NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has assigned an 'A+' rating on the expected issuance of approximately $110 million of debt issued by the New York City Health and Hospitals Corporation (NYHHC). In addition, Fitch affirms the following parity debt issued by NYHHC at 'A+':
--$528.3 million series 2010A
--$188.0 million series 2008A
--$174.1 million series 2008B, C, D and E (variable)
--$132.3 million series 2003A
The Rating Outlook is Stable.
Proceeds from the 2013 series A bonds will be used to refund the series 2003A bonds and a portion of the series 2008A bonds and pay for the cost of issuance. Maximum annual debt service (MADS), which was provide by the underwriter, is expected to lower to $86 million from $93 million. The series 2013A bonds are expected to sell the week of March 18 via negotiation and will be issued as fixed-rate bonds.
The bonds are a general obligation of the NYHHC, which include all revenues derived from provision of patient care, but exclude premium revenue from MetroPlus (NYHHC's Medicaid managed care organization) and monies provided by the city for capital programs. Pledged funds flow through an exceptionally strong lockbox structure, with first dollars sequestered on a monthly basis for debt service needs before remaining funds go to NYHHC for operations. Bond documents and related statute require the maintenance of debt service reserve funds in the amount of MADS, and the city is required to replenish draws on such funds (subject to appropriation), in the event NYHHC is not able to restore the funds to required levels.
KEY RATING DRIVERS
LOCK BOX MAIN CREDIT STRENGTH: The first revenues received by NYHHC beginning on the fifteenth of each month are set aside by the bond trustee in a lockbox for debt service payments. Monthly revenues are not made available to NYHHC until the revenues received cover the debt service payment. In fiscal 2012, NYHHC had 64x patient service revenues to pro forma debt service. Fitch views this lockbox structure as a major credit strength.
CHALLENGING OPERATING ENVIRONMENT: As New York City's (NYC) safety net hospital system, with over 60% of gross revenues composed of Medicaid and approximately a third of its patients uninsured, NYHHC is reliant on a number of city, state, and federal revenue sources to offset the cost of care to these lower reimbursed and indigent patient populations. The legislative stress to cut spending to these funding programs and their vulnerability to other policy changes, especially as health care reform moves forward, are Fitch's main credit concerns.
ESSENTIALITY OF SERVICES: Fitch views as a credit strength the vital role that NYHHC plays in NYC's health care infrastructure, believing this essentiality helps NYHHC secure sufficient levels of funding from city, state, and federal sources. NYHHC not only serves the most medically and economically vulnerable populations both in an inpatient and outpatient setting (NYHHC recorded approximately five million outpatient visits in fiscal 2012), NYHHC operates six of NYC's 15 trauma centers, accounts for over one third of all NYC's inpatient psychiatric admissions, is the inpatient provider for the corrections system and provides the sexual assault response team for all NYC emergency rooms.
MANAGEMENT TEAM A STRENGTH: NYHHC has a seasoned management team in place that has produced stable financial performance, completed or is near completing major capital modernization projects at seven of 11 of its acute care hospitals, received federal approval as an accountable care organization, maintained productive relationships with key stakeholders, including NYC officials, and implemented an enterprise-wide process improvement tool that has led to enhanced quality and approximately $487 million in system wide savings.
LINKAGE TO NYC RATING: NYHHC's rating is closely linked to Fitch's 'AA' rating on NYC's general obligation bonds (see Fitch Rates New York City GO's 'AA '; Outlook Stable, Dec. 6, 2012) as NYC provides significant financial support to NYHHC, mostly through funds that NYC provides for matching federal supplemental funding programs. This support has ranged from $1.3 billion to $2 billion a year over the last four fiscal years and is expected to remain at approximately $1.7 billion annually through fiscal 2017. In addition, NYC has provided $2.1 billion in capital funds to NYHHC over the past 14 years. Further linking the ratings is NYC's obligation to replenish the bonds' debt service reserve fund, subject to appropriation, should NYHHC deplete it. To date, NYHHC has never had to tap its debt service reserve fund to make bond payments.
CONTINUED NEW YORK CITY SUPPORT: Changes to the levels of support that NYC provides to NYHHC would affect the rating.
