TEXT-fitch affirms Dartmouth-Hitchcock Obligated Group, N.H. revs at 'A+'

Thu Feb 7, 2013 11:54am EST

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Feb 7 - Fitch Ratings affirms the 'A+' rating on approximately $207 million
of Dartmouth-Hitchcock Obligated Group's (DHOG) outstanding debt issued through
the New Hampshire Health & Education Facilities Authority and Massachusetts
Health & Educational Facilities Authority. DHOG has approximately $616 million
of total debt outstanding of which $409 million are non-rated direct bank loans.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated
group (OG). DHOG is comprised of Dartmouth Hitchcock (DH; Mary Hitchcock
Memorial Hospital and Dartmouth Hitchcock Clinic) and Cooley Dickinson Hospital
(CDH). CDH is expected to withdraw from the OG sometime in 2013. Fitch does not
view this as a credit negative as it comprised approximately 11% of the OG's
revenue base.

KEY RATING DRIVERS

INTEGRATED DELIVERY PLATFORM: DH provides high acuity care to an extensive
geographic area through its flagship academic medical center (Mary Hitchcock
Memorial Hospital) and its physician clinic (Dartmouth Hitchcock Clinic). DH has
a close relationship with the Geisel School of Medicine at Dartmouth College
(Fitch rated 'AAA'; Stable Outlook) to further its mission in education and
research. Under new consolidated leadership at DH, the organization is focused
on providing value through lowering cost, increasing efficiency and improving
value. DH has consistently been ranked as one of the lowest cost providers in
the nation.

IMPROVED OPERATING PERFORMANCE: Under new leadership, DH's financial discipline
and improved profitability has been a mandate with maintaining an operating
margin target of 4% beginning in fiscal 2013. Fiscal 2012 performance exceeded
budget with a 1.5% operating margin despite the elimination of disproportionate
share funding (DSH). Through the five months ended Nov. 30, 2012, improved
operating performance was sustained with a 2.6% operating margin, although
behind the fiscal 2013 operating margin budget.

LIMITED DEBT CAPACITY: DH issued $150 million of taxable debt (direct bank loan)
and the proceeds were used to fund its defined benefit pension plan. This
issuance limits DH's future debt capacity; however, DH does not have any major
capital needs in the near to medium term. Fitch is concerned about DH's debt
profile, which has put dates in 2018, 2019 and 2022.

TACKLING PENSION OBLIGATION: DH's projected benefit obligation totals
approximately $927 million and with the pension financing, the plan is now
approximately 82% funded on a GAAP basis. Management's objective with the
pension financing was to increase the funded status and to lower the volatility
associated with pension requirements, which includes settling approximately $320
million of its pension liabilities over the next seven years, which Fitch views
favorably.

RATING SENSITIVITIES

FAILURE TO SUSTAIN IMPROVED PERFORMANCE: Given DH's pressured financial profile
with the additional debt and pension obligation, it is necessary for DH to
sustain its operating performance trend to improve debt service coverage and
build liquidity. The failure to sustain improved performance could result in
negative rating pressure.

CREDIT PROFILE

Transforming Healthcare Delivery

In November 2011, the dual-presidency leadership structure of DH was
consolidated into a chief executive officer (CEO) position. The current CEO was
previously President of the Dartmouth-Hitchcock Clinic and Director of the
Dartmouth Institute for Health Policy and Clinical Practice, home of the
Dartmouth Atlas of Healthcare. Fitch believes the directives under the new
leadership have leveraged DH's integrated platform model, which should continue
to drive down costs and provide care more efficiently. These initiatives include
streamlining governance and management of DH, focusing on population health, and
collaborating with national providers, all in an effort to deliver the best
quality outcomes at the lowest cost possible. DH has demonstrated lower
utilization rates in imaging and surgeries compared to national averages and
have been ranked highly by UHC regarding efficiency, which focuses on per case
cost performance and length of stay.

A newly created Chief Clinical Officer and Executive Vice President for
Population Health role is expected to further DH's initiatives in creating a
high value network in its expansive geographic region. DH is the state's only
academic medical center and has various outpatient facilities throughout NH and
VT. DH is collaborating with other providers and has a goal of serving one
million lives over the next three to five years.

Improved Operating Performance

DH's operating performance has improved despite the elimination of DSH funding
from the state. Historically, the state funded its DSH program through a
Medicaid Enhancement tax (MET) on providers. As of July 1, 2011, the state
continued to collect the MET with no offsetting revenue and the annual impact to
DH was approximately $40 million.

