Fitch Affirms 'B+' on Nyack Hospital's $19.8MM Bonds; Outlook Stable.

NEW YORK -- Fitch has affirmed the 'B+' rating on the approximately $19.8 million Dormitory Authority of the State of New York hospital revenue bonds (Nyack Hospital), series 1996. The Rating Outlook is Stable.

The 'B+' rating affirmation is supported by Nyack Hospital's (Nyack) stabilized operating performance, enhanced relationship with New York-Presbyterian Healthcare System (NYPHS), and low days in accounts receivable. In fiscal 2003, Nyack posted an operating surplus of $360,000 (0.3% operating margin), its first gain from operations since fiscal 1998 (excluding investment income). Nyack's net income of $5.3 million in 2003 (3.7% excess margin) includes $3.9 million of nonrecurring revenues related to prior bad debt and charity care payments and appealed settlements of Medicare cost reports, which resulted in adequate maximum annual debt service coverage of 2.2 times. From 2001-2003, Nyack demonstrated year-over-year operating improvement under a new management team after 2000's operating loss of $32.2 million in 2000, which was largely due to a six-month nurses' strike. Through the five months ended May 31, 2003, Nyack posted near break-even operations.

The operating improvement from 2001-2003 was driven by several initiatives, which realized over $7 million in revenue enhancements, namely, an updated charge master, renegotiated managed care contracts, and revised billing practices. Although inpatient discharges declined in 2003, Nyack's net patient revenue increased 6.8%, largely due to such initiatives. Nyack plans to enter a more formal relationship with NYPHS, which may improve physician recruitment; expand service lines; and enable Nyack to contract with NYPHS for purchasing, information systems, and managed care support, as well as other administrative services. Fitch believes this enhanced affiliation will improve Nyack's clinical reputation. Nyack's revenue cycle management continues to improve, as evidenced by a low 49.3 days in accounts receivable at Dec. 31, 2003, a decrease from 60.9 days in 2000.

Ongoing credit concerns are Nyack's weak liquidity position, future capital needs, the nationwide nursing shortage, and negative inpatient utilization trends in recent years. Nyack's liquidity position has eroded significantly due to prior operating losses. At Dec. 31, 2003, Nyack's $3.1 million of unrestricted cash and investments represented a very low 9.1 days cash on hand and 12.4% of outstanding debt, declining from $7.5 million at Dec. 31, 2002, which follows an increase from $2.4 million at Dec. 31, 2001. In 2002, the increase in unrestricted cash was supported by improved cash flow from operations. The decline in 2003 resulted from a $14.7 million reduction in liabilities, including Medicare and other third-party payors ($8.2 million), accrued salaries and related withholdings ($2.8 million), and a net reduction of long-term debt and leases payable ($2.5 million), among others. Deferred capital replacement and routine maintenance needs that have grown due to turnaround priorities are a primary concern. From 2000-2003, capital expenditures as a percentage of depreciation expense averaged a low 43.8%, leading to Nyack's high average age of plant of 17.2 years at Dec. 31, 2003. Due to Nyack's difficulty with nurse recruitment, agency nurse expense increased $1.9 million in 2003. Nevertheless, Fitch views favorably Nyack's current three-year contract with its nurses union, which mitigates any salary pressures over the medium term. From 2001-2003, inpatient discharges decreased 5.6% to 15,298 but have increased through the five months ended May 31, 2004, compared with the same period in 2003.

The Stable Outlook reflects Fitch's belief that Nyack's return to profitable operations is sustainable and will be supported by its enhanced relationship with NYPHS. Fitch expects Nyack to slowly grow its liquidity position from improved cash flow; however, this growth may be hindered by the funding of capital expenditures over the near-to-medium term. Due to significant future capital needs, continued operational improvement is imperative, as Nyack has very limited financial flexibility.

Nyack is a 375-bed staffed hospital located in Nyack, NY, approximately 25 miles north of New York City. Nyack had total operating revenue of $139 million in fiscal 2003. Nyack covenants to supply bondholders with annual information only, which is viewed very negatively by Fitch. However, disclosure to Fitch and bondholders has been timely and thorough, including a recent investor conference.