Fitch Affirms Nyack Hospital (New York) Revs At 'B-'; Outlook Negative.

NEW YORK -- Fitch Ratings has affirmed and removed from Rating Watch Negative the 'B-' rating on the outstanding $14.375 million Dormitory Authority of the State of New York hospital revenue bonds (Nyack Hospital), series 1996. The Rating Outlook is Negative.

On May 15, Fitch placed the rating for Nyack Hospital on Rating Watch Negative over delays in providing its fiscal 2005 audit (year ended Dec. 31) to the nationally recognized municipal securities information repositories (NRMSIRs) by April 30, 2006 as is required in its bond documents and a continued precariously low liquidity level, which weakens Nyack's ability to absorb an unforeseen negative event.

The rating affirmation is primarily due to Nyack Hospital's (Nyack) covenant violations and further credit profile deterioration resulting from continued weak liquidity position, future capital needs, continued weak operating performance, protracted negotiations surrounding labor contracts, negative utilization trends, and management turnover. In May 2006, The Dormitory Authority of the State of New York (DASNY) waived Nyack's violation of a covenant to maintain a 1:1 ratio of net income available for debt service to maximum annual debt service (MADS) until April 2007, which temporarily delays any acceleration of Nyack's debt; however, any further covenant relief will likely result in a rating downgrade. At June 30, 2006 (unaudited), Nyack had 5.7 days cash on hand, 0.3 times (x) cushion ratio and 10.6% cash to debt, up from 4.2 days cash on hand, cushion ratio of 0.2x and cash to debt of 7.8% at fiscal 2005. Nyack's liquidity position has eroded significantly due to ongoing operating losses. MADS coverage by earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal 2005 was a weak 0.4x. Nyack has reported operating losses for five of the last six years, and losses were at $4.911 million (negative 3.4% operating margin) in fiscal 2005.

Management attributed the continued poor operating performance and decreased liquidity over the past few years to increases in employee staffing expenses that have outpaced increases in net patient revenues; however, Nyack's patient volume (except for outpatient surgeries) has been increasing, while its average length of stay has decreased to 4.9 days in fiscal 2005 from 5.3 days in fiscal 2000. The union contract for Nyack's nurses expired without being renewed on Dec. 31, 2005. Having worked without a contract in 1998 and 1999 and then striking for half a year in 2000, the current nursing issue is a concern. A federal mediator has been called to settle the current disputes over the union contract. Nyack has been limited in implementing large-scale capital improvements or clinical program developments to increase new patient volumes and revenue growth due to its low liquidity level. These financial constraints have resulted in continued pressure on Nyack's operational profile. Nyack's average age of plant is over 23 years, which is significantly greater than Fitch's median of 13.1 years for non-investment-grade hospitals. MADS is over $6.85 million (of which $3.85 million is for the series 1996 bonds), which, according to Nyack's management, could support $70 million to $80 million of new debt instead of its approximate $19.96 million of total outstanding long-term debt as of June 30, 2006.

The primary credit strength is Nyack's enhanced corporate relationship with New York Presbyterian Healthcare System (NYP). Despite its low cash position and the lack of any definitive turnaround plan, Nyack's management believes that, given sufficient time, the corporate affiliation between Nyack and NYP, dated March 2005, will provide some sustained opportunities in its operations from clinical programmatic enhancements, increased patient volumes, increased reimbursements from managed care rates, improved supply chain management, and improved community image. The most significant benefit of the affiliation to date has been NYP's assistance in renegotiating rates for Nyack's managed care contracts; however, some of the new contracts are still unprofitable.

The Negative Outlook is based on Nyack's continued balance sheet weakness, inability to stem ongoing losses, and still uncertain timeframe for recovery to normalized profitability and credit measures. Management remains challenged to increase patient volumes and cut costs to bring the hospital into compliance with bond covenants and improve liquidity. Fitch expects to monitor Nyack's results on a quarterly basis. Further balance sheet deterioration and ongoing sizable losses from operations will prompt further negative rating actions.

Fitch does not believe that Nyack can simply rebuild its liquidity position from improved cash flow; furthermore, any liquidity growth may be hindered by much-needed capital expenditures over the near-to-medium term, unless Nyack is better-able to access capital and restructure its debt. Due to a protracted inability to make routine capital expenditures (estimated by Nyack's management at more than $20 million), immediate operational improvement is an imperative, as Nyack has extremely limited financial flexibility.

Fitch does believe that Nyack's viability rests largely on the NYP relationship, and Nyack's ability to implement an immediate turnaround plan that improves profitability, negotiates favorable contracts with managed care payors and labor unions, and accesses capital for much needed facility improvements and debt restructuring.

Significant credit risk is present. Financial commitments are currently being met, but a limited margin of safety remains. Despite Nyack's distressed financial profile, it has not missed any debt service payments to-date. Nyack maintains a fully funded debt service reserve fund in the amount of approximately $3.5 million. Nyack's bonds are secured with a revenue pledge and a mortgage.

Nyack is a 375-bed staffed hospital, with a medical staff of more than 650 physicians, located in Nyack, New York, approximately 20 miles north of New York City. Nyack had total operating revenue of $145.355 million in fiscal 2005. Nyack has not entered into any swap arrangements. Nyack covenants to disclose only annual financial information to the NRMSIRs, which Fitch views negatively. However, Nyack intends to resume its prior practice of disclosing quarterly information to the NRMSIRS.

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