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Rating Action:

Moody's affirms Aa3 on Memorial Sloan Kettering Cancer Center (NY); outlook negative

12 Dec 2022

New York, December 12, 2022 -- Moody's Investors Service has affirmed the Aa3 assigned to Memorial Sloan Kettering Cancer Center's (NY) outstanding bonds. The outlook remains negative. Memorial Sloan Kettering (MSKCC) has approximately $3.2 billion of debt outstanding.

RATINGS RATIONALE

The affirmation of MSKCC's Aa3 reflects its preeminent brand and exceptional reputation for high-end cancer care and research. This niche position supports MSKCC's ability to resume solid enterprise growth that will translate to recovery of revenue and cash flow to historic levels after a very weak fiscal 2022. Operating losses incurred in FY 2022 reflect volume dislocation to access points outside of NYC and industry headwinds including higher labor expenses and inflationary pressures. Despite strategies focused on growth in Manhattan over the last several years, and although consolidated system volumes are nearly at pre-pandemic levels, demand at MSKCC's Manhattan based inpatient facilities has lagged expectations, contributing to sizeable budget shortfalls. Maintenance of the rating is based on an expectation of improvement of cash flow generation coupled with some reduction in financial leverage, though Moody's anticipates that operating cash flow (OCF) margins and debt to cash flow will likely be unfavorable to historical levels through fiscal 2024. The Aa3 also expects MSKCC will maintain strong liquidity as it continues to fund capital projects amid a cycle of weakened cashflow. MSKCC will also continue to benefit from excellent fundraising capabilities, providing a solid resource for capital investment. In addition to operating pressures, offsetting considerations include MSKCC's high debt load from strategic capital investments, which emphasizes the need to rebuild cashflow.  

RATING OUTLOOK

The negative outlook reflects concerns that the time frame to build back clinical demand in Manhattan coupled with headwinds faced system-wide due to labor costs and inflationary pressures could challenge MSKCC's ability to meaningfully improve upon FY 2022 performance. The negative outlook expects no additional debt at this time. Though MSKCC's solid balance sheet provides flexibility in the short term to address the very weak cash flow, the balance sheet will be at risk if weakness persists for a protracted time period.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

-     Material and durable improvement in operating cash flow margins

-     Material decrease in financial leverage, particularly total debt to revenue and total debt to cash flow

-     Strengthening of cushion provided by cash and investments

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

-     Inability to demonstrate traction on margins according to plan

-     Greater than anticipated moderation in days cash or additional leverage that dilutes current measures

LEGAL SECURITY

All rated bonds are unsecured general obligations of the Memorial Sloan Kettering Cancer Center (the Center), which holds over 71% of unrestricted cash and investments consolidated in the audited financial statements. The Series 2012 and Series 2015 taxable bonds are unsecured general obligations of the Center, issued under the 2012 taxable indenture between the Center and the taxable bond trustee. The Sloan-Kettering Institute for Cancer Research (the Institute) and SKI Realty have also entered into unsecured guaranties for the Center's payments under the indenture. If certain Funding Events occur, the Center and Hospital will be required to provide bondholders with a lien, mortgage, or security interest on certain Shared Collateral. Shared Collateral would be released at the time when there is no Funding Event. This Shared Collateral includes, but is not limited to, pledge of or security interest in the gross receipts of the Center and related corporations (excluding the Hospital), and a mortgage on certain property including Hospital property (excluding research facilities). Funding events include, but are not limited to: the senior unsecured or unenhanced debt of the Center is rated lower than the "A" rating category by two rating agencies (if MSKCC is rated by 3 rating agencies) or breach of certain financial covenants. Despite contractions in revenues and cash flow, MSKCC will likely have adequate headroom under financial covenants. If a Funding Event were to occur, the ratings across the different legal securities could differ.

The Series 2011A taxable bonds are issued under an indenture between the Center and the taxable indenture trustee. They are unsecured general obligations of the Center and also include unsecured guaranties from the Institute and SKI Realty. Upon the occurrence and continuation of a Funding Event (which are identical to the Funding Events under the Series 2012 taxable indenture) the bond trustee would be granted a lien, mortgage or security interest on Shared Collateral (as described above).

The 2019 Series 1 bonds, as well as the 2017 Series 1 bonds, and certain unrated bonds privately placed with banks, were issued under the 2003 bond resolution. In addition to being unsecured general obligations of the Center with unsecured guaranties from the Institute and SKI Realty, upon the occurrence and continuation of certain Funding Events, the bond trustee would be given a lien on Shared Collateral (as described above). The springing collateral pledge for these bonds would also include a mortgage on a 23-story research building. Collateral is released from the pledge when a Funding Event is no longer continuing. Funding Events include downgrade of MSKCC's debt rating below the "A" rating category by two rating agencies or breach of certain financial covenants.

The Series 1998 bonds are an unsecured general obligation of the Center. They do not have a guaranty from the Institute or Realty. Bondholders have a security interest in pledged revenues related to certain residential facilities owned by MSKCC (up to $6.5 million) but do not have a springing lien on Shared Collateral, the Research Building, or gross receipts of the Hospital.

MSKCC will not issue additional debt under the 1989 resolution. There will be a very modest amount of debt outstanding under the 2002 bond resolution which is expected to be fully redeemed within 24 months.

PROFILE

MSKCC ($6.2 billion revenue in 2021) is a leading national provider of cancer research and clinical care. Unless stated otherwise, the figures in this report present a combined view of Memorial Sloan Kettering Cancer Center (the Center) and Affiliated Corporations. The audit consolidates financial information for Memorial Sloan Kettering Cancer Center, Memorial Hospital for Cancer and Allied Diseases (514 licensed beds), Sloan Kettering Institute for Cancer Research, S.K.I. Realty, the Graduate School of Biomedical Sciences, the captive insurance company, and other smaller affiliates. The Center and Affiliated Corporations are collectively referred to as MSKCC.

METHODOLOGY

The principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018 and available at https://ratings.moodys.com/api/rmc-documents/70886. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating.  For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Beth Wexler
Lead Analyst
PF Healthcare
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Susan Fitzgerald
Additional Contact
Higher Education
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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