NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the expected issuance of approximately $135 million of Build NYC Resource Corporation Tax-Exempt Revenue Bonds (Mount Sinai Hospital Project), Series 2013 to be issued on behalf of The Mount Sinai Hospital (MSH).

In addition, Fitch affirms at 'A' the following parity debt issued on behalf of MSH:

--$63,800,000 Dormitory Authority of the State of New York (Mount Sinai Hospital Obligated Group) Revenue Bonds, Series 2011A

--$311,000,000 Dormitory Authority of the State of New York (Mount Sinai Hospital Obligated Group) Revenue Bonds, Series 2010A

The Rating Outlook is Stable.

The 2013 bonds will be issued as fixed rate. Proceeds from the bonds will finance a major capital improvement project at Mount Sinai Queens that includes a new ambulatory care building and facade and infrastructure improvements to the adjacent hospital. Maximum annual debt service (MADS) will be $45.8 million and that figure was provided to Fitch by the underwriters. The 2013 bonds are expected to sell via negotiation the week of Sept. 30.

SECURITY

--Interest in gross receipts and a mortgage on MSH's property

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: MSH's operating and financial metrics are consistent with the 'A' category medians.

MANAGEABLE DEBT BURDEN: Pro forma maximum annual debt service (MADS) coverage of 4.2 times (x) and pro forma MADS as a percent of revenue of 2.4% at June 30, 2013, are both better than their respective 'A' category medians of 3.8x and 3.1%.

STABLE HISTORICAL OPERATING PLATFORM: MSH's overall operating platform?characterized by good physician recruitment, successful strategic initiatives around maintaining and advancing its quaternary and tertiary clinical services, ongoing capital investments, and a high level of integration with the Icahn School of Medicine at Mount Sinai (ISSMS)?has supported solid financial results through the historical period.

CONTINUUM MERGER: MSH expects to combine with Beth Israel Medical Center (BIMC), The St. Luke's-Roosevelt Hospital Center (SLRHC) and the New York Eye and Ear Infirmary (NYEE) -- each of which are currently members of Continuum Health Partners (Continuum) and in total have five hospitals, 1,440 staffed beds, and $2.8 billion of operating revenue in 2012 ? to form a new health care system, the Mount Sinai Health System (MSHS). The various obligated groups housed within the new MSHS, including MSH, are expected to remain separate.

RATING SENSITIVITIES

CONTINUUM INTEGRATION: While Fitch views the merger of MSH and Continuum as strategically sound, there is attendant execution risk over the next two to three year period as these two systems merge into one large, integrated system. While MSH and Continuum will be separately obligated on their outstanding debt negative rating pressure could occur should MSH's financial profile weaken as an effect of the Continuum integration process.

CREDIT SUMMARY

MSH, which is the obligated group on which the rating is based, is an academic medical center affiliated with ISMMS, operating at a main campus on the Upper East Side of Manhattan and a satellite campus in Astoria, Queens. In 2012, MSH had 63,533 discharges and total operating revenues of approximately $1.7 billion.

Solid Financial Profile

MSH finished 2012 with a 3% operating margin and a 9.2% operating EBITDA both of which are consistent with the prior year performance and are consistent with their respective 'A' category medians of 3.3% and 10.7%. The stable operating performance reflects good outpatient growth, especially for oncology services, and further recruitment of physicians, even as inpatient volumes have been pressured by the shift from inpatient to ambulatory. Through the six months ended June 30, MSH has generated a 2.5% operating margin and 8.7% operating EBITDA margin, which while lower than year end fiscal 2012 results are slightly ahead of the year over year six month 2012 interim results.

Most of MSH's capital ratios compare favorably to Fitch's 'A' category medians reflecting MSH's manageable pro-forma debt burden. Coverage of pro-forma MADS through the six month interim period is a strong 4.2x despite lower profitability.

Liquidity remains a credit strength, with 224.7 days cash on hand, 23.2x pro forma cushion ratio, and 199.8% pro-forma cash to debt at June 30, 2013; all better than Fitch's 'A' category medians. MSH liquidity has grown steadily over the last four years with unrestricted cash and investments of $1.1 Billion, at June 30, 2013, up 41% since 2009. MSH does have exposure to alternative investments through a common investment pool with the ISMMS. At year-end 2012, approximately $461.5 million of MSH's funds was invested in alternative investments through this pool.

Mitigating this concern is the oversight provided by MSH's board (which includes a number of investment professionals), MSH's conservative debt profile (overwhelming fixed rate), and the remaining $551 million which in cash and short term investments. Additionally, approximately 43% of the investments in the pool can be liquidated within 90 days and nearly 77% in six months.

