|[February 06, 2013]
Fitch Affirms Cape Cod Healthcare (MA) Revs at 'BBB+'; Outlook Revised to Positive
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the following Massachusetts Health and
Educational Facilities Authority (Cape Cod Healthcare Obligated Group)
--$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
The Rating Outlook is revised to Positive from Stable.
The bonds are secured by a pledge of the gross receipts and mortgages on
the property and equipment of the core hospital campuses.
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 (News - Alert) 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.
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% ad 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
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
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 at 4.9x 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.
Additional information is available on '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,
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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