RATING ACTION IMPACTS $127 MILLION OF DEBT
Dormitory Authority of the State of New York
NEW YORK, Sep 13, 2010 -- Moody's Investors Service has upgraded the rating assigned to Lenox
Hill Hospital's (LHH) Series 2001 bonds to Baa3 from Ba1. The rating has been
removed from watchlist, and the outlook is positive at the higher rating level.
The rating action impacts $127 million of Series 2001 bonds and reflects LHH
becoming a member of North Shore-Long Island Jewish Health System (rated Baa1)
effective May 19, 2010 and our expectations for ongoing operational
improvement at LHH.
LEGAL SECURITY: Gross revenue pledge of Lenox Hill Hospital. 1.25 rolling
twelve-month debt service covenant test and 50 day cash on hand requirement. Our
analysis has historically incorporated the consolidated financial performance of
Lenox Hill Hospital (LHH) and Manhattan Eye Ear and Throat Hospital (MEETH) who
is not obligated on the debt but merged with LHH in 2007.
DEBT-RELATED INTEREST RATE DERIVATIVES: none
*Recent merger with North Shore-Long Island Jewish Health System (rated Baa1
with stable outlook) allows for many opportunities for operational improvement.
LHH has struggled as a standalone hospital in the competitive New York
landscape, unable to achieve certain economies of scale and to negotiate
competitive reimbursement rates and terms with private payers. We expect that
the new management team will focus on operational efficiencies and expense
containment, improved managed care contract rates and terms, and capturing of
market share, including Manhattan and parts of Queens, with a goal of
breakeven operations at LHH by FY 2012.
*Although the legal security and obligated group for the Series 2001 bonds has
not changed, the upgrade to Baa3 heavily incorporates an assumption that North
Shore will provide the necessary financial and managerial resources to improve
and grow LHH's clinical services, increase profitability, and make adequate
capital investments. We believe that this is a very strategic acquisition for
North Shore, and as such, expect a strong ongoing commitment from the North
Shore team to improve LHH's financial performance, expand clinical
activities, and maintain a strong reputation.
*Large tertiary care provider ($665 million of operating revenue and 28,344
inpatient admissions in FY 2009) located on the Upper East Side of Manhattan
with specialties including cardiac care, obstetrics, and orthopedics. LHH has a
high Medicare case mix index (1.8 in FY 2009) and a favorable payer mix
(47% commercial payers, 8% Medicaid, and 41% Medicare, as calculated from
discharges). LHH serves as a teaching affiliate of New York University Langone
*Management reports strong physician support for the merger, with expected
ongoing recruitment and expansion of medical staff.
*Diverse patient mix and geographical draw at LHH that complements North Shore's
patients' origins. LHH currently draws less than half of its patients from
Manhattan (44%), and draws patients from other New York boroughs and out of
state, including Queens and Brooklyn (each 15%). We believe that LHH's strong
market presence in the western region of Queens will nicely mesh with North
Shore's stronger presence in the eastern parts of Queens.
*Multi-year operating deficits and weak operating cash flow (2.6% operating
deficit and 4.1% cash flow margin in FY 2009). Debt service coverage has been
thin (1.7 times in FY 2009). Pressure on patient volumes and weak managed care
contracts have contributed to weak operating performance. In FY 2009, LHH
recorded 28,344 inpatient admissions, down from 31,494 in FY 2005. Based on
unaudited financial data for the first six months of FY 2010, we believe LHH's
operating performance has improved modestly including growth of inpatient
admissions volumes and outpatient surgeries year to date compared to the first
6 months of FY 2009. As described above, we expect that there is significant
room for operational improvement at LHH, with management targeting breakeven
operations within 2-3 years.
*Historically thin balance sheet liquidity and past significant exposure to
hedge funds and other alternative investments with more limited
liquidity, including within the pension plan. In FY 2009, LHH had $170.7 million
of unrestricted cash and investments (including $20 million drawn on a working
capital line of credit, which was has since been repaid), which provided 96 days
cash on hand and covered $185 million of debt 0.92 times. North Shore is in the
process of placing redemptions and liquidating a large proportion of
alternative investments, with an expected significant shift into fixed
income and equities which could be liquidated more quickly.
*LHH has a relatively large unfunded pension obligation ($131 million in FY
2009), although the Hospital froze the defined benefit plan in 2007 and
converted it to a defined contribution plan for all employees except nurses,
which should help limit future growth of the obligation.
*Need for continued capital investment at LHH. Capital spending has been low
(0.7 times in FY 2009) and age of plant has steadily grown over the past four
years (up to 14.2 years in FY 2009) indicating ongoing capital needs. Debt to
revenue remains moderate at 27.8% in FY 2009.
Effective May 19, 2010, LHH became a member of North Shore-Long Island Jewish
Health System. North Shore has become the sole corporate member of LHH. All LHH
board members are now part of the North Shore board, with an LHH executive
committee kept locally. The Chief Executive Officer, Chief Financial Officer,
and Chief Operating Officer of North Shore will now serve those roles for LHH.
The positive outlook reflects our expectations for sustained improvement in
LHH's operating performance and balance sheet liquidity.
What could change the rating--UP
Improved cash flow and debt service coverage coupled with growth of
unrestricted cash and investments and improved balance sheet liquidity
What could change the rating-DOWN
Inability to turn around operating performance; balance sheet
deterioration; significant increase in debt absent compensating growth of
unrestricted cash and investments and revenue to pay debt service
Assumptions & Adjustments:
-Based on financial statements for LHH and Subsidiaries
-First number reflects audit year ended December 31, 2008
-Second number reflects audit year ended December 31, 2009
-Investment returns smoothed at 6% unless otherwise noted
Admissions: 29,014 admissions; 28,344 admissions
Total operating revenue: $651.3 million; $665.2 million
Net revenue available for debt service: $62.0 million; $42.8 million
Total debt outstanding: $178.0 million; $184.96 million
Operating margin: (1.7%); (2.6%)
Operating cash flow margin: 5.5%; 4.1%
Cash-to-debt: 79.3%; 92.3%
Debt-to-cash flow: 3.38 times; 5.45 times
Days cash on hand: 82.5 days; 96.4 times
Series 2001: Baa3
Issuer: Mr. Robert Shapiro, Chief Financial Officer, 516 465-8162
LAST RATING ACTION:
The last rating action with respect to Lenox Hill Hospital was on June 10, 2010
when the Ba1 rating was placed on watchlist for upgrade.
The principal methodology used in rating Lenox Hill Hospital, NY was
Not-for-Profit Hospitals and Health Systems rating methodology published in
January 2008. Other methodologies and factors that may have been considered in
the process of rating this issuer can also be found on Moody's website.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, and public information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of maintaining a credit rating.
MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Kimberly S. Tuby
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
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MOODY'S UPGRADES LENOX HILL HOSPITAL'S RATING ON SERIES 2001 BONDS TO Baa3 FROM Ba1; RATING REMOVED FROM WATCHLIST AND OUTLOOK IS POSITIVE AT THE HIGHER RATING LEVEL
Moody's Investors Service
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