local area providers.
Outlook to Negative
The Outlook revision to Negative from Stable reflects Fitch's concerns
over NJH's ability to improve profitability over the near term. While
management has identified $3.5 million of annual expense savings Fitch
expresses concern over NJH's ability to narrow the full year operating
loss in 2013 relative to prior results. Furthermore, Fitch believes a
creditable plan to achieve operating profitability over the next two to
three years is imperative to maintain the current rating. Failure to
generate improved operating performance in FY 2013 relative to FY 2012
or further erosion in liquidity metrics will likely result in a rating
About the Organization
NJH is a national referral medical institute engaged in patient care,
medical research and teaching, primarily in the areas of respiratory,
cardiac, allergic, and immunologic medicine. NJH only has 46 licensed
beds and the majority of its services are provided on an outpatient
basis. Its medical staff (all employed) provides inpatient care at
Denver area hospitals. Revenue generated by clinical and research
activities ($167 million) accounted for 85% of total operating revenue
for fiscal 2012. Total revenue for fiscal year ended June 30, 2012 was
NJH covenants to disclose audited financial statements within 120 days
of the end of the fiscal year. Quarterly unaudited financial information
is disclosed within 45 days of the close of the first three quarters of
the fiscal year and within 90 days of the close of the fourth quarter.
Financial statements are posted to the Municipal Securities Rulemaking
Board's EMMA system.
--$26,790,000 Colorado Health Facilities Authority refunding revenue
bonds (National Jewish Health Project) series 2012;
--$11,700,000 Colorado Health Facilities Authority (CO) (National Jewish
Medical & Research Center Project) adjustable-rate demand health care
facilities revenue bonds series 2005 (LOC: UMB Bank, National
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23,
--'Revenue-Supported Rating Criteria', June 12, 2012.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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