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Rating Update:

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

13 Sep 2010

RATING ACTION IMPACTS $127 MILLION OF DEBT

Dormitory Authority of the State of New York
Health Care-Hospital
NY

Opinion

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

STRENGTHS

*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 Medical Center.

*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.

CHALLENGES

*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.

RECENT DEVELOPMENTS/RESULTS

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.

Outlook

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

KEY INDICATORS

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

RATED DEBT

Series 2001: Baa3

CONTACTS

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.

RATING METHODOLOGY:

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.

REGULATORY DISCLOSURES

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.

Analysts

Kimberly S. Tuby
Analyst
Public Finance Group
Moody's Investors Service

Daniel Steingart
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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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
No Related Data.
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