S&P Afms NYS Med Care Fac Fin Agy BB Revs;Outlk Stab.
The outlook revision reflects: -- Anticipated benefits from the recent merger with two other eastern Long Island hospitals, including enhanced managed-care contracting leverage and the centralization of certain ancillary and administrative functions;
-- Improved financial performance since poor 1995 results caused a covenant violation when debt service coverage fell below 1 times (x); and
-- The expectation of improved coverage and free cash flow pending a drop in debt service from the current level of $2.2 million to $1.75 million in 1999.
Continuing credit risks reflected in the rating include: -- Weak excess margins of 1.22% in 1996 and 0.77% in 1997, resulting in thin, but adequate debt service coverage of 2.03x in 1996 and 1.76x in 1997;
-- Very high leverage, with debt to capital at 85% due to a low fund balance of only $3.4 million, although the debt burden is more moderate at 4% of revenues; and
-- Light liquidity, as cash and board-designated funds totaled $5.1 million at Dec. 31, 1997, equal to 35 days' expenses and 26% of debt.
In 1997, Peconic Bay Health System was created as the parent corporation for three hospitals -- Central Suffolk, Southampton Hospital, and Eastern Long Island Hospital. Each hospital appoints board members to the parent but retains its own assets. Benefits from the merger are just beginning to become manifest, particularly as managed-care contracts are renegotiated as a system. Managed care is a rapidly growing part of the payor mix, accounting for one-third of business. Medicare accounts for 45% of revenues, while Medicaid is modest at 5%. Central Suffolk should benefit from length-of-stay reductions engineered in the last year. The overall length of stay in June 1998 was 5.18 days, compared with 7.19 in June 1997.
Capital spending has been crimped by low cash flow, averaging just $1.2 million in the last three years, well below the annual $2.3 million depreciation expense. As a result, age of plant for fiscal year-end 1997 was high at 13.87 years. Routine capital spending should be restored as debt service expense decreases starting in 1999. However, management reports no major capital needs. Admissions were flat in 1997 at 4,514, but rose 3.2% for the first half of 1998.
OUTLOOK: STABLE The outlook anticipates that merger benefits will help to at
least maintain the current financial position until the debt service begins to fall, after which cash flow is expected to improve, Standard & Poor's said. CreditWire
CONTACT: Elizabeth Sweeney, New York (1) 212-208-8311 Cynthia Keller, New York (1) 212-208-1840 For more information on criteria or subscriptions: http://www.ratings.standardpoor.com
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|Date:||Sep 3, 1998|
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