SUPPLEMENTAL PAYMENT UNCERTAINTY: National health care reform and financial pressure on other funding programs will cause changes in NYHHC revenue sources over the next few years. The uncertainty surrounding these programs is a credit concern and a material drop or disruption in the revenue flow from these sources could lead to negative rating pressure. However, Fitch believes that NYHHC's essentiality, especially in providing health care to indigent and uninsured populations, positions it well to continue to access funds as the various supplemental programs are restructured.
The 'A+' rating reflects the strength of the lockbox structure, NYC's support of NYHHC, strong management team, and the essentiality of NYHHC's operations. Credit concerns include NYHHC's challenging operating environment and stress on revenues from changes expected in supplemental payments starting in 2014, uncertainty regarding the implementation of other parts of health care reform, and the ability of NYC to continue to provide support at historical levels. Mitigating some of the concern is the patient service lockbox revenue to annual debt service ratio which was 58x at June 30, 2012 (64x based on proforma MADS), as well as the city's debt service reserve replenishment obligation.
In spite of a challenging operating environment, NYHHC management has been focused on efficiency, savings, and growth through the use of an enterprise-wide process improvement tool. Approximately 90% of the system facilities are using the tool, with 1,197 rapid improvement events conducted, and 22% of staff engaged in the process tool. To date, NYHHC estimates that the process improvement has yielded $304.2 million in financial benefits, composed of a cost savings of $24.5 million and new revenue of $279.65 million. The cost containment initiatives have helped financial performance, which improved slightly over the last two fiscal years. Operating losses were reduced to $446.5 million in fiscal 2012 (negative operating margin of 5.8%) from $747.8 million in fiscal 2010 (negative operating margin of 10.8%).
Unrestricted cash and investments improved to $1.1 billion from fiscal 2010's $656 million, which equates to 55.1 days cash on hand (DCOH), up from fiscal 2010's 34.5 DCOH. NYHHC's performance relies heavily on supplemental Medicaid payments, as well as funding sources that result from close cooperation with, and facilitation by, the state and the city. For the most recent fiscal year, third party payments, which include Medicaid Upper Payment Limit (UPL) and Disproportionate Share Hospital (DSH) payments were slightly higher than in the prior year, offsetting a reduction in Medicaid fee for service payments. The combined UPL and DSH payments are expected to remain relatively level for the current fiscal year, but will decrease starting in 2014, resulting in growing revenue shortfalls. NYHHC is planning to partially offset these with the savings from the restructuring program, and projections show significantly diminishing, but still positive closing cash balance for the 2013 - 2016 projection period. Additionally, various alternative funding sources are being explored by NYHHC to replace the DSH funding.
NYHHC sustained material damage at two of its acute care hospitals, Bellevue and Coney Island, during Hurricane Sandy, and both hospitals were closed for a period of time. The hospitals have restored most services with Bellevue fully operational as of February 7 and Coney Island expected to return to full operations by early March. NYHHC estimated costs and damages of $973 million in total, with about 65% of that for permanent construction to mitigate future events. NYHHC has submitted and gotten approval for $137.5 million of FEMA claims related to emergency protective measures, and NYC has committed to advance $710 million of funding to meet NYHHC's cash flow needs for recovery and capital rebuilding. A larger request for funding is pending at FEMA and NYHHC is looking into other sources to help recover a portion of the lost revenue. While the disruption in service and building damage did affect NYHHC's utilization and performance through the first six months, Fitch is not concerned about any longer term impact on NYHHC's financial performance or credit rating given its importance to the city.
NYHHC's rating and Outlook are closely related to that of New York City. Fitch expects that the size of the system and its critical importance in providing services for the uninsured and indigent populations will continue to secure support to maintain sufficient pledged revenues flowing through the lockbox. In addition, the strength of the lockbox coverage provides a level of rating stability that would likely remain intact even when NYHHC experiences its expected reduction in supplemental payments.
Serving the five boroughs of New York City, HHC is the largest municipal hospital system in the country, and comprises 11 acute care teaching hospitals, four long-term care facilities, six diagnostic and treatment centers, more than 70 community health clinics, a large Medicaid managed care organization and a certified home health care agency. HHC had total revenues of approximately $7.1 billion in fiscal 2012. As per its continuing disclosure agreement, HHC agrees to provide annual audited and quarterly financial statements to the MSRB's EMMA system.
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:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012);
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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