Fitch Downgrades Saint Barnabas (NJ) Revs to 'BB+'; Outlook Negative
2008-12-03 04:05:01 -
Fitch Ratings has downgraded to 'BB+' from 'BBB' the underlying rating on approximately $900 million New Jersey Health Care Facilities Financing Authority and New Jersey Economic Development Authority bonds issued on behalf of Saint Barnabas Health Care System (SBHCS). The Outlook is revised to Negative. All outstanding bonds are listed at the end of this release.
The rating downgrade to 'BB+' reflects the increasing likelihood of an event of default stemming from declining liquidity and ongoing operating and investment losses that have occurred over the last two fiscal years and that continue for the nine month period ending Sept. 30, 2008. SBHCS lost $24.1 million from operations in 2006, $19.3 million from operations in 2007 and $33.2 million YTD for the period ending Sept. 30, 2008 (which includes $9.9 million for prior year medical denials and $5.8 million of impairment losses related to its investment portfolio), producing operating margins of negative 1.1%, negative 0.8%, and negative 1.8%, respectively.
Non-operating income offset the operating losses in fiscal year 2006 and 2007, producing excess margins of $24.5 million (1.1% excess margin) and $3.8 million (0.2% excess margin), respectively, but for the nine month period ending Sept. 30, the SBHCS posted $14.6 million of non-operating losses, producing negative excess income of $47.8 million (negative excess margin of 2.7%). This compares unfavorably with Fitch's rating medians for the non-investment grade category of 0.3% operating margin and 1.9% excess margin. In addition, market volatility coupled with the lack of cash flow generation has pressured liquidity indicators. Days cash on hand has declined from 108 days in 2006 to 103 days in 2007 and to 87 days year to date, reflecting $54 million in unrealized losses as of Sept. 30, 2008. For the remaining quarter of the year, losses on SBHCS' investment portfolio are expected to be especially severe.
Saint Barnabas faces escalating operational pressures primarily due to an increasingly unfavorable operating environment in one of its northern New Jersey markets (particularly in Newark, NJ), a shift in payor mix stemming from the closures of nearby facilities and ongoing market volatility, exacerbated by the continuing impact of the six-year $265 million settlement with the U.S. Department of Justice negotiated in 2006. In 2008, the New Jersey Commission on Rationalizing Health Care Resources published its final report, which included the recommendation to allow those hospitals deemed nonessential to close.
Additionally, the state reduced charity reimbursement by $111 million in its 2008/2009 operating budget. While all of SBHCS' hospitals were deemed to be essential, the system still lost $11 million in charity care reimbursement, with a $7 million reduction in funding for SBHCS' Newark Beth Israel Medical Center, which is now serving a portion of the population that predominantly used the recently closed Saint James Medical Center and Columbus Hospital.
In response, management has quickly implemented a financial turnaround plan that identified $70 to $80 million in expense reductions intended to return SBHCS to profitability by 2009, engaged a management consultant to help create and implement a strategic restructuring of system operations, and renegotiated managed care contract increases totaling $90 million. Management has reduced expenses by an annualized $42 million, including a 350 full-time equivalent staff reduction and is selling four of its nine nursing homes, which is expected to net SBHCS approximately $30 million. Three other nursing homes will be restructured. Management is pursuing the divestiture or closure of Kimball Medical Center, which is expected to lose $8 million from operations in 2008.
Credit strengths include SBHCS' position as the largest health care systems in New Jersey by a considerable margin. SBHCS has more than 2,300 acute care beds in service in the state and accounts for 17% of total discharges. The next largest system, Robert Wood Johnson Health System has a 7% market share. More than 4,700 physicians, 25% of the state's physician population, are affiliated with SBHCS. Saint Barnabas Medical Center and Newark Beth Israel Medical Center, the two flagship facilities, are major teaching affiliates of the University of Medicine and Dentistry in New Jersey. Saint Barnabas Medical Center and Community Medical Center are two of the oldest and largest providers in the state. SBHCS also provides certain unique services. It is the only certified burn treatment facility in the states and the only lung transplant center. It is one of the top ten facilities in the nation for heart transplants and the state's second largest employer.
The Outlook is revised to Negative as operating performance remains challenged. Four of SBHCS' seven hospitals are unprofitable due primarily to Medicare and Medicaid reimbursement that does not cover expenses and payor mix changes occurring in the Newark, NJ market. In addition, SBHCS is facing declining profitability at Saint Barnabas Medical Center and Community Memorial Medical Center. Management reports that it intends to meet with the rating agencies and other market participants by mid-January 2009 to present further details on its operational restructuring program. Based on previous management discussions and the severity of the operating decline, Fitch does not expect a return to profitability in the near term, barring a substantial restructuring of SBHCS' operations. Continued decline in profitability or liquidity could necessitate further rating action.
SBHCS consists of six free-standing acute care hospitals, a children's hospital, a free-standing psychiatric hospital, nine long-term care facilities, and other various other health care entities operating in northeastern and coastal New Jersey, with corporate headquarters located in West Orange. SBHCS had total revenues of $2.3 billion in 2007. SBHCS covenants to disclose to bondholders on a quarterly basis.
Fitch currently rates SBHCS' outstanding issues as follows:
--New Jersey Health Care Facilities Financing Authority revenue refunding bonds (Saint Barnabas Health Care System Issue), series 2006A;
--New Jersey Health Care Facilities Financing Authority revenue refunding bonds (Saint Barnabas Health Care System Issue), series 2006B;
--New Jersey Health Care Facilities Financing Authority revenue and bonds (Saint Barnabas Health Care System Issue), series 2001A;
--New Jersey Health Care Facilities Financing Authority insured revenue and bonds (Saint Barnabas Health Care System Issue), series 2001B (insured: FSA);
--New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Community Medical Center/Kimball Medical Center/Kensington Manor Care Center), series 1998 (insured: FSA);
--New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Saint Barnabas Medical Center/West Hudson Hospital), series 1998A (insured: MBIA);
--New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Saint Barnabas Health Care System Issue), series 1998B (insured: MBIA);
--New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Kensington Manor Issue), series 1998C (insured: MBIA);
--New Jersey Health Care Facilities Financing Authority revenue bonds (Shoreline Behavioral Health Center), series 1997 (insured: MBIA);
--New Jersey Economic Development Authority revenue bonds (Saint Barnabas Realty Development Corporation Project), series 1997A (insured: MBIA);
--New Jersey Economic Development Authority revenue bonds (Clara Maass Health System Obligated Group Project), series 1996 (insured: FSA).
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