2008-08-07 23:36:04 -
- Fitch Ratings has downgraded approximately $41 million of New Jersey Health Care Facilities Financing Authority revenue bonds issued on behalf of Palisades Medical Center, Inc (PMC). The obligated group (Palisades) consists of PMC and Palisades General Care, Inc. (PGC), which includes the Harborage, a nursing home adjacent to the hospital. The Rating Outlook is revised to Stable from Negative.
The downgrade to 'BB+' reflects flat utilization trends and several years of increasing operating losses at PMC, leading to a significantly weakened balance sheet with declining liquidity and poor debt ratios. In fiscal 2007, Palisades lost $5.7 million from operations (negative 3.9% operating margin) and $2.7 million on the bottom line (negative 1.8% excess margin). The Medical Center lost $4.8 million, including approximately $1.5 million in investment earnings. At the end of fiscal 2007, both liquidity and debt ratios show further deterioration. Palisades had 67 days cash on hand down from 71.3 days in 2006 and 99.8 days in 2005, well below Fitch's median of 120.3 days for the category. Maximum annual debt service has declined to 1.7 times (x) from 2.7x in fiscal 2006 and 2.3x in 2005 which compares unfavorably to Fitch's median of 3x for the 'BBB' rating category.
The obligated group's financial condition has been further stressed due to an actuarial adjustment to its future pension plan liabilities. As a result of the adjustment, Palisades has a negative fund balance for fiscal 2007 of $13 million. Palisades has contributed approximately $5.2 million in fiscal 2007 and plans to contribute $6.2 million in fiscal 2008 to the pension plan. Through May 31, 2008, Palisades produced a negative 1.6% operating margin (a $960,000 loss; excludes a $1.5 million one time gain from a prior period settlement) compared to an average negative margin of 2.1% generated over the last three years. Days cash on hand and debt-to-EBITDA ratios were 51.1 days (excluding proceeds from a $2 million line of credit) and 4.1x compared to Fitch's below investment grade medians of 53.6 days and 4x, respectively.
Continuing credit concerns include PMC's flat volume trends, and a challenging payor mix with a high self-pay component at 10% with 60% of the revenue base stemming from a combination of Medicare and Medicaid. Admissions declined to 9,873 in 2007 from 9,946 in 2006, reflecting the growing tertiary presence of Hackensack University Medical Center (general revenue bonds rated 'A-' by Fitch) and change of admissions to observation status.
The revision in outlook to Stable from Negative reflects Palisades' recent and ongoing initiatives to improve operations at PMC coupled with the historically solid cash flow generated by the Harborage. The Harborage alone, which had an EBITDA of approximately $3.6 million in fiscal 2007, covers the obligated group's debt service at approximately one times. Indicators of stability also include PMC's leading market share in the service area, its recent designation as a Tier One Essential Hospital by the NJ Dept of Health, and evidence of growth in the secondary market area. Additional initiatives included substantial FTE reductions, financial and case management overhaul, coding improvements, the introduction of new services and new physicians to the service area, and managed care rate renegotiations. Of particular significance is the designation of PMC as a Tier One Essential Hospital, indicating the expectation of increases in charity care subsidies from the state of New Jersey despite an overall reduction in the amount of charity care designated by the state legislature. In fiscal 2007, PMC received $3.4 million in charity care reimbursement and expects to receive an additional $4.8 million in 2008 and $5.6 million in 2009. Fitch believes that these initiatives are likely to accrue into further profitability improvements, although achieving significant profitability in the near future may be difficult given PMC's challenging operating environment.
PMC is a 202-bed acute care hospital located in North Bergen, NJ. PGC is a 249-bed skilled nursing and assisted living facility adjacent to the hospital. In fiscal 2007, Palisades reported total operating revenues of $144.9 million. Palisades covenants to provide to the NRMSIRs annual audited financial statements and quarterly disclosure consisting of a balance sheet, income statement, utilization statistics, and management discussion and analysis.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, New York
Carolyn Tain, +1-212-908-0259
Alex Bumazhny, +1-212-908-0341
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