[January 31, 2014]

Fitch Affirms Einstein Healthcare (PA) Revs at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed the 'BBB+' rating on the following Pennsylvania Economic Development Financing Authority bonds issued on behalf of Einstein Healthcare Network (EHN, formerly Albert Einstein Healthcare Network):

--$116.5 million health system revenue bonds, series 2009A.

The Rating Outlook is Stable.

Additionally, Einstein Medical Center Montgomery (EMCM), an affiliate of EHN, has approximately $308.3 million of Federal Housing Administration (FHA) insured mortgage revenue bonds, series 2010 outstanding. The FHA bonds are non-recourse to the EHN obligated group and are not rated by Fitch. In total, EHN system had outstanding debt of approximately $424.8 million as of Dec. 31, 2013 (six-month interim period; unaudited).

SECURITY

The bonds are secured by a gross revenue pledge, lien on property of the obligated group, and a debt service reserve fund.

KEY RATING DRIVERS

WEAKENED PROFITABILITY METRICS: In fiscal 2013 (June 30; audited) EHN recorded an operating loss of $26.7 million (negative 2.5% operating margin and 4.4% operating EBITDA margin), exceeding a budgeted shortfall of $18.3 million. Negative financial results reflect increased depreciation, interest and start-up expenses related to the opening of EMCM. Furthermore, there were several unbudgeted items that impacted profitability including upfront payments associated with workforce reduction that are expected to yield long-term savings. Overall, Fitch views EHN's profitability indicators as weak when compared against Fitch's 'BBB' category medians.

FISCAL 2014 PERFORMANCE: Through the six-month interim period 2014, EHN recorded an approximately $15.2 million loss from operations (negative 2.8% operating margin), which Fitch views negatively. The operating losses are primarily driven by a confluence of factors that include declining patient utilization patterns, close-down costs related to EHN's former Montgomery Hospital, and various one-time expenses. However, EHN is slightly ahead of its year-to-date budget and fully intends to meet its year-end target of an approximate $1.8 million loss. Management expects employee benefit changes, supply expense reductions, labor productivity improvements, and enhanced volumes at EMCM to support profitability growth throughout the rest of the fiscal year, which Fitch views as attainable.

SATISFACTORY LIQUIDITY: At Dec. 31, 2013 EHN had $350.9 million of unrestricted cash and investments, which equated to 122.7 days cash on hand, 22.2x cushion ratio, 82% cash to debt. These metrics are mostly consistent with Fitch's 'BBB' category medians of 144.7 days, 10.2x, and 91.7%, respectively.

GROWTH STRATEGY: Management's strategy to grow inpatient and outpatient services in the northwest portion of EHN's service area is viewed favorably. Fitch expects this strategy to increase EHN's market share in a better payor mix environment, allowing the organization to continue serving its challenged downtown service area.

HIGH MEDICAID PATIENT LOAD: EHN has a very high Medicaid patient load, which accounted for approximately 30% of gross revenues through Nov. 30, 2013 and is reflective of the main facility's (Einstein Medical Center (EMC (News - Alert))) challenging service area in North Philadelphia.

DECLINING INPATIENT ADMISSIONS: On a same-store basis (not including ECMC or the old Montgomery Hospital) inpatient admissions continued to fall for EHN for the fifth consecutive year. The inpatient utilization drop is primarily due to unfavorable service area economic factors hindering patient usage and increased observation encounters. Specifically, inpatient admissions fell to 24,305 through June 2013 from 25,385 in June 2012.

RATING SENSITIVITY

OPERATIONAL IMPROVEMENT EXPECTED: Supporting the 'BBB+' rating is the expectation that EHN will meet its budgeted goal for fiscal 2014 of an approximate $5 million operating gain for the obligated group and near break-even performance on a consolidated basis. Despite the large operating loss experienced through six-months fiscal 014 on a consolidated basis, management is confident in meeting its profitability goals, which underpins the Stable Outlook. Any material difference from budgeted plan may lead to negative rating pressure. Additionally, Fitch expects consolidated operations to demonstrate gradual improvement over time, while maintaining satisfactory performance consistent with current levels at the obligated group level.

CREDIT PROFILE

EHN operates Einstein Medical Center - Philadelphia, a 509-bed tertiary teaching hospital in northern Philadelphia; EMCM, a new 170-bed facility in East Norriton Township; Elkins Park Hospital, a 66-bed general hospital; and MossRehab, a nationally recognized inpatient rehabilitation hospital located in nearby Elkins Park. Additionally, EHN operates several other ambulatory and specialized facilities. In fiscal 2013, EHN had total revenues of $1.06 billion.

AFFIRMATION OF 'BBB+' RATING

The rating affirmation of 'BBB+' continues to be supported by EHN's leading market position in its historical service area and growth strategy in a better payor mix environment, manageable capital plans, and satisfactory liquidity position. EHN continues to have a leading market presence in the greater Philadelphia area at 17.2%. Fitch views favorably management's strategy of expanding services into the northwest portion of its service area, which should improve EHN's payor mix and profitability over the long term.

At Nov. 30, 2013 EHN had $351.6 million of unrestricted cash and investments, which equaled 121 days cash on hand, 22.3x cushion ratio (obligated group only maximum annual debt service - MADS), and 78.2% cash to debt. Fitch views EHN's liquidity position as satisfactory for the rating level as days cash on hand and cash to debt are near the 'BBB' medians of 144.7 days and 91.7%, respectively, while cushion ratio compared particularly well against the median of 10.2x.

Fitch believes EHN's capital plans are manageable. Management plans to spend approximately $335.2 million on various routine and clinical information system needs from FY14-FY19. Management indicated that the system has no near-term plans for any additional borrowing. Additionally, EHN has a $150 million capital campaign that extends through 2016, which will help fund the system's capital needs.

KEY CREDIT CONCERNS

Fitch's main credit concerns include EHN's weak profitability, all-in debt service coverage metrics, and challenged service area characteristics highlighted by serving a large Medicaid population.

EHN's consolidated profitability metrics have historically been weak, averaging near breakeven operating performance (negative 0.1% operating margin and 5.4% operating EBITDA margin) over the past four fiscal years. In addition, EHN is highly dependent on supplemental funding (Medicare and Medicaid disproportionate share funding, etc.), which totaled approximately $70.5 million in fiscal 2013. Through the six months ended Dec. 31, 2013, EHN had an operating loss of $15.2 million (negative 2.8% operating margin),in part due to unfavorable volume trends and several one-time related expenses. These costs included a loss of productivity due to electronic health record implementation and the out-migration of some voluntary physicians. However, management expects to meet its fiscal 2014 budget of negative $1.8 million operating loss. EHN's projected operating margin remains weak over the near term but steadily improves to almost 2% in fiscal 2018.

MADS of $42.9 million includes the non-recourse FHA debt and results in weak coverage for the rating level with 1.7x coverage by EBITDA and 1.1x coverage by operating EBIDTA (fiscal 2013), compared to the respective 'BBB' category medians of 3.1x and 2.7x. A decline from existing all-in debt service coverage metrics would be viewed negatively by Fitch and could contribute to downward rating movement. Fitch notes that debt service coverage on an obligated group basis was stronger, reflective of a lighter debt burden - MADS of $15.7 million. This represented coverage by EBITDA and operating EBITDA of 4.7x and 2.9x, respectively, in fiscal 2014.

DISCLOSURE

EHN provides annual and quarterly disclosure to the MSRB's EMMA system. Overall, Fitch views EHN's disclosure favorably, which consists of a balance sheet and statement of profitability and loss, cash flow statement, and utilization information.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 3, 2013;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818917

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