Fitch views positively management's quick response to the loss in revenue. Cost
reduction initiatives included a voluntary early retirement option ($16 million
expense in fiscal 2011) and a further reduction in force in early fiscal 2012.
DH exceeded its fiscal 2012 budget with a 1.5% operating margin. If the DSH
funding was still in place, DH would have ended fiscal 2012 with a 5.8%
operating margin.

Through the five months ended Nov. 30, 2012, DH had an operating margin of 2.6%,
which is behind its 4% operating margin budget for the full year. Management has
identified several clinical improvement initiatives to reach its 4% operating
margin target by year end, which Fitch believes are achievable. In addition,
Fitch believes there are benefits to be realized from DH's continued
transformation of healthcare delivery and full implementation of its EMR.

Pension Plan Liability

As of June 30, 2012, DH's projected benefit obligation was $927 million and with
the proceeds from the pension financing, the pension plan is now approximately
82% funded on a GAAP basis (based on 4.9% discount rate, which is the same
discount rate as of June 30, 2012). Under IRS guidelines and incorporating the
pension law changes in MAP-21 (allows use of 25 year average discount rate,
which was 7 %) the funded status is over 100%.

The financing allowed for more dollars to be invested in DH's liability driven
investment strategy, which hedges interest rate risk. The pension assets are now
over 70% hedged to interest rate changes, decreasing the volatility of the
pension liability. Further reducing the pension liability is management's plan
to settle approximately $320 million of the pension liabilities over the next
seven years. Although the pension financing elevated DH's debt burden and limits
its additional debt capacity at the current rating level, Fitch views
management's plan to reduce the volatility associated with its pension plan
favorably. In addition, the projected cash outflow for funding pension
requirements over the next seven years is neutral with or without the pension
financing.

Limited Debt Capacity

With the $150 million pension financing, DH's debt capacity is limited. Total
outstanding debt is approximately $558 million and is 83% fixed rate and 17%
variable rate. DH has one floating to fixed rate swap outstanding that does not
have any collateral posting requirements. The majority of DH's outstanding debt
is direct bank loans and factoring in the current amortization of the loans the
putable debt is $79 million in 2018, $128 million in 2019 and $102 million in
2022. Fitch believes DH's access to capital and liquidity position somewhat
mitigates this risk. The balloon indebtedness is amortized over 20 years for
debt service calculation purposes under its master trust indenture (MTI).

Maximum annual debt service (MADS) for DH is $38.8 million and debt service
coverage was only 2.5x in fiscal 2012 and 1.6x in fiscal 2011 compared to the A
category median of 4.1x. With the improved profitability through the five months
ended Nov. 30, 2012 and greater than normal realized investment gains, debt
service coverage improved to 3.8x for the interim period.

Flexible Capital Spending

DH's future capital needs are manageable with no large projects projected. Total
capital spending for FY 2013 - 2017 is projected at $468 million and will be
scaled back if there is a shortfall in available funding sources. Recent major
projects include new ambulatory facilities to alleviate capacity at DH's main
hospital.

Stable Liquidity

Total unrestricted cash and investments was $464 million as of Nov. 30, 2012,
which equated to 137 days cash on hand and 83.2% cash to debt, which both
compare unfavorably to Fitch's 'A' category medians of 194.1 and 113.8%,
respectively. However, these ratios have been relatively stable over the last
four years. A decline in liquidity would be of concern especially due to DH's
potential put risk.

Stable Outlook

The Stable Outlook reflects Fitch's expectation that DH will continue to improve
its operating performance, which is necessary given DH's historically weak
financial profile for its rating level. However, Fitch weighs DH's qualitative
factors heavily as we believe the organization is a leader in its approach to
healthcare delivery and believes that DH's goals position the organization well
in a reduced reimbursement environment.

About the Organization

DHOG historically comprised four members - Mary Hitchcock Memorial Hospital
(MHMH), Dartmouth Hitchcock Clinic (DHC), Cooley Dickinson Hospital (CDH) and
CVMC. CVMC exited the OG as of Nov. 1, 2011 and CDH intends to exit the OG in
2013. Audited financials from fiscal 2012 (June 30 year end) going forward will
be for DH and CDH separately compared to a combined statement for the OG
historically. DH had total annualized revenue of $1.3 billion in fiscal 2012
(June 30; 9 months due to fiscal year end change from Sept. 30), and covenants
to provide annual and quarterly financial statements to bondholders through the
MSRB's EMMA system.


Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012).

Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
FILED UNDER:
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