Moody's Investors Service lowered Mount Sinai Hospital in New York's rating to Baa1 from A3. The outlook is stable. The hospital had $1.6 billion in debt at the end of fiscal 2022.
Moody's said the downgrade reflects its expectations that Mount Sinai Hospital and Mount Sinai Hospitals Group system's operating performance and liquidity will fall below historical averages and remain there for several years.
"Weaker performance is in part driven by higher permanent labor costs. Liquidity will continue to be negatively impacted by material transfers to support losses at affiliate hospitals and network expansion as well as a relatively high allocation to alternative investment strategies," Moody's said.
"These elements highlight rising human capital and financial strategy risks under Moody's ESG [environmental, social and governance] classification and are key drivers of this rating action. Further, leverage will increase with the addition of growing lease obligations," the rating agency said.
Moody's said the stable outlook reflects its expectations the health system's operating cashflow margin, including FEMA grants, will be 3% to 4% in fiscal 2023 and will start to improve after. It expects the system's cash on hand will be about 120 to 140 days.
The rating remains supported by the health system's "high acuity services in a competitive market, which will support volume growth. Leading research, commercialization opportunities, and substantial fundraising at the closely affiliated Icahn School of Medicine at Mount Sinai [ISMMS] will benefit the entire enterprise," Moody's said.
"Favorably, an accelerated improvement plan, Medicaid rate increases, and completion of an IT platform will help stabilize and eventually improve operating performance," Moody's said. "Further, some one-time cash infusions will provide some offset to liquidity drain from the transfers."
The hospital is a large tertiary care teaching hospital in upper Manhattan with a division located in Queens. It is closely affiliated with ISMMS in Manhattan, which is a separate legal entity.
In 2013, the hospital, ISMMS and the Mount Sinai Medical Center completed a transaction with Beth Israel Medical Center, St. Luke's-Roosevelt Hospital Center and The New York Eye and Ear Infirmary to create the Mount Sinai Health System.
Moody's said factors that could lead to an upgrade include higher sustained margins for the total system; material growth in liquidity; and improvement in leverage, reflected in reduction in debt-to-cashflow and increase in cash-to-debt.
Moody's said factors that could lead to a downgrade include an inability to generate 3-4% operating cashflow margin for the system in fiscal 2023 with a trend of further improvement thereafter; a sustained decline in cash on hand to below 120 days for the system; reduction in monthly liquidity of unrestricted investments; and a meaningful increase in hospital or system leverage, including leases, beyond expectations in 2023.
The Mount Sinai Obligated group sold $400 million of taxable bonds in 2020, $500 million of taxables in 2019 and $382 million of taxables in 2017. The Dormitory Authority of the State of New York sold $512 million of tax-exempt revenue bonds for ISMMS in 2015.
Separately, Moody's downgraded the Icahn School of Medicine at Mount Sinai's issuer and revenue bond ratings to Baa1 from A3. As of Dec. 31, 2022, ISMMS had $1.3 billion in debt issued through DASNY. The outlook is stable.
"The downgrade of the Icahn School of Medicine at Mount Sinai's issuer and debt ratings to Baa1 from A3 is driven by weakening of credit quality at Mount Sinai Hospital, given the multiple strategic, governance, and financial linkages between the two entities," Moody's said.
"These linkages include the strong integration of healthcare activities and reliance on the hospital for intercompany transfers for liquidity," Moody's said. "In addition, ISMMS faces inherent credit challenges that encompass a sharp reduction in cash and investments, along with narrow liquidity and thin operating performance."
