New York, November 13, 2012 --
Issue: Hospital Revenue Bonds, Series 2012A; Rating: Baa1; Sale Amount: $177,825,000; Expected Sale Date: 11/21/2012; Rating Description: Revenue: 501c3 Unsecured General Obligation
Moody's Investors Service has assigned a Baa1 rating to Barnabas Health's (previously known as Saint Barnabas Health Care System, referred to in this report as "Barnabas") $177.825 million of Series 2012A fixed rate bonds to be issued by New Jersey Health Care Facilities Financing Authority. The rating outlook has been revised to stable from positive. At this time we have upgraded the rating to Baa1 from Baa2 on Barnabas' outstanding bonds.
SUMMARY RATING RATIONALE
The Baa1 rating and stable outlook reflect the continued and pronounced turnaround at Barnabas under the direction of new financial leadership and a reinvigorated senior management team. Performance improved again in FY 2011 over FY 2010 and is continuing through the first nine months of FY 2012 ending September 30, 2012. We expect that FY 2012 will be another favorable year, pointing to durable credit strengthening that began in FY 2009 when the board and executive leadership brought in new financial management and set in place multi-year financial plans to take better advantage of Barnabas's size, scope and geographic coverage in New Jersey. The improved credit position is offset by a sizeable amount of indirect debt, including operating leases and an underfunded pension, and continued declines in inpatient volumes system-wide. In addition, many of the Barnabas hospitals are operating in highly competitive local markets. Finally, the system continues to make progress on its effort to evolve from a holding company to a more centralized operating model, but this will be a multi-year process.
* Continued improvement in financial performance that demonstrates the durability of Barnabas' financial recovery; through the first nine months of FY 2012 the operating cash flow margin reached 11.6%, up from 10.3% in the prior year comparable period and ahead of 10.5% in FY 2011
* Growth in liquidity as of September 30, 2012 with $888.1 million in unrestricted cash and investment, equating to 141 days and up from $781.1 million or 121 days at the end of FY 2011; growth driven by cash flow, revenue cycle management and limited capital spending
* Cash to debt is approaching 100% (90.1% as of September 30, 2012) as cash balances have improved; capital spending will increase to 1.0 times per year for the next four years, more in line with national spending trends and addresses Moody's concerns regarding limited capital spending in the recent past
* Improved debt coverage measures with 3.3 times debt to cash flow and Moody's-adjusted maximum annual debt service coverage of 5.4 times on an annualized FY 2012 basis, from weaker 3.7 times and 4.8 times in FY 2011, respectively
* Largely fixed rate debt structure (92%) with no exposure to interest rate derivatives
* Continued centralization of Barnabas Health as a system under the direction of new leadership, following its origins as a holding company model; Barnabas and its board developed a new strategic plan at its recent inaugural board retreat since the system's creation 16 years ago
* Material 3.9% decline in inpatient volumes through nine months of FY 2012, continuing a trend of declining volumes; five of the six facilities are showing declines
* Material amount of indirect debt with a pension liability of $227 million at the end of FY 2011 (up from $189 million in FY 2011) as the discount rate declined and $219 million in operating leases (using a 6 times multiplier method); cash to total comprehensive debt declines to 53.8% in FY 2011 and below the Baa1 median of 67.7%
* Very high 93% debt to capitalization in FY 2011 as the system rebuilds its equity; since declined to 75% as of September 30, 2012
* Highly competitive local markets for inpatient and outpatient care, particularly in central and northern New Jersey
* Reliance on charity care funds which represents one-third of FY 2011 operating cash flow, although down from very high two thirds in FY 2009
* Kimball continues to post losses with $2.7 million loss through September 30, 2012 and a projected loss of $5.6 million for FY 2012
* Increased payments on the final two years of DOJ settlement with $32 million paid in FY 2012 and $30 million due in FY 2013
The stable outlook reflects expectations that financial performance will produce good debt service coverage while balance sheet indicators should show some improvement, even as capital spending increases and pension contributions that exceed pension expense will continue.
WHAT COULD MAKE THE RATING GO UP
Improvement in financial performance and liquidity measures, further de-leveraging; no decrease in market share in its local markets
WHAT COULD MAKE THE RATING GO DOWN
Departure from current results; erosion of liquidity; changes in local market share
The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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Lisa Goldstein Associate Managing Director Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Jennifer Ewing Associate Analyst Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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