Fitch Ratings has assigned a 'BBB+' rating to approximately $79,230,000
of Nassau County Local Economic Assistance and Financing Corporation
revenue bonds, series 2014 (Catholic Health Services of Long Island
Obligated Group Project) issued on behalf of Catholic Health Services of
Long Island (CHSLI).
In addition, Fitch affirms the following parity bonds issued on behalf
--$184,630,000 Suffolk County Economic Development Corporation (NY)
(Catholic Health Services of Long Island Obligated Group) revenue bonds,
--$60,500,000 Nassau County Local Economic Assistance and Financing
Corporation (NY) (Catholic Health Services of Long Island Obligated
Group) revenue bonds, series 2011;
--$35,200,000 New York State Dormitory Authority (NY) (Catholic Health
Services of Long Island Obligated Group) Mercy Medical Center revenue
bonds, series 1999B;
--$85,675,000 New York State Dormitory Authority (NY) (Catholic Health
Services of Long Island Obligated Group) St. Francis Hospital revenue
bonds, series 2004.
The Rating Outlook is revised to Stable from Negative.
The series 2014 bonds will be issued as tax exempt, fixed rate bonds and
are expected to be sold via negotiation the week of May 12, 2014.
Proceeds from the 2014 bonds will be used to refund the series 2004
bonds and pay for the cost of issuance. A debt service reserve will not
be required in connection with the series 2014 issuance. Maximum annual
debt service (MADS) will be $54.4 million and the refunding is expected
to generate approximately $5 million of present value savings.
The series 2014 bonds are secured by mortgages on CHSLI's obligated
group's hospital facilities and its gross revenues. The obligated group
includes five of the system's six hospitals (St. Joseph is not a member
of the obligated group) and accounted for 77% of the consolidated system
assets and 84% of consolidated revenues in fiscal 2013. Fitch's analysis
is based on the results of the consolidated system.
KEY RATING DRIVERS
OPERATING PERFORMANCE STABILIZING: The Outlook revision to Stable from
Negative reflects the improved financial performance of CHSLI in the
second half of 2013 and through the first quarter of 2014. First quarter
2014 results show CHSLI losing $4.8 million compared to a loss of $15.3
million in the first quarter of 2013. Furthermore, early 2014
utilization figures indicate that inpatient volumes maybe stabilizing
after a 7% decline in both 2012 and 2013.
LARGEST HOSPITALS IMPROVE: St. Francis Hospital and Good Samaritan
Hospital Medical Center (which together accounted for 56% of net patient
service revenue in 2013 generated $10.2 million in operating income in
the first quarter of 2014, compared to a $4.8 million operating loss in
the first quarter of 2013. CHSLI continues to have operating losses at
its other hospitals, but CHSLI management has developed an operating
improvement plan for each facility that Fitch believes should lead to
better profitability over the next two years.
SOLID LIQUIDITY: Despite a $22 million loss from operations in 2013,
CHSLI was able to grow its liquidity position, with unrestricted cash
and investments increasing 8.6% to $815.9 million at Dec. 31, 2013. All
of CHSLI's major liquidity ratios exceed Fitch's 'BBB' category medians.
MIXED DEBT BURDEN: The challenged operations have impacted debt
coverage, with pro forma MADS coverage by EBITDA at 2.5 times (x) in
fiscal 2013 which is below the 'BBB' category median of 3.1x. However,
CHSLI has a modest debt burden as measured by MADS as a% of revenue,
which at 2.6% is better than the 'BBB' median of 3.5%.
SCALED BACK CAPITAL PLAN: A key driver in the rating downgrade and
outlook revision to negative at Fitch's last rating action in July 2013
was a planned $250 million debt issuance that would have significantly
increased CHSLI's debt burden. CHSLI opted not to proceed with that
financing plan and has since significantly scaled back its capital
budget. The revised capital plan is much more modest with only a
potential $50-100 million to be issued over the next 12 to 18 months,
which Fitch believes CHSLI has the debt capacity for at the current
rating level, assuming operations continue to improve as projected.
COMPETITIVE MARKET: CHSLI held a 22.8% market share through Dec. 2013 in
the Nassau and Suffolk County service area (both rated 'A' by Fitch),
second only to a strong competitor, the North Shore Long Island Jewish
Health System (NSLIJHS rated 'A-', Positive Outlook by Fitch) with a
33.1% market share. The competitive environment places added pressure on
CHSLI to make strategic investments in order to maintain its market
CONTINUED OPERATIONAL IMPROVEMENTS: The positive operational improvement
at CHSLI's largest hospitals reflect, in part, the success of CHSLI's
strategy under its new CEO, including the addition of oncology services
at St. Francis Hospital (St. Francis) and open heart services at Good
Samaritan Hospital Medical Center (Good Sam). Fitch believes that
CHSLI's operational improvements will continue to trend in a positive
direction,and operating margins should become consistent with 'BBB'
category median over time as CHSLI further executes its strategy. CHSLI
is budgeting a 'breakeven' operating margin for 2014, which Fitch
believes is achievable.
CHSLI is an integrated healthcare system comprising six acute care
hospitals, three nursing homes, certified home health and long-term home
health care programs, a hospice service and a network of services for
the mentally and developmentally disabled, all based on Long Island. The
system has 1,928 licensed hospital beds and 790 licensed nursing home
beds, and reported revenues of $2.1 billion in fiscal 2013 (year end
OPERATING PERFORMANCE STABILIZES
The negative performance in 2013 was driven largely by lower
utilization, partially due to a slow approach to physician employment,
and expenses related to a system-wide EMR implementation. At the time of
Fitch's last rating review, CHSLI's had an operating loss of $18 million
(a negative 2.1% operating margin) through the five months ended May 31,
2013 with a full year loss projected at $33 million (a negative 1.6%
operating margin). Operating performance improved materially in the
second half of the year which translated into a full year loss of $22.9
million (a negative 1.1% operation margin).
