|[December 04, 2013]
Fitch Affirms Deborah Heart & Lung Center's (NJ) Revs at 'B'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the 'B' rating on the outstanding $17.6
million in series 1993 revenue bonds for the New Jersey Health Care
Facilities Financing Authority's. The bonds are issued on behalf of the
Deborah Heart and Lung Center (DHLC).
The Rating Outlook is Stable.
The bonds are secured by a revenue pledge and a mortgage on DHLC's
facility and additionally benefit from a Subsidy Agreement with the
Deborah Hospital Foundation (the Foundation), which is obligated to fund
DHLC's cash flow requirements, including operating costs, capital needs
and debt service payments.
KEY RATING DRIVERS
IRS PROPOSED ADVERSE DETERMINATION REGARDING SERIES 1993 BONDS: The IRS
has notified DHLC of a proposed determination that the series 1993 bonds
may be subject to taxability due to issues related to DHLC's 2004 total
return swap. DHLC made an offer to settle on terms that would not
materially impact DHLC's liquidity, but the ultimate outcome of this
issue cannot be determined at the present.
FOUNDATION KEY CREDIT STRENGTH: The Foundation exists for the support of
DHLC. As such, the rating incorporates the Foundation's commitment to
meet DHLC's obligations. The Foundation contributed a total of $4.5
million to DHLC in the 2012 fiscal year.
STRONG YEAR TO DATE RESULTS AN EXCEPTION: Following a typical operating
loss of $2.4 million in fiscal 2012, offset by the Foundation
contribution, DHLC recorded operating income of $4.3 million for the
nine months period ended Sept. 30, 2013 (the interim period), aided by a
number of non-recurring items.
WEAK LIQUIDITY: DHLC's liquidity at $7.8 million continues to be a
credit concern. However, on a combined basis with the Foundation
unrestricted cash and investments were $26.8 million at Sept. 30, 2013,
equal to 68.2 days cash on hand (DCOH), 6.6x cushion ratio and 130% cash
FINAL IRS DETERMINATION: A final adverse determination regarding the
taxability of the series 1993 bonds, or a settlement which would
materially diminish liquidity, could pressure the rating.
Deborah Heart and Lung Center is an 89-bed tertiary care cardiac,
pulmonary and vascular care facility located in Browns Mills, NJ
(approximately 20 miles from Trenton). DHLC had total revenues of
approximately $145 million in fiscal 2012. The rating affirmation and
Stable Outlook reflect the continued support of the Foundation and the
benefit of the Lourdes Medical Center satellite emergency department
(SED) located on DHLC's campus.
IRS PROPOSED ADVERSE DETERMINATION REGARDING SERIES 1993 BONDS:
DHLC has received a Notice of Proposed Adverse Determination from the
Department of the Treasury regarding the eligibility for tax-exemption
for the series 1993 bonds. This action relates to a total return swap
entered into by DHLC in 2004, relating to the series 1993 bonds issue.
The swap is no longer extant.
DHLC is not in agreement with certain findings made by the Department of
the Treasury regarding the swap. DHLC had received a legal opinion from
a nationally recognized law firm prior its execution and is in the
process of negotiating a potential settlement. No determination as to
the final outcome can be made at this time. Fitch will continue to
monitor the situation and take rating action as necessary.
FOUNDATION KEY CREDIT STRENGTH:
The Foundation raised $4.7 million in fiscal 2012 and $3.4 million
through Sept. 30, 2013. The interim period included $2.6 million of
proceeds from a New Jersey Stabilizaton Grant program (which is being
terminated) as well as $375,000 from the Robin Hood Foundation and a
portion of a large estate, resulting in the interim period fundraising
Because of accounting regulations, some of the amounts being reported as
other operating revenue for DHLC are funds that were raised and
recognized as revenue by the Foundation and transferred to DHLC as donor
restricted contributions. It is expected that the Foundation will
transfer $4.7 million to DHLC by year end 2013, as planned, despite
DHLC's strong operating results to date.
The Foundation has redirected its focus towards more structured
development efforts, including corporate giving, direct mail and estates
and planned giving, intended to replace what had traditionally been its
grassroots fundraising effort relying on a large number of small
Combined DHLC and Foundation unrestricted cash through the end of the
third quarter was reported at $26.8 million, equating to 68.2 DCOH,
cushion ratio of 6.6x and cash equal to 130% of debt (DHLC alone had
cash and investments of only $7.8 million). This figure is not adjusted
for a $1 million draw on a line of credit which is secured by a DHLC
certificate of deposit and has perpetually remained drawn at $1 million.
STRONG YEAR TO DATE RESULTS AN EXCEPTION
DHLC's patient revenues increased by 3.4% in fiscal 2012, which ended
with a $2.4 million operating loss (negative 1.7% operating margin). As
is typical, the Foundation contribution of $4.5 million partially offset
the operating loss, resulting in excess income of $2.4 million. For
fiscal 2012, DHLC reported maximum annual debt service (MADS) coverage
by EBITDA of 2.0x. Net patient revenues through the interim period
remained level with the prior year, but because of significantly higher
other operating revenues, total revenues increased by 6.6%, resulting in
operating income of $4.3 million (3.7% operating margin). This is
atypical for DHLC, which usually incurs an operating loss as it accepts
all patients, regardless of insurance status.
Additional revenue pressure in the coming year and beyond comes from
high exposure to Medicare, which represents over 50% of gross revenues.
The interim gain was the result of several one-time items, as described
above, and DHLC is likely to budget an operating loss for the next
fiscal year. Coverage of (MADS) was a stronger 3.0x though the interim
period, even before the Foundation transfer expected by year end.
After strong volume growth reported last year, for the interim period
DHLC's utilization is showing some weakening. DHLC continues to benefit
from the Lourdes Medical Center satellite emergency department (SED)
located on its campus, which is owned and operated by Our Lady of
Lourdes Health System (Lourdes), part of CHE Trinity Inc. (Fitch rated
'AA/F1+'), following the May 2013 Catholic Health East and Trinity
Health merger. The SED generates between 25-30% of DHLC inpatient
Year to date admissions decreased by 13% and cardiac catheterizations
were 2.9% lower compared to the prior year period, responsible for the
flat year to date patient revenues. However, open heart procedures
remained level with 204 open heart procedures performed through the
third quarter. DHLC's plans for boosting revenues include a potential
second site for the Joslin Diabetes Clinic, a wound center, launching a
bariatric surgery program and equipping a hybrid operating room, which
would allow performing complex cardiology procedures.
DHLC covenants to disclose only annual audited financial information
(within 120 days) to the Municipal Securities Rulemaking Board's EMMA
system, which Fitch views negatively. However, Fitch does note that
DHLC's bond covenants date back to documents produced in 1993 when the
expectations for disclosure were not as thorough. Currently, DHLC does
provide unaudited interim quarterly and annual audited information to
the trustee and the New Jersey Health Care Facilities Authority as well
as to bondholders upon request.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 20,
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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