NEW YORK--(BUSINESS WIRE)-- Fitch Ratings takes the following rating action on New York University Hospitals Center (NYUHC) as part of its continuous surveillance effort:
--$48.3 million Dormitory Authority of the State of New York revenue bonds series 2000D upgraded to 'BBB' from 'BBB-';
--$94.8 million Dormitory Authority of the State of New York revenue bonds series 2006A upgraded to 'BBB' from 'BBB-';
--$251.1 million Dormitory Authority of the State of New York revenue bonds series 2007A and 2007B upgraded to 'BBB' from 'BBB-'.
The Rating Outlook remains Positive
RATING RATIONALE
The upgrade is supported by NYUHC's continued positive trend in operations, with operating margin in fiscal 2009 of 8.5% and operating EBITDA margins of 13.2%, well above the 'BBB' rating category, which continued for the seven-month interim period ended March 31, 2010.
NYUHC liquidity continues to improve; its unrestricted cash and investments of $340.6 million at March 31, 2010 translate to 97.8 days cash on hand (DCOH), 7.6 times (x) cushion ratio and 74% cash to debt, as compared to the Fitch 'BBB' medians of 114 DCOH, 8.1x and 62.6%, respectively.
By focusing on delivery of higher acuity care, as reflected in the 1.9 case-mix index in fiscal 2009, and increasing its ambulatory network, NYUHC was able to increase revenues by 15.2% in fiscal 2009 despite a decrease in discharges of 3.5%. For the interim period ended March 31, 2010, discharges increased by 2.2%, and outpatient volumes are robust.
The strong operating results are attributed to the successful integration of NYUHC and the closely affiliated New York University School of Medicine (SoM) under a common leadership structure, which created a platform which minimized competition for scarce resources, increased efficiency of care delivery, streamlined physician recruitment efforts, and resulted in strengthening of clinical operations.
The organization has a very successful record of fundraising, which is conducted in conjunction with the SoM, as demonstrated by the $700 million raised since 2008 ($200 million in fiscal 2009).
Despite the improvement in the operating and liquidity metrics, a higher rating is precluded at this time pending greater clarity regarding the capital plans in the near term.
WHAT COULD TRIGGER AN UPGRADE
--Continued strong earnings at levels demonstrated over the last 18 months, 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 NYU to improve its financial profile to a level that will enable it to finance a large $1.4 billion capital plan needed to address an aging facility which will need to be supported by significant fundraising, operating cash-flow, and a planned $600 million debt issuance in late fiscal 2013.
Security
Bond payments are secured by a mortgage and gross revenue pledge of the Obligated Group.
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 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 decisionmaking, physician recruitment, managed care contracting, fundraising and coordination of capital planning.
NYUHC's profitability continued to improve in fiscal 2009 with operating income of $116.5 million, equal to an operating margin of 8.5% and operating EBITDA margin of 13.2%, exceeding the 'BBB' medians of 1.1% and 8.0%, respectively. Similar level of operating results was reported for the seven-month interim period with operating and operating EBITDA margins of 11.6% and 16.7%. While inpatient discharges decreased in fiscal 2009, net patient revenues grew by 15.5% stemming from increased ambulatory volumes and a focus on higher margin inpatient services, such as cardiology and cardiac and vascular surgery, neurology and oncology and high-end pediatric services. Made possible by the strong 2009 operating performance, NUYHC 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 these specialties to further grow these services. 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 volume growth reported for the seven-month interim period ended March 31, 2010: a 1.7% increase in discharges, 3.5% increase in ambulatory visits and 7% increase in the 34th Street Cancer Center visits. Management reports that the recent purchase of the Cabrini facility 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 from $194.5 million (63.5 DCOH) in fiscal 2008 to $340.6 million at March 31, 2010, equal to 97.8 DCOH and cash equal to 74% of debt. NYUHC's debt load is also within the rating category with 3.8x maximum annual debt service (MADS) coverage, and MADS equal to 3.2% of revenues, as compared to the 'BBB' medians of 2.5x and 3.5%, respectively. The organization does have large capital plans, most significant of which is the new inpatient pavilion. As currently conceived, the project would require $600 million of debt issuance, planned for not earlier than 2013. 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. To date, already $285 million has been raised for the new pavilion.
The Positive Outlook reflects Fitch's belief that the improved operating performance, made possible by the integration of NYUHC and the SoM and the focus on revenue generation, is sustainable. Further upward movement in the rating is precluded at this time as Fitch would like to see further improvement in balance sheet metrics and gain greater clarity on NYUHC's future capital plans and borrowing needs.
NYUHC is an academic medical teaching hospital in New York with two main campuses. NYUHC had 36,860 discharges and total revenues of approximately $1.4 billion in fiscal 2009. 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 available on Fitch's website at www.fitchratings.com include:
--'Nonprofit Hospitals and Health Systems Rating Criteria', Dec. 29, 2009;
--'Revenue-Supported Rating Criteria', Dec. 29, 2009;
Additional information is available at www.fitchratings.com.
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KEYWORDS: United States North America New York
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