|[January 16, 2014]
Fitch Rates Lawrence General Hospital's (MA) Series 2014A Bonds 'BBB'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has assigned a 'BBB' rating to approximately $45 million
Massachusetts Development Finance Agency revenue bonds, series 2014A
bonds to be issued on behalf of Lawrence General Hospital (LGH).
The series 2014A bonds are expected to be issued as fixed rate bonds.
Proceeds will be used to finance the renovations of patient floors ($17
million), routine capital expenditures for next three years ($21
million) and costs of issuance. The series 2014A bonds are expected to
price the week of Jan. 27 through negotiated sale.
LGH recently closed a $15 million series 2013A direct placement which
refunded outstanding debt. Fitch was not asked to rate the direct
placement but considered the debt in its analysis.
The Rating Outlook is Stable.
The bonds are expected to be secured by a pledge of gross revenues of
the obligated group, a first lien mortgage and a debt service reserve
KEY RATING DRIVERS
ROBUST CAPITAL PLANS: LGH is commencing phase I of a multi-year (fiscal
2013-2019) $127 million master facilities plan. With this financing,
Lawrence General Hospital (LGH) is undertaking a number of strategic
initiatives that will better position its aging facility including
renovations to patient floors and routine capital expenditures. Fitch
views the investment in the plant positively as it will provide better
access and service capabilities.
MANAGEABLE DEBT BURDEN: Despite the issuance of $60 million of bonds in
fiscal 2014 ($45 million expected of new money), LGH is lightly levered
with pro forma maximum annual debt service (MADS) equal to 1.9% of
fiscal 2013 (Sept. 30 year-end) revenue resulting in a coverage of pro
forma MADS of 3.9x.
STEADILY IMPROVING LIQUIDITY: LGH had $63.9 million in unrestricted cash
and investments at fiscal year-end (FYE) 2013, a 67% increase from $38.4
million at fiscal year-end 2011. Days cash on hand of 112.5 has improved
over the last three years but still remains light compared to the 'BBB'
category median. Pro forma cash to debt and pro forma cushion ratio are
in line with the respective 'BBB' category medians.
AFFILIATIONS WITH OTHER PROVIDERS: Fitch believes LGH's successful
affiliations with other providers in certain service lines have resulted
in expanded clinical programs and access to providers and has also
helped to curb outmigration into the downtown Boston area. LGH is
clinically affiliated with Beth Israel Deaconess Medical Center and
Floating Hospital for Children at Tufts Medical Center.
SUFFICIENT CAPACITY: Fitch is aware of the potential issuance of
additional $30 million in debt to update operating room suites in fiscal
2015. At this time, Fitch believes that LGH has sufficient capacity for
the additional debt assuming the corporation maintains its positive
MAINTENANCE OF FINANCIAL PERFORMANCE: Fitch expects LGH to maintain cash
flow consistent with current debt service coverage levels.
LGH is a 189 licensed bed non-profit hospital located approximately 25
miles north of Boston, MA. LGH had total revenue of $221.6 million in
CAPITAL PLANS UNDERWAY
LGH has identified several projects to be undertaken over the next three
to six years. Fitch sees LGH's capital plan as manageable and strategic
in nature. The total cost f phase I of LGH's master plan is
approximately $72 million. Phase I of the plan includes $17 million for
inpatient renovations and infrastructure updates. The renovation and
upgrading of the surgical suites are expected to cost approximately $55
million and will be funded through cash flow and a potential additional
debt issuance. In addition to the infrastructure changes above, routine
capital expenditures are expected to approximate $6 million annually
over the next three years.
LGH was awarded Delivery System Transformation Initiative (DSTI) funding
totaling $43.3 million over a three year period (July 11 - June 14),
which is supplementing operations and cash flow. On Sept. 30, 2013 the
Massachusetts Executive Office of Health and Human Services submitted a
Section 1115 Demonstration Project Extension Request to CMS for a higher
level of DSTI funding. If approved, LGH will receive a five-year
extension commencing on July 1, 2014.
At Sept. 30, 2013 LGH had $63.9 million in unrestricted cash and
investments, a 67% increase from $38.4 million at fiscal year-end 2011.
Days cash on hand has improved over the last three years to 112.5 days
at FYE 2013 from 80.2 days at FYE 2011 but still remains somewhat light
compared to the 'BBB' category median of 144.7. Pro forma cash to debt
and pro forma cushion ratios of 111.7% and 15.6x, respectively, exceed
the respective 'BBB' category medians of 91.7% and 10.2x.
LGH has demonstrated solid revenue growth over the last few years.
Operating margin has fluctuated slightly over the last three years
(2011-2013). In fiscal 2013 LGH produced a 3% operating margin, which
remains above the 'BBB' category median of 1.8%. Management expects the
two midnight rule for observation stays to result in a $3.3 million
reduction to revenue in fiscal 2014. However, a mitigation plan has been
implemented that will increase revenues by $1.3 million and cut expenses
by $2.1 million, which Fitch believes is manageable.
MANAGEABLE PRO FORMA DEBT BURDEN
After the series 2014A issuance, LGH will have approximately $60 million
outstanding, of which 75% is fixed and 25% is variable. The series 2013A
variable rate bonds have been privately placed Pro forma MADS ($4.1
million) as a percent of fiscal 2013 revenue is light at 1.9% compared
to the 'BBB' median of 3.5%. Historical coverage of pro forma MADS by
EBITDA of 3.9x in both fiscal 2012 and 2013 exceeds the 'BBB' category
median of 3.1x. LGH is contemplating an additional $30 million in debt
in fiscal 2015. Fitch believes LGH has debt capacity for up to $30
million of additional debt at the current rating level assuming that LGH
maintains its positive operating trend.
Fitch believes LGH's successful affiliations with physicians and other
clinicians in certain service lines has resulted in expanded clinical
programs and access to providers. LGH is focusing on expanding its
physician alignment. Its physician hospital organization (PHO) currently
has about 360 physician members resulting in 20,000 covered lives. LGH
is working to add service capabilities to address needs in the service
area, including bariatrics, endocrinology and oncological surgery as
well as pediatric specialties. Clinical affiliations with Beth Israel
Deaconess Medical Center and Floating Hospital for Children at Tufts
Medical Center has helped to stem outmigration to the academic medical
centers in downtown Boston.
LGH will covenant to disclose annual financial statements to EMMA within
150 days of year end in addition to quarterly disclosure within 60 days
of the end of each quarter.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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