MSMC's revenue bonds affirmed as BB+ by Fitch Ratings

Fitch Ratings affirmed the 'BB+' rating on approximately $260 million of the City of Miami Beach Health Facilities Authority Hospital Revenue Bonds, series 1998, 2001A and 2004 issued on behalf of Mount Sinai Medical Center of Florida (MSMC). The Rating Outlook is revised to Stable from Negative.

The affirmation is based on MSMC's improved operating results, relatively stable liquidity, and strong philanthropic support. Following 2008's operating loss of $15.7 million (negative 3.2% operating margin), which showed deterioration from the prior year of negative $8.9 million (negative 1.9% operating margin), management has taken several steps to improve the operating results, including adding a new chief of cardiac surgery in December 2008, a new chief of cardiology in January 2009, adding additional doctors in key service lines, and maintaining overall expense increases at only 0.3% year over year (through the six month interim).

These initiatives have resulted in an increase in patient acuity, driven by strong cardiac surgical volume (up 31% year over year), thoracic surgery volume (up 15%), an increase in the case mix index, and an increase in emergency room visits, mainly from the freestanding emergency department in Aventura (up 52%). As a result, through the six month interim period ended June 30, 2009, operating income was negative $5.4 million (negative 2.1% operating margin) as compared to an $8.4 million loss (negative 3.3%) for the prior year period. These figures do not include the $5 million transfer from the foundation for the half year ($10 million will be transferred in the full fiscal year), which is recorded as net revenue. Additionally, management has hired Wellspring Partners for a six month engagement which will contribute to a total of $8.5 million in expense savings that is expected to be realized over the course of 2009, with the majority of the savings coming in the second half.

Although MSMC's liquidity metrics are relatively low at 83 days cash on hand, 4.4 times (x) cushion ratio, and 39% cash to debt, they are inline with the below investment grade medians of 60 days, 4.6x, and 40%, respectively. Additionally, the liquidity position is fairly stable as the asset allocation is very conservative with 100% held in cash or short term fixed income securities. The Mount Sinai Medical Center Foundation continues to see strong community support as pledge revenues are up over 100% year over year. Through the interim period, the Foundation has raised $8.7 million and in fiscal 2008, it raised $10.5 million and made a $10 million contribution to MSMC.

Primary credit concerns include the high debt burden and the disposition of Miami Heart Institute. MSMC's debt burden remains high, with MADS as a percentage of revenue of 4.7% and debt to EBITDA of 7.7x at fiscal year end. The debt is all fixed-rate and there are no swaps outstanding, which Fitch views favorably. The strong historical debt service coverage, which has averaged 1.9x over the last five fiscal years and was 1.9x in the interim, also provides some offset to the high leverage position. The disposition of the Miami Heart Institute will have a material impact on MSMC's financial standing as the facility carries $108 million in debt and sizable yearly carrying costs. Management has listed the property for sale since late 2007, and has experienced trouble moving the property given the downturn in the commercial real estate market in South Florida.

The Stable Outlook is based on improvements to utilization figures, especially to the high end service lines which have improved profitability. Continued improvements to the operating margin due to expense reductions and growth in key service lines, combined with the stable liquidity position should maintain MSMC at the current rating level for the near- to medium-term.