TMCnet News
Fitch Affirms South Nassau Communities Hospital's (NY) Rating at 'A-'; Outlook NegativeFitch Ratings has affirmed the 'A-' rating on approximately $84.2 million of series 2012 bonds issued by the Nassau County Local Economic Assistance and Financing Corporation on behalf of South Nassau Communities Hospital (South Nassau). The Rating Outlook is revised to Negative from Stable. SECURITY The bonds are secured by a pledge of gross receivables of the obligated group, and a mortgage on the main hospital facility. South Nassau is the only member of the obligated group. KEY RATING DRIVERS MODERATE LEVERAGE METRICS: The rating affirmation is primarily supported by South Nassau's manageable debt burden. Maximum annual debt service (MADS) coverage was 5.4x in fiscal 2015 and 4.4x through the six months of fiscal 2016 ended June 30. MADS represents a low 1.5% of revenues for the six months of fiscal 2016. INCREASING CAPITAL EXPENDITURES: The revision of the Outlook to Negative from Stable reflects an increased capital and programmatic investment agenda that has diluted South Nassau's cash position. Some of the upcoming capital projects may be funded by a new financing in the second half of fiscal 2017, which, when combined with the lower cash position, result in a more constrained balance sheet position in the near future. DECLINING and LOW LIQUIDITY CUSHION: Unrestricted cash and investments have declined significantly since the prior rating review primarily due to weak cash flow generation and increased capital and strategic investments. Unrestricted cash balances fell to $134.3 million in fiscal 2015, equating to 110 days cash on hand (DCOH) from $158.7 million in fiscal 2014 (143.4 DCOH). Liquidity of 105.6 days cash as of June 30, 2016 is significantly below the 215.5-day median for the 'A' rating category. WEAKER BREAK-EVEN OPERATING RESULTS: Profitability has decreased in fiscal 2015 and year-to-date fiscal 2016, yielding break-even operations and low operating EBITDA margins of 6.5% and 6.9%, respectively. These results compare unfavorably to the 10.3% median for this rating category. Financial results have been compressed by high medical claims in South Nassau's self-insured program, a low flu season in 2016 and increased competition for orthopedic volume. FEMA FUNDING EXPECTED FOR STRATEGIC IMPROVEMENTS: South Nassau is expected to receive approximately $171 million in FEMA funding as a result of having acquired the assets of Long Beach Medical Center (LBMC), which closed after incurring significant damage from superstorm Sandy. South Nassau proposes to expand its ambulatory campus in Long Beach (approximately $40 million) and use the remaining funds (approximately $130 million) for major upgrades at its main Oceanside campus, which also serves the Long Beach and other communities in the south shore of Long Island. RATING SENSITIVITIES CONTINUED MARGIN COMPRESSION: South Nassau Communities Hospital's (South Nassau) profitability will need to improve in order to generate increased cash flow to cover the elevated level of strategic investments. The increased spending, without a commensurate growth in cash flow, may result in negative rating pressure. BALANCE SHEET METRICS: The 'A-' rating may also be pressured if liquidity decreases further from the current position and/or if South Nassau incurs a significant amount of debt to fund the expected capital projects. CREDIT PROFILE South Nassau Communities Hospital (SN) is a 435-bed (358 operated) acute care hospital (plus a 20-bed Transitional Care Unit), located in Oceanside, on the south shore of Long Island. Its service area includes Nassau County and parts of eastern Queens County. Total operating revenue in fiscal 2015 (Dec. 31 year end) was $472.8 million. STRATEGIC INITIATIVES South Nassau operates in a service area that is competitive and fragmented, with two dozen hospitals, many of which are owned by two larger competitors: Catholic Health Services of Long Island (CHS) (rated 'BBB+'/Stable Outlook) and Northwell Health (rated 'A'/Stable Outlook). To remain competitive in its service area and to prepare for changes in the healthcare industry, South Nassau has been increasingly investing in its physicians, Trauma II designation, residency programs, capital projects, and population health initiatives. Over the past couple of years, South Nassau opened a new Transitional Care Unit and renovated the Critical Care and Intensive Care Units at its Oceanside campus. It also began the first phase of a renovation and eventual expansion of its Emergency Department (ED), which operates at almost twice its capacity (over 60,000 visits per year). Aside from doubling the ED, future capital plans at Oceanside include adding and renovating the surgical suites and the addition of critical care beds. Some of these projects will be funded from operations as well as a possible debt financing in the second half of fiscal 2017, while another portion (approximately $130 million) of projects at Oceanside are expected to be funded from FEMA funds. FEMA funding would be provided to South Nassau under a permitted alternate use plan at Oceanside. South Nassau purchased LBMC's assets during a bankruptcy proceeding in 2014, making South Nassau the designated recipient of these funds. LBMC was not rebuilt as an inpatient hospital, but South Nassau opened a new freestanding ED at that location in 2015. The Long Beach community is served by South Nassau's Oceanside campus, and therefore South Nassau expects approval from FEMA for the alternate use of funds for regional services. If awarded, the FEMA grant would be approximately $171 million and it would fund 90% of the FEMA-related projects, which include the $130 million in capital updates at Oceanside and $40 million for a Long Beach medical pavilion that expands the ambulatory presence and offerings at the current ED site in Long Beach. South Nassau is required to fund the other 10% of the FEMA funded projects. The FEMA-funded projects will not commence unless South Nassau receives final approval from FEMA. In addition, South Nassau is projecting to spend approximately $90 million in other capital expenditures between 2016 and 2019. To that end, the hospital may consider a financing in the second half of 2017. The amount, or timing, is uncertain but it may be up to $60 million.
WEAKER OPERATING RESULTS The elevated capital and programmatic spending in 2015 and 2016 coincided with a period of compressed margins at South Nassau. Fiscal 2015 was affected by high medical expense claims in its employee self-insured program. The hospital incurred an additional cost of over $500,000 in 2016 to purchase stop-loss insurance, but the claim experience has not been as high in 2016. The hospital also increased its clinical staff in 2015 in response to a high flu season and increasing acuity at the hospital. However, the volume did not materialize as expected in 2016 and patient visits are below budget. South Nassau's profitability has also been affected by the increase in ambulatory competition from other hospital providers as well as private physician practices. Overall, South Nassau has incurred higher expenses related to physician recruitment and start-up costs, as growing the number of employed and aligned physicians is a key objective for management. The hospital has also formed an Independent Physician Association, New York Medical Partners (NYMP), to align its employed and voluntary staff. NYMP applied to Medicare to become an ACO in 2017. Given the competition and mature service area, Fitch expects that cash flow will continue to be tepid in the coming years, precluding any significant growth in liquidity, especially since cash flow is required to fund the elevated capital needs over the next three years. DISCLOSURE South Nassau covenants to provide annual audited financial statements 150 days after the fiscal year-end and quarterly unaudited financial statements 60 days after the quarter-end to EMMA. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Not-for-Profit Hospitals Rating Criteria (pub. 04 Dec 2015) https://www.fitchratings.com/site/re/874120 Revenue-Supported Rating Criteria (pub. 16 Jun 2014) https://www.fitchratings.com/site/re/750012 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012314 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012314 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEB SITE AT 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. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001. View source version on businesswire.com: http://www.businesswire.com/news/home/20160928006357/en/ |