Continuum Merger

Fitch believes over the long term the combined system of MSH and the Continuum hospitals could be materially accretive to MSH. In the near term, there should be efficiencies gained through consolidating back office functions, improved revenue cycle, and better group purchasing pricing. Clinically, the merger should better position the combined organization for population health management as Continuum has 260 employed primary care physicians located around New York City, with a concentration in Manhattan. The addition of the Continuum hospitals will also provide opportunities to restructure services lines across the new system, which could potentially create more inpatient capacity at MSH's main campus, which has been a credit concern.

However, Fitch believes there is significant execution risk moving forward as the two systems, with $4.6 billion in total revenue, seven hospitals, and various medical staffs begin the process of integration, and management attempts to standardize care, quality, and financial performance across the system. An additional concern is the capital needs at the Continuum hospitals. Management plans to move forward on an information technology (IT) implementation project at Continuum, in order to bring its IT up to MSH's levels, which is expected to cost approximately $125 million. Other capital needs are expected to emerge as the systems integrate. The rating assumes that projects to benefit the Continuum hospitals that require new debt will be financed outside the MSH obligated group.

A new corporate structure will be established as part of the merger transaction. The Mount Sinai Health System (MSHS) will be the new corporate parent of ISMMS and a newly created hospitals group, Mount Sinai Hospitals Group (MSHG), where all the hospitals will reside. Within MSHG, the hospitals will remain within their separate obligated groups. Both MSHS and MSHG will be passive parent corporations.

While the 'A' rating is based on MSH's financial performance, Fitch did its own analysis on the newly created system, on a pro forma combined basis. All three major components of Continuum ?SLRHC, BIMC, and NYEE -- had positive cash flow in 2012. Combined results for the whole system, including MSH, show dilution of MSH's financial ratios, but an overall financial profile in line with Fitch's 'A' category medians and peer group. Longer term, given the size of the revenue base, the sizable patient base, and geographic reach of an integrated MSH and Continuum, there is potential to strengthen the combined financial profile. However, in the near term, there is a high level of execution risk.

Capital Project Update

With this bond financing, MSH is moving forward on a major capital project to upgrade its Queens, NY campus, located in Astoria, which has had little capital investment since MSH acquired it in 1999. The project is expected to cost $150 million, including capitalized interest and cost of issuance, with bond funds covering $134 million of the costs, MSH contributing approximately $11 million in equity, and an additional $4 million to come from New York State's HEAL grant program.

The project will include the building of a new five-story poly-clinic building, which MSH describes as a one-stop shop for coordinated care and medical services. The poly clinic, which will be located adjacent to the main hospital, is expected to have a mix of 40 primary care physicians and specialists, diagnostic and laboratory services, an expanded emergency department with 36 bays and 8 observation beds, and seven new operating rooms. Upgrades to the main hospital building next door will include new limestone cladding, new replacement windows, a new HVAC system, and a new 2-story entrance. Construction is expected to begin this month and be completed by June of 2016.

The projects funded with the 2011 debt issuance are all complete. Those projects included the outfitting of floors dedicated to clinical cancer services and radiation oncology in a new Center for Science and Medicine (CSM), built in conjunction with ISMMS, and an apartment tower contiguous with CSM, which was financed and built by a non-obligated affiliated corporation. Fitch toured the new CSM and the apartment tower. The clinical space within the CSM is state of the art and helping to drive the growth in oncology services. The apartment tower was 88% rented when Fitch toured and has positive cash flow.

MSH guarantees $143.7 million of variable-rate debt issued on behalf of the affiliated corporation that built the apartment tower. Fitch had expected the debt to be refinanced upon stable occupancy, which has been reached. However, the letter of credit supporting the variable rate debt has been extended at favorable rates, so the refinancing has been postponed.

However, the guarantee is a credit concern until the debt is permanently refinanced. Fitch does not include the debt service or the debt in its calculations for MSH. Fitch believes MSH has the financial capacity, if needed, to honor the guarantee and remain at the current rating level and much of the risk has been mitigated as the tower has been built and occupied.

Disclosure

MSH covenants to disclose annual and quarterly financial information and operating statistics through MSRB's EMMA system, and disclosure has been excellent in terms of timeliness and content. Quarterly statements include a balance sheet, income statement, cash flow statement, utilization statistics, and management discussion and analysis.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria' (June 3, 2013).

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria -- Effective Aug. 12, 2011 to July 23, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=801781

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