[May 02, 2014]

Fitch Rates Catholic Health Services of Long Island, NY's, 2014 Revs 'BBB+'; Outlook to Stable

Fitch Ratings has assigned a 'BBB+' rating to approximately $79,230,000 of Nassau County Local Economic Assistance and Financing Corporation revenue bonds, series 2014 (Catholic Health Services of Long Island Obligated Group Project) issued on behalf of Catholic Health Services of Long Island (CHSLI).

In addition, Fitch affirms the following parity bonds issued on behalf of CHSLI:

--$184,630,000 Suffolk County Economic Development Corporation (NY) (Catholic Health Services of Long Island Obligated Group) revenue bonds, series 2011;

--$60,500,000 Nassau County Local Economic Assistance and Financing Corporation (NY) (Catholic Health Services of Long Island Obligated Group) revenue bonds, series 2011;

--$35,200,000 New York State Dormitory Authority (NY) (Catholic Health Services of Long Island Obligated Group) Mercy Medical Center revenue bonds, series 1999B;

--$85,675,000 New York State Dormitory Authority (NY) (Catholic Health Services of Long Island Obligated Group) St. Francis Hospital revenue bonds, series 2004.

The Rating Outlook is revised to Stable from Negative.

The series 2014 bonds will be issued as tax exempt, fixed rate bonds and are expected to be sold via negotiation the week of May 12, 2014. Proceeds from the 2014 bonds will be used to refund the series 2004 bonds and pay for the cost of issuance. A debt service reserve will not be required in connection with the series 2014 issuance. Maximum annual debt service (MADS) will be $54.4 million and the refunding is expected to generate approximately $5 million of present value savings.

SECURITY

The series 2014 bonds are secured by mortgages on CHSLI's obligated group's hospital facilities and its gross revenues. The obligated group includes five of the system's six hospitals (St. Joseph is not a member of the obligated group) and accounted for 77% of the consolidated system assets and 84% of consolidated revenues in fiscal 2013. Fitch's analysis is based on the results of the consolidated system.

KEY RATING DRIVERS

OPERATING PERFORMANCE STABILIZING: The Outlook revision to Stable from Negative reflects the improved financial performance of CHSLI in the second half of 2013 and through the first quarter of 2014. First quarter 2014 results show CHSLI losing $4.8 million compared to a loss of $15.3 million in the first quarter of 2013. Furthermore, early 2014 utilization figures indicate that inpatient volumes maybe stabilizing after a 7% decline in both 2012 and 2013.

LARGEST HOSPITALS IMPROVE: St. Francis Hospital and Good Samaritan Hospital Medical Center (which together accounted for 56% of net patient service revenue in 2013 generated $10.2 million in operating income in the first quarter of 2014, compared to a $4.8 million operating loss in the first quarter of 2013. CHSLI continues to have operating losses at its other hospitals, but CHSLI management has developed an operating improvement plan for each facility that Fitch believes should lead to better profitability over the next two years.

SOLID LIQUIDITY: Despite a $22 million loss from operations in 2013, CHSLI was able to grow its liquidity position, with unrestricted cash and investments increasing 8.6% to $815.9 million at Dec. 31, 2013. All of CHSLI's major liquidity ratios exceed Fitch's 'BBB' category medians.

MIXED DEBT BURDEN: The challenged operations have impacted debt coverage, with pro forma MADS coverage by EBITDA at 2.5 times (x) in fiscal 2013 which is below the 'BBB' category median of 3.1x. However, CHSLI has a modest debt burden as measured by MADS as a% of revenue, which at 2.6% is better than the 'BBB' median of 3.5%.

SCALED BACK CAPITAL PLAN: A key driver in the rating downgrade and outlook revision to negative at Fitch's last rating action in July 2013 was a planned $250 million debt issuance that would have significantly increased CHSLI's debt burden. CHSLI opted not to proceed with that financing plan and has since significantly scaled back its capital budget. The revised capital plan is much more modest with only a potential $50-100 million to be issued over the next 12 to 18 months, which Fitch believes CHSLI has the debt capacity for at the current rating level, assuming operations continue to improve as projected.

COMPETITIVE MARKET: CHSLI held a 22.8% market share through Dec. 2013 in the Nassau and Suffolk County service area (both rated 'A' by Fitch), second only to a strong competitor, the North Shore Long Island Jewish Health System (NSLIJHS rated 'A-', Positive Outlook by Fitch) with a 33.1% market share. The competitive environment places added pressure on CHSLI to make strategic investments in order to maintain its market position.

RATING SENSITIVITIES

CONTINUED OPERATIONAL IMPROVEMENTS: The positive operational improvement at CHSLI's largest hospitals reflect, in part, the success of CHSLI's strategy under its new CEO, including the addition of oncology services at St. Francis Hospital (St. Francis) and open heart services at Good Samaritan Hospital Medical Center (Good Sam). Fitch believes that CHSLI's operational improvements will continue to trend in a positive direction,and operating margins should become consistent with 'BBB' category median over time as CHSLI further executes its strategy. CHSLI is budgeting a 'breakeven' operating margin for 2014, which Fitch believes is achievable.

CREDIT PROFILE:

CHSLI is an integrated healthcare system comprising six acute care hospitals, three nursing homes, certified home health and long-term home health care programs, a hospice service and a network of services for the mentally and developmentally disabled, all based on Long Island. The system has 1,928 licensed hospital beds and 790 licensed nursing home beds, and reported revenues of $2.1 billion in fiscal 2013 (year end Dec. 31).

