Fitch Affirms Yale New Haven Health (CT) Revs at 'AA-'; Outlook Stable
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues of the Yale New Haven Health System (YNHHS) obligated group.
KEY RATING DRIVERS
RENOWNED FOR CLINICAL REPUTATION: YNHHS's reputation and brand recognition for excellent tertiary and quaternary care and state of the art clinical research are primary credit strengths, supported by the relationship with the Yale University School of Medicine (YUSM), for which it serves as the primary teaching facility. Its flagship Yale New Haven Hospital is one of the largest hospitals in the U.S. and ranks highly in several specialties.
STRONG HISTORICAL OPERATING RESULTS: The system has been producing solid profitability, with operating income averaging approximately \\$150 million annually over the last four years, most recently \\$159.7 million in the fiscal year ended Sept. 30, 2015, equal to operating and operating EBITDA margins of 4.4% and 10.3%, respectively, consistent with the category medians.
LOW DEBT BURDEN: YNHHS's maximum annual debt service (MADS) of \\$62 million represented a very low 1.7% of total revenues in fiscal 2015 and compared favorably against Fitch's 'AA' category median of 2.4%. The organization's relatively low debt burden and good profitability metrics produced solid MADS coverage by EBITDA of 6.0x in fiscal 2015.
SIZEABLE CAPITAL SPENDING: YNHHS intends to spend approximately \\$1.5 billion on capital over the next five years, with approximately \\$400 million from debt, to fund various projects, half of which will be directed to strategic growth. While the system's debt burden is manageable at the current rating level, Fitch would expect revenue growth to be commensurate with any additional borrowings and leverage for metrics not to significantly deteriorate.
ADEQUATE LIQUIDITY METRICS: At Dec. 31, 2015 (three-months unaudited), YNHHS had approximately \\$1.73 billion in unrestricted cash and investments, which translated into 186.2 days cash on hand (DCOH) and cash and unrestricted investments equal to 165% of debt, all slightly lighter than Fitch's 'AA' medians, but adequate for the rating level, particularly in light of the very modest debt burden.
REDUCED PROFITABILITY EXPECTED: Connecticut's budget woes are impacting the state's providers as result of the increases in the hospital provider taxes, freeze on supplemental funding and lower Medicaid reimbursement. The aggregate negative impact on Yale New Haven Health System is estimated to compress the operating margin, which is conservatively budgeted at a slim 1.9% for fiscal 2016. Coverage of MADS even with the projected lower operating margin would still be adequate at well over 4x in the current fiscal year.
Credit Profile & Organizational Structure
Yale New Haven Health System is a fully integrated regional healthcare delivery system headquartered in New Haven, consisting of several operating entities and affiliates. The system's primary components include Yale-New Haven Hospital (1,541 beds), Bridgeport Hospital (383 beds), Greenwich Hospital (206 beds) and a 120-bed skilled nursing facility and Northeast Medical Group, a 553 member physician foundation.
The Obligated Group includes all entities except for Greenwich Hospital, which is rated 'AA-' by Fitch. In fiscal 2015 (year-end Sept. 30), the consolidated YNHHS system had approximately \\$3.49 billion in total revenue. The OG represented 87% of consolidated system assets and 75% of system revenues in fiscal 2015. Fitch's analysis is based on the results of the consolidated system.
The system is conducting a national search to replace its long term CFO, with a final decision expected in late April. The system's Senior Executive VP for Finance and Corporate Services, who has 14 year tenure with YNHHS, is serving as the interim CFO.
Solid Historical Financial Profile
The system's historical financial profile is characterized by good liquidity growth, consistently solid operations, and a low debt burden, which helped support strong debt service coverage. At Dec. 31, 2015, YNHHS had \\$1.73 billion in unrestricted cash and investments, a 55% increase in absolute terms from 2012, equal to 186.2 DCOH, 27.8 cushion ratio and 165.2% cash to debt, compared to Fitch's medians of 178.1 days, 27x and 201.7%. YNHHS earned \\$170.1 million in operating income in fiscal 2014 and \\$159.7 million in 2015. Fiscal 2015 operating margin and operating EBITDA margins at 4.4% and 10.3% were only slightly lower than the 'AA' rating category medians of 4.9% and 11.5%. The combination of solid profitability and low debt burden produced strong MADS coverage of 6x in 2015, better than the 'AA' medians and MADS as a percent of revenue is very modest at 1.7%.
The pressures from the higher state hospital provider tax, in combination with decreasing Medicaid payments and the freezing of the state supplemental payments is resulting in compression of the operating profitability. The system budget for 2016 operating income is \\$69 million, a 1.9% operating margin, but management reports that year to date operating performance through Feb. 20, 2016 is ahead of budget. However, even based on the lower projected profitability, the system would cover MADS by a still adequate 4.6x.
System Strategic Initiatives
In July 2015, YNHHS signed an affiliation agreement with Lawrence and Memorial Hospital (Lawrence; rated 'A', Stable Outlook, Aug. 14, 2014). Lawrence had been seeking a partner and part of the affiliation agreement was YNHHS's commitment for a \\$300 million capital investment (to be funded from Lawrence's current operating cash-flow projections and synergies and efficiencies from the affiliation). The relationship was intended to facilitate further clinical cooperation and to produce synergies and efficiencies for the two organizations. At this time, the affiliation is on hold as the governor imposed a moratorium on Certificates of Need for transactions on this scale. The moratorium is expected to run through Jan. 15, 2017. As part of a strategic plan, Yale New Haven Hospital leased a floor from Milford Hospital in September 2015 to relocate its 24-bed inpatient short term rehabilitation and wellness center to the space. The system is also growing its primary care network and expanding ambulatory sites. NEMG, the system's physician foundation with over 500 professionals in 120 practices throughout the region, was expanded in 2015 by acquiring PriMed, a 120 physician multispecialty group in with 31 locations primarily in Fairfield County.
Long-Term Capital Spending Plan
Over the next five years, YNHHS intends to spend approximately \\$1.5 billion on various capital projects throughout the system, with half focused on strategic investments. Approximately \\$400 million will come from additional debt planned to be issued in tranches between 2017-2020, with the remainder being funded primarily from operating cash flow, with a small portion from philanthropy. Fitch views the healthy capital spend and increased incremental borrowing as manageable at the current rating level, but would expect commensurate revenue growth to offset any significant increase to the organization's relatively low debt burden.
YNHHS's debt structure is approximately 55% traditional fixed rate and 45% variable rate. The system has six swaps with four different counterparties for a total notional par of \\$338.4 million. The mark-to-market valuation was negative \\$63.9 million as of Sept. 30, 2015 and no collateral is being posted.
YNHHS covenants to disclose annual audits within 150 days of fiscal year end and unaudited quarterly information within 60 days of quarter end (first three quarters) to the MSRB's EMMA system.
Fitch affirms the following debt at 'AA-':
--\\$44,815,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds, Series N;
--\\$50,000,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds, Series O;
--\\$132,000,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds (Taxable), series 2013;
--\\$29,780,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds, Series D (Bridgeport Hospital);
--\\$102,300,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds (Yale New Haven Health Issue) Series A;
--\\$168,275,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds (Yale New Haven Health Issue), Series B;
--\\$77,235,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds (Yale New Haven Health Issue), Series C;
--\\$108,275,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds (Yale New Haven Health Issue), Series D;
--\\$78,710,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds (Yale New Haven Health Issue), Series E;
--\\$50,725,000 State of Connecticut Health and Educational Facilities Authority Revenue Bonds (Taxable), Series 2014.