A significant reduction of Federal Housing Administration insured debt landed New York-Presbyterian Hospital a bond upgrade ahead of a planned $500 million taxable sale.
Moody’s Investors Service upgraded the Manhattan-based hospital to Aa2 from Aa3 Tuesday citing a 30% decrease of FHA debt the last three years. The new rating applies to roughly $1.6 billion of outstanding taxable debt. The outlook is stable.
Moody’s analyst Lisa Martin noted that NYPH is on pace to pay off its FHA debt by the last call date in 2023. Following the planned issuance of $500 million in Series 2019 taxable bonds, FHA will comprise 25% of NYPH’s total debt compared with a much higher 58% in 2015, according to Martin. The hospital has also received conditional consent from the U.S. Department of Housing and Urban Development to release $1 billion in real estate assets on its Columbia University and White Plans campuses from mortgages that secured the FHA debt.
“The new Aa2 rating also reflects New York Presbyterian’s strong brand and academic affiliations with two premier medical schools which will drive further growth of a large enterprise, exceptional philanthropic support, and expected stable operating cash flow margins from continuing integration initiatives and volume growth,” Martin wrote. “Liquidity will remain strong as cash flow, debt proceeds, and gifts provide adequate funding for a high capital spending program.”
Martin noted that NYPH will have elevated leverage over the next two years before debt metrics improve in 2021 and 2023 following its expected paydown of the FHA insured debt. The hospital system will also face increased competition from large, consolidated healthcare providers with margins projected to be “somewhat constrained” from staff investments in staff to meet growth goals, according to Martin.
NYPH is planning to use proceeds from the upcoming $500 million taxable bond deal for general corporate purposes. As of June 30, 2019, NYPH had $781 million of debt insured by FHA with most of it secured by first lien mortgages on its properties including and a revenue pledge from the hospital. The system operates seven campuses in Manhattan and Westchester County.
“NYPH enjoys a preferred status with FHA, which as long as it meets and maintains certain financial tests, allows for less restrictive financial and operating covenants,” Martin said. “While FHA’s documents allow for control over assets and certain business decisions, the contractual and effective subordination of the unsecured bondholders has been significantly reduced because of the reduction in FHA debt relative to total debt and consent to release certain properties under the mortgages.”