The narrowing of the projected losses was due to a significant fourth
quarter improvement at CHSLI's two largest hospitals - St. Francis
Hospital and Good Samaritan, which historically have been key margin
contributors. Through the first three quarters of 2013, the two
hospitals generated loss from operations of $4.2 million on a combined
basis. However, in the fourth quarter the two hospitals posted income
from operations of $21.1 million on a combined basis which has been
sustained through the first quarter of 2014.
The improved year end performance reflected a combination of the
positive impact of growth initiatives coupled with solid expense
management. At St. Francis, inpatient admissions rose by 4.8% in 2013,
and most of St. Francis' key cardiology service lines (open heart,
cardiac catheterizations, and angioplasty) also showed volume growth.
The completion of emergency room renovations and outpatient expansion
strategies at St. Francis, especially around oncology, further
contributed to the volume growth and the strong year end performance.
Good Samaritan, on the other hand, experienced a 14% drop in inpatient
volumes in 2013, but was able to manage expenses, carrying out an FTE
reduction, as well as implementing a documentation initiative that
helped raise its Medicare CMI by 11%. In the fourth quarter, CHSLI
management also replaced the leadership of its emergency room (ER) to
reduce inpatient leakage out of the ER. In January 2014, CHSLI added
open heart surgery to the Good Samaritan campus operated under the
auspices of St. Francis, which has a national reputation in cardiology,
and 49 open heart procedures were performed in the first quarter of
2014. All of these initiatives contributed to a very strong first
quarter at Good Samaritan as Good Samaritan posted a 4.6% operating
margin ($6.7 million in operating income) and had an 8.9% increase in
Challenges remain at CHSLI's other four hospitals (Mercy Medical Center,
St. Charles Hospital, St. Catherine of Siena Medical Center and St.
Joseph Hospital), which had a combined fourth quarter 2013 loss of $4
million and continued to post operating losses through the first quarter
of 2014. However, Fitch views the turnaround at CHSLI's two main
hospitals as a critical step forward stabilizing CHSLI's overall
financial profile and believes that CHSLI's strategy for the other four
hospitals, which includes cost reductions, redesign of services, and
physician recruitment, should improve their performance over the next
STREAMLINED GOVERNANCE STRUCTURE
Further supporting the Outlook change to Stable is the effectiveness of
CHSLI's management team, led by Dr. Guerci. Dr. Guerci was appointed
President and CEO effective July 1, 2013, after a period of management
turmoil which included the replacement of the prior CEO after eight
months on the job. Dr. Guerci has implemented a higher level of
integration among the system's hospitals and has streamlined system
governance and consolidated certain shared service functions. Effective
April 1, 2014, the system is governed under a single system Board of
Directors, with the individual hospital Boards made up of the same
individuals as the system Board. Fitch believes the new governance
structure allows for much more effective budgeting, planning and
allocation of system resources.
REVISION OF CAPITAL PLAN
Management has reduced its original capital plan including canceling the
construction of a new patient tower at Good Samaritan Hospital. Instead,
the system in 2013 carried out renovations and refurbished operating
rooms for the new open heart program and plans to use portion of $21
million of recently approved FEMA sponsored Hazard Mitigation Grant
Program monies to address needed infrastructure issues at the site.
The bulk of the system planned maximum $50-100 million debt issuance
over the next year and a half will be focused on strategic investment in
programs, physician alignment and ambulatory expansion. The capital plan
for the current fiscal year is approximately $150 million, with $40
million targeted at ambulatory expansion. CHSLI is commencing a $30
million fundraising program to support expansion of the St. Francis
SOLID LIQUIDITY AND MIXED DEBT BURDEN
At March 31, 2014 the system reported $802 million of unrestricted cash
and investments, equating to 147.4 days cash on hand (DCOH), cushion
ratio of 14.8x and cash equal to 156.9% of debt, all better than the
'BBB' medians of 138.5 days, 10.2x and 91.7% respectively.
The system's coverage of pro forma MADS by EBITDA of 2.5x in 2013 and
2.0x, through the first quarter of 2014 is weak relative to the 'BBB'
category median of 3.1x. However, pro forma MADS equates to 2.6% of 2013
revenues, which is light relative to the 'BBB' category median of 3.5%.
CHSLI has $23 million drawn on a $30 million line of credit, which
expires in July 2014. If not extended, the system has the option to
convert the balance into a three year term loan. Post issuance of the
series 2014 bonds, the system will have 82% of its debt in fixed rate
mode and it does not have any swaps.
CHSLI covenants to provide annual and quarterly disclosure of the
obligated group's financial information on EMMA. Disclosure includes an
income statement, balance sheet, and utilization statistics.
Fitch has also withdrawn the 'BBB+' rating on CHSLI's taxable bonds
series 2013 as the bond was not sold.
Additional information is available at 'www.fitchratings.com'.
This action was informed by information identified in Fitch's
Revenue-Supported Rating Criteria. In addition to the sources of
information identified in Fitch's Revenue Supported Rating Criteria,
this action was informed by information from Goldman Sachs & Co. and
Morgan Stanley & Co. Incorporated as underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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