August 29, 2017 / 10:52 AM / a year ago

Fitch Affirms Northumbria Healthcare NHS Foundation Trust at 'A'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA, August 29 (Fitch) Fitch Ratings has affirmed Northumbria Healthcare NHS Foundation Trust's (Northumbria FT) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A' with Stable Outlooks and Short-Term Foreign Currency IDR at 'F1'. KEY RATING DRIVERS Northumbria FT manages hospital, community health and adult social services in Northumberland and community health services in North Tyneside. Fitch rates Northumbria FT on a stand-alone basis using its Revenue Supported Rating Criteria as well as its Public Sector Entity Criteria to add a two-notch uplift. Revenue Defensibility is assessed as Midrange. Northumbria FT is a major provider of healthcare in the north east of England and operates with three general hospitals, a new specialist emergency care hospital, six community hospitals and multiple community sites. Northumbria FT provides services to a population of 550,000 spread across the widest geographical area of any Trust in England, from Tyneside to the Scottish borders and from the north-east coast to Haltwhistle in the west. Northumbria FT holds a strong market share in inpatient and outpatient elective services in Northumberland and North Tyneside. Proximity is a key factor in patients' choice of Trust. Northumbria FT was rated highly in inpatient surveys. Northumbria FT receives over 90% of its operating revenue for delivering health care from NHS Commissioners, which include Clinical Commissioning Groups (CCGs) and NHS England. This reliable source of funding facilitates revenue forecasting and expense management during the year. Demand for services remains strong across the country and any change in tariffs is unlikely to affect demand. Nevertheless, assessment of revenue is constrained by the lack of control FTs have on tariffs. The supportive regulatory regime aims to maintain compensation for services at a level that consistently supports the solvency of not-for-profit provider of an essential public service. Operating Risk is assessed as Midrange. The sector has well-identified cost drivers and low potential volatility in major items. Northumbria FT has flexibility in timing of major costs and limited near-term material capex, as investment on the new specialist emergency care hospital has already taken place. Northumbria FT has an adequate supply of resources and labour with limited volatility in terms of amount cost and timing. Nevertheless the nature of the healthcare sector reflects a fairly rigid expenditure structure with staff costs constituting about 60% of total expenses. Approximately 80% of this is direct personnel (nurses, medical staff) and 20% are indirect such as administration and estates employees. NHS staff survey results showed that Northumbria FT's employees are among the most satisfied in the country. Financial Profile is assessed as Midrange. The trust's performance has been varied over the past five years, ranging from breaking even to a GBP16 million surplus, except for financial year to March 2014 when the deficit was GBP50 million as a consequence of terminating the Hexham public finance initiative (PFI). Surpluses of about GBP23 million are forecast over the next couple of years with operating margins of about 9%, which considering its not-for-profit mission, is consistent with the Trust's ratings. Since FY09 (with the exception of FY14), Northumbria FT has reported operating margins of 4%-6% and expects to achieve higher margins by rigorously controlling costs. At FYE17 Northumbria FT had total debt of GBP207 million, a decrease from its peak of GBP252 million at FYE14 when two PFI agreements with Hexham General Hospital were terminated. Of total debt just over two thirds are with Northumberland County Council and about 25% with the Foundation Trust Financing Facility (FTFF). Net debt-to-EBITDA has fluctuated between 5x and -7x over the last five years due to Northumbria FT having partly taken on debt to finance the new specialist emergency care hospital. However, debt is projected to decline by GBP9 million annually over the next few years and net debt-to-EBITDA to remain below 6x. Fitch assesses the credit profile of FTs on a standalone basis, but also factors in a two-notch uplift to its standalone assessment. This reflects the assessment of substitution of services by other FTs, ratings relative to the indirect sponsor's, borrowing options, and moral hazard as well as the strong quality of the cash flow through reliable funding for delivering public healthcare from NHS Commissioners. In addition, the strong regulatory oversight and support and willingness to intervene to safeguard patient services if FTs are thought to be failing are a consideration. RATING SENSITIVITIES An upgrade could result from a sustained net debt/EBITDA ratio below 4x or a reassessment of revenue defensibility to Strong from Midrange. A downgrade could result from a sustained weakening of Northumbria FT's net debt/EBITDA ratio to above 6x or a reassessment of the notching uplift. Contact: Primary Analyst Ines Callahan Director +34 93 467 87 45 Fitch Ratings Espana S.A.U. Av. 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