TEXT - Fitch revises Massachusetts Cap Cod Healthcare outlook
Feb 6 - Fitch Ratings has affirmed the following Massachusetts Health and Educational Facilities Authority (Cape Cod Healthcare Obligated Group) at 'BBB+': --$23.06 million, series C; --$58.59 million, series D. Cape Cod Healthcare has approximately $49.7 million in direct bank placements, which Fitch was not asked to rate but considered in the analysis. The Rating Outlook is revised to Positive from Stable. SECURITY The bonds are secured by a pledge of the gross receipts and mortgages on the property and equipment of the core hospital campuses. SENSITIVITY/RATING DRIVERS SUSTAINED STRONG FINANCIAL PERFORMANCE: The Positive Outlook reflects the continued solid improvement in Cape Cod Healthcare's (CCHC) financial performance due to realized benefits of its turnaround strategy that began in 2008. CCHC's profitability, liquidity and capital metrics have improved year-over-year for the past five years and all metrics currently exceed the 'BBB' category medians. STRONG MARKET POSITION: CCHC is a sole community provider hospital with a dominant market share in its primary service area (PSA), controlling 73.1% of inpatient admissions as of fiscal 2011. CCHC's strong physician alignment and enhanced relationships with other providers should result in a continued strong market position. POTENTIAL DEBT ISSUANCE: CCHC is contemplating a debt refinancing, which could include a new money component. A financing plan has not been finalized, however, Fitch believes CCHC has some capacity for additional debt even at a higher rating level given its current modest debt burden, strong debt service coverage, and front loaded debt service schedule. Coverage of maximum annual debt service (MADS) in fiscal 2012 (Sept. 30 year end) of 4.9x well exceeds the 'BBB' category median of 2.8x. GOOD LIQUIDITY: Once a credit concern, CCHC's liquidity has significantly improved over the last five years with 166.5 days cash on hand and 172% cash to debt at Sept. 30, 2012 (fiscal year end) compared to 88.7 days and 65.6% at Sept. 30, 2008. HIGH DEPENDENCE ON GOVERNMENT PAYORS: CCHC's payor mix is unfavorable as it has a high exposure to governmental payors, with 67% of its gross revenues from Medicare and Medicaid. This is particularly concerning given looming reimbursement reductions at the federal level. WHAT COULD TRIGGER A RATING ACTION CONTINUED PERFORMANCE IN LINE WITH 'A' CATEGORY CREDITS: After there is more clarity surrounding CCHC's debt plans, upward rating movement may be likely if the pro forma financial performance remains in line with Fitch's 'A' category medians. CREDIT PROFILE Since the execution of a financial turnaround plan in 2008, CCHC has continued to deliver solid operating performance, which has been consistent since fiscal 2010. Operating performance was especially strong in fiscal 2012 due to several one-time revenues, including $5.1 million for the Medicare budget neutrality settlement, about $2.6 million for cost report settlements and $1.1 million for a Medicaid state-wide ambulatory payment settlement. Including these one-time revenue sources, CCHC posted a 6.4% operating margin and 11.4% operating EBITDA margin in fiscal 2012, well exceeding the respective 'BBB' category medians of 1.9% and 8.3%. Excluding the approximately $8.8 million in one-time revenues, operating margin and operating EBITDA were both still very strong at 5.2% and 10.2%, respectively. This compared to 5.6% operating margin and 10.9% operating EBITDA margin in fiscal 2011. The profitability has been driven by expense controls and revenue enhancements, including the expansion of its ambulatory strategy with the addition of several new outpatient centers in the service area as well as its expanded relationship with Brigham and Women's Hospital and Brigham and Women's Hospital Physician Group, which will provide for further clinical and research collaboration. Management historically budgets conservatively and the fiscal 2013 operating income budget is $20 million (2.7% operating margin), which Fitch expects CCHC to meet or exceed. Because of strong cash flow generation, CCHC has been able to continue to bolster its balance sheet and liquidity metrics. Total unrestricted cash and investments was $278.1 million in fiscal 2012, which is an 18% improvement from the prior year. Days cash on hand was 166.5, cash to debt was 172.3% and cushion ratio was 16.1x during this time period well exceeding the respective 'BBB' category medians of 138.9 days, 82.7% and 9.4x. Total outstanding debt as of January 2013 was $155.2 million. Of this, $130.9 million is bonded debt, which is 80% fixed rate and 20% variable rate. The variable rate exposure is on a 10-year direct bank loan at an indexed floating rate. This debt is synthetically fixed with two floating to fixed rate swaps that had a negative mark-to-market of $4.2 million as of Dec. 31, 2012. There are no collateral posting requirements on the swaps. MADS coverage by EBITDA is very good at4.9x in fiscal 2012 compared to the 'BBB' category median of 2.8x. Excluding the one-time revenues, MADS coverage by EBITDA remains very strong at 4.4x. MADS as a percent of revenue was 2.5% in fiscal 2012, comparing favorably to the 'BBB' category median of 3.3%. In the spring, CCHC may refinance its series C bonds for savings and could issue some new money, but details on this potential financing are still being determined. Capital spending has increased over the last two years and its fiscal 2013 capital budget is $47 million (approximately 180% of depreciation expense). However, CCHC has a successful foundation, recently raising $100 million in its last capital campaign, and management expects to finance a significant portion of its emergency expansion and renovation (total project costs for both Cape Cod Hospital and Falmouth Hospital is about $13 million-$15 million) through philanthropy. Another key credit strength is CCHC's dominant market position and designation as Sole Community Provider under the Medicare Program. CCHC maintains a leading market share position above 70% in its PSA and operates the only two hospitals on Cape Cod. However, utilization trends are seasonal given its location. Fitch's main credit concern is CCHC's exposure to government payors. Medicare and Medicaid as a percentage of gross revenues has consistently been over 60%, which Fitch views negatively, as the organization remains highly exposed to reimbursement pressure at the state and federal level. The Positive Outlook is based on Fitch's expectation that CCHC will continue to produce solid financial performance. The ability to maintain performance in line with 'A' category credits while executing its capital plan could result in upward rating movement. Located in Barnstable County, Massachusetts, CCHC operates two hospitals (Cape Cod Hospital and Falmouth Hospital) with a combined total of 354 licensed beds. In fiscal 2012, CCHC had total operating revenues of $663.02 million. CCHC covenants to submit certain annual and quarterly financial and utilization information to EMMA.
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