Budget pressure amid plans for capital investments drove a downgrade to a Long Island hospital affiliated with the Mount Sinai Health System network.
Moody’s Investors Service downgraded Mount Sinai’s South Nassau Communities Hospital in Oceanside, N.Y. to Baa2 from Baa1 Tuesday, citing fiscal struggles in 2018 that have continued this year. The downgrade impacts roughly $159.5 million of Moody’s-rated debt.
“The downgrade to Baa2 reflects the unexpected and material miss to budget in fiscal 2018 and a continuation of weak results into 2019 contributing to a decline in an already modest cash position that will remain weak,” Moody’s analyst Jennifer Barr wrote “Leverage and capital spending will remain high over the next several years as the hospital invests in facilities to remain competitive in the consolidating Long Island market, limiting the ability to grow cash.”
The hospital partnered with New York City-based Mount Sinai last year, and became the Long Island flagship in the Mount Sinai Health System.
Under the affiliation agreement, Mount Sinai agreed to contribute $20 million annually over the next five years for capital upgrades to expand South Nassau’s facility. Barr noted that South Nassau remains the sole obligor on its debt, but joint strategic initiatives this year and planned integration strategies are expected to yield some fiscal benefits.
“The stable outlook reflects expectations that the system's physician and facilities strategies, as well as better contract terms, will improve margins in the second half of 2019 and in fiscal year 2020,” Barr said. “While still weak, we expect liquidity will be maintained given substantial and identified resources to fund large capital projects, including bond proceeds, FEMA grants and potential Mount Sinai contributions.”
Mount Sinai South Nassau’s bonds are secured by a pledge of gross receivables and a mortgage on the hospital’s core acute care facilities. It is the sole member of the obligated group, which does not include various subsidiaries that operate physician practices and other outpatient services.
Barr said that the 455-bed hospital could receive a further downgrade if unable to achieve targeted operating cash flow margins or it experiences further declines in liquidity beyond expectations. Increased leverage and a weakening of market position could also trigger a lower rating, according to Barr.
The hospital could experience a credit upgrade if it posts “significant” and “durable” improvements with operating margins and restores liquidity to match up with peer healthcare institutions, Barr said. A potential ratings boost also hinges on completing capital projects with “minimal operating disruption.”
South Nassau issued a statement in response to the Moody’s downgrade noting that the hospital has “recovered significantly” from the impact of a 2018 operating surplus that fell below projections due to the loss of a major admitting group. The hospital is expecting current year operating performance to exceed 2019 budget estimates thanks to the addition of other surgical groups and to achieve a surplus for 2020.
“Our recent partnership with the Mount Sinai Health System has produced significant dividends for our patients and improved operating performance,” the statement said. "The hospital has recently embarked on a capital investment program at its Oceanside and Long Beach campuses that will provide greater access to high quality services while positioning it as a strong regional medical center on Long Island for decades to come."