OPERATING PERFORMANCE STABILIZES

The negative performance in 2013 was driven largely by lower utilization, partially due to a slow approach to physician employment, and expenses related to a system-wide EMR implementation. At the time of Fitch's last rating review, CHSLI's had an operating loss of $18 million (a negative 2.1% operating margin) through the five months ended May 31, 2013 with a full year loss projected at $33 million (a negative 1.6% operating margin). Operating performance improved materially in the second half of the year which translated into a full year loss of $22.9 million (a negative 1.1% operation margin).

The narrowing of the projected losses was due to a significant fourth quarter improvement at CHSLI's two largest hospitals - St. Francis Hospital and Good Samaritan, which historically have been key margin contributors. Through the first three quarters of 2013, the two hospitals generated loss from operations of $4.2 million on a combined basis. However, in the fourth quarter the two hospitals posted income from operations of $21.1 million on a combined basis which has been sustained through the first quarter of 2014.

The improved year end performance reflected a combination of the positive impact of growth initiatives coupled with solid expense management. At St. Francis, inpatient admissions rose by 4.8% in 2013, and most of St. Francis' key cardiology service lines (open heart, cardiac catheterizations, and angioplasty) also showed volume growth. The completion of emergency room renovations and outpatient expansion strategies at St. Francis, especially around oncology, further contributed to the volume growth and the strong year end performance.

Good Samaritan, on the other hand, experienced a 14% drop in inpatient volumes in 2013, but was able to manage expenses, carrying out an FTE reduction, as well as implementing a documentation initiative that helped raise its Medicare CMI by 11%. In the fourth quarter, CHSLI management also replaced the leadership of its emergency room (ER) to reduce inpatient leakage out of the ER. In January 2014, CHSLI added open heart surgery to the Good Samaritan campus operated under the auspices of St. Francis, which has a national reputation in cardiology, and 49 open heart procedures were performed in the first quarter of 2014. All of these initiatives contributed to a very strong first quarter at Good Samaritan as Good Samaritan posted a 4.6% operating margin ($6.7 million in operating income) and had an 8.9% increase in inpatient volumes.

Challenges remain at CHSLI's other four hospitals (Mercy Medical Center, St. Charles Hospital, St. Catherine of Siena Medical Center and St. Joseph Hospital), which had a combined fourth quarter 2013 loss of $4 million and continued to post operating losses through the first quarter of 2014. However, Fitch views the turnaround at CHSLI's two main hospitals as a critical step forward stabilizing CHSLI's overall financial profile and believes that CHSLI's strategy for the other four hospitals, which includes cost reductions, redesign of services, and physician recruitment, should improve their performance over the next rating cycle.

STREAMLINED GOVERNANCE STRUCTURE

Further supporting the Outlook change to Stable is the effectiveness of CHSLI's management team, led by Dr. Guerci. Dr. Guerci was appointed President and CEO effective July 1, 2013, after a period of management turmoil which included the replacement of the prior CEO after eight months on the job. Dr. Guerci has implemented a higher level of integration among the system's hospitals and has streamlined system governance and consolidated certain shared service functions. Effective April 1, 2014, the system is governed under a single system Board of Directors, with the individual hospital Boards made up of the same individuals as the system Board. Fitch believes the new governance structure allows for much more effective budgeting, planning and allocation of system resources.

REVISION OF CAPITAL PLAN

Management has reduced its original capital plan including canceling the construction of a new patient tower at Good Samaritan Hospital. Instead, the system in 2013 carried out renovations and refurbished operating rooms for the new open heart program and plans to use portion of $21 million of recently approved FEMA sponsored Hazard Mitigation Grant Program monies to address needed infrastructure issues at the site.

The bulk of the system planned maximum $50-100 million debt issuance over the next year and a half will be focused on strategic investment in programs, physician alignment and ambulatory expansion. The capital plan for the current fiscal year is approximately $150 million, with $40 million targeted at ambulatory expansion. CHSLI is commencing a $30 million fundraising program to support expansion of the St. Francis oncology program.

SOLID LIQUIDITY AND MIXED DEBT BURDEN

At March 31, 2014 the system reported $802 million of unrestricted cash and investments, equating to 147.4 days cash on hand (DCOH), cushion ratio of 14.8x and cash equal to 156.9% of debt, all better than the 'BBB' medians of 138.5 days, 10.2x and 91.7% respectively.

The system's coverage of pro forma MADS by EBITDA of 2.5x in 2013 and 2.0x, through the first quarter of 2014 is weak relative to the 'BBB' category median of 3.1x. However, pro forma MADS equates to 2.6% of 2013 revenues, which is light relative to the 'BBB' category median of 3.5%.

CHSLI has $23 million drawn on a $30 million line of credit, which expires in July 2014. If not extended, the system has the option to convert the balance into a three year term loan. Post issuance of the series 2014 bonds, the system will have 82% of its debt in fixed rate mode and it does not have any swaps.

DISCLOSURE

CHSLI covenants to provide annual and quarterly disclosure of the obligated group's financial information on EMMA. Disclosure includes an income statement, balance sheet, and utilization statistics.

Fitch has also withdrawn the 'BBB+' rating on CHSLI's taxable bonds series 2013 as the bond was not sold.

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

This action was informed by information identified in Fitch's Revenue-Supported Rating Criteria. In addition to the sources of information identified in Fitch's Revenue Supported Rating Criteria, this action was informed by information from Goldman Sachs & Co. and Morgan Stanley & Co. Incorporated as underwriter.

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

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