NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB+' rating to the $145 million series 2011A revenues bonds to be issued by the Dormitory Authority of the State of New York on behalf of NYU Hospitals Center (NYUHC), and upgrades to 'BBB+' from 'BBB' its rating on the following series of bonds:
-- $46.8 million Dormitory Authority of the State of New York revenue bonds series 2000D,
-- $94.6 million Dormitory Authority of the State of New York revenue bonds series 2006A;
-- $247.2 million Dormitory Authority of the State of New York revenue bonds series 2007A and 2007B.
The Rating Outlook remains Positive.
The series 2011 bonds are expected to be issued as fixed-rate bonds and sell the week of Jan. 3, 2011. Bond proceeds will be used to provide funds for a portion of the first phase of the campus transformation project, including the Musculoskeletal Institute, renovations to the emergency department, and other routine infrastructure projects, as well as capitalized interest, a debt service reserve fund and costs of issuance. The bonds will have a 2040 final maturity.
RATING RATIONALE
--The upgrade is supported by the continued strength of NYUHC's notable operational improvement, which has led to a tenfold increase in operating income from fiscal 2008 to fiscal 2010. While this operating performance and commensurate growth in liquidity have produced certain metrics that exceed those for this rating level, the uncertainty regarding the magnitude, timing and debt structure of the organization's very large capital plan precludes a higher rating at this time. Nevertheless, the Positive Outlook indicates Fitch's expectation of a continuation of the recent performance improvement.
--The operating improvements have been led by a focused and committed senior leadership team that has successfully integrated the New York University Hospitals Center (NYUHC) and the closely affiliated New York University School of Medicine (SoM), resulting in increased efficiency of care delivery, stronger clinical operations, gains in physician recruitment, and a more unified philanthropic effort.
--NYUHC's liquidity continues to grow with unrestricted cash and investments equal to $361.2 million at 2010 fiscal year end, translating to 98.7 days cash on hand (DCOH), 6.8 times (x) cushion ratio and 81.7% cash to debt, but the balance sheet needs to show further improvement in order to support the sizeable capital plan.
--By focusing on delivery of higher acuity care, as reflected in the 1.93 case mix index, and increasing its ambulatory network, NYUHC was able to increase revenues by 14.2% in fiscal 2010 based on robust inpatient and outpatient volumes.
--The organization has a very successful record of fundraising, which is conducted in conjunction with the SoM, as demonstrated by the more than $800 million raised since 2008.
WHAT COULD TRIGGER AN UPGRADE
--Sustaining the strong earnings at levels demonstrated over the last two fiscal years, coupled with a strengthening of the balance sheet, and supported by programmatic and clinical growth, including the recruitment and retainment of an excellent physician cadre.
--The ability of NYUHC to improve its financial profile to a level that will enable it to finance its capital plan, estimated to be approximately $1.5 billion in addition to the current issuance, needed to address an aging facility which will need to be supported by significant fundraising, operating cash-flow, and debt issuance, the most significant of which is an estimated $600 million bond issue planned for a new inpatient pavilion in 2013 or 2014.
SECURITY
Bond payments are secured by a mortgage and gross revenue pledge of NYU Hospitals Center, which is the sole member of the Obligated Group. The Fitch report financial ratios are based on the combined financial performance of NYU Hospitals Center and the CCC550 Insurance, Inc., referred to as NYUHC.
CREDIT SUMMARY
The upgrade to 'BBB' is supported by the continued improvements in NYUHC's operating profitability, increased liquidity and solid revenue growth. The strong operating results are attributed to the successful integration of the New York University Hospitals Center (NYUHC) and the closely affiliated New York University School of Medicine (SoM). The two organizations greatly benefit from a strong, common leadership and the high degree of integration which facilitates decision-making, physician recruitment, managed care contracting, fundraising and coordination of capital planning.
NYUHC's profitability continued to improve in fiscal 2010 with operating income of $166.8 million, equal to a very robust operating margin of 10.6% and operating EBITDA margin of 15.8%, exceeding the 'BBB' medians and comparing favorably to the Fitch 'A' category medians of 3% and 10%, respectively. Preliminary results for the first quarter of fiscal 2011 ended Nov. 30 are consistent with fiscal 2010 operating performance. The strong operating performance over the last two years is the result of a strategy which includes aggressive physician recruitment, focus on higher-margin inpatient services, such as cardiology and cardiac and vascular surgery, neurology and oncology and high-end pediatric services and expanding the ambulatory network. This strategy, combined with improvements in productivity, revenue cycle and expenses management, aided by management's use of highly sophisticated information management tools, has resulted in net patient revenue growth which averaged 15.8% over the last two years and resulted in excellent operating results. Made possible by the strong operating performance, NYUHC made a $50 million transfer to the SoM in fiscal 2010 in support of the SoM's efforts to recruit physicians and fund programs in various specialties, and plans to make a $45 million contribution to the SOM in fiscal 2011. NYUHC is also investing in an expanded ambulatory network in the outer boroughs, Westchester and Long Island in order to bolster referral activity.
The programmatic and ambulatory investments are paying off with strong volumes. Discharges increased by 1.5%, and outpatient utilization, in particular, was very strong. Outpatient surgery increased by 7.4%, emergency department visits by 6.4% and cancer visits to the Cancer Center were up by 12.2%. The Cancer Center is now operating seven days per week and an expansion is planned using available space nearby. Management reports that the purchase of the Cabrini facility located close to NYUHC by Memorial Sloan Kettering is not a concern given the robust and growing volumes of its Cancer Center visits and the increasing demand for oncology services.
The strong earnings have resulted in an improved balance sheet position with unrestricted cash and investments increasing to $361.2 million (98.7 DCOH) at 2010 fiscal year end from $194.5 million (63.5 DCOH) in fiscal 2008. NYUHC's debt load is also within the rating category with 4.3x pro forma maximum annual debt service (MADS) coverage of the series 2011 debt by EBITDA, and MADS equal to 3.4% of revenues, which compare well to the 'BBB' category medians of 2.5x and 3.5%, respectively. The organization does have large capital plans, most significant of which is the new inpatient pavilion with a currently estimated project cost of $1.35 billion. As currently conceived, the project would require an estimated $600 million of debt issuance, planned for 2013 or 2014, depending on the level of philanthropy for the project, with the remaining sources of funds a combination of fundraising and internally generated cash flow. Mitigating Fitch's concern with the size of this borrowing, as well as smaller projects which may require some level of borrowing over the next couple of years, is the organization's successful track record of raising significant funds through philanthropy. Fundraising, which is conducted in concert with the SOM, has raised $822 in the last three years. To date, already $300 million has been raised for the new pavilion and the organization is setting aside $10 million per month as a reserve for the project, which is made possible by the strong cash flow; fiscal 2010 cash flow was $238 million.
NYUHC is an academic medical teaching hospital in New York with two main campuses. NYUHC had 37,408 discharges and total revenues of approximately $1.6 billion in fiscal 2010. As part of the realignment with the SOM (not part of the obligated group), effective 2008 NYUHC changed their fiscal year to Aug. 31 to coincide with the SOM academic year. NYUHC covenants to disclose annual and quarterly information to the MSRB's EMMA system.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Aug. 16, 2010;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
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KEYWORDS: United States North America New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance
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