|[March 07, 2014]
Fitch Rates Hartford HealthCare's (CT) series D/E Revs 'A'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings assigns an 'A' rating to the following bonds expected to
be issued on behalf of Hartford HealthCare (HHC):
--$162,611,000 Hartford HealthCare Corporation taxable bonds series D;
--$92,635,000 Connecticut Health and Educational Facilities Authority
revenue bonds, series E .
Additionally, Fitch affirms the 'A' rating for the following bonds
issued on behalf of HHC:
--$254,730,000, Connecticut Health and Educational Facilities Authority
revenue bonds, series 2011A;
--$71,085,000, Connecticut Health and Educational Facilities Authority
variable rate revenue bonds, series 2011B *;
--$50,000,000, Taxable variable rate revenue demand bonds, series
*The series 2011B bonds are supported by a direct pay letter of credit
issued by Bank of America N.A. **The series 2011C bonds are supported by
a direct pay letter of credit issued by JPMorgan Chase Bank, N.A.
The Rating Outlook is Stable.
The series D and series E bonds are expected to be issued as taxable
fixed rate bonds and tax-exempt fixed rate bonds, respectively. Proceeds
of series D will be used to fund various capital projects, reimburse HHC
for a prior pension funding, refinance an outstanding line of credit and
pay costs of issuance. Proceeds of series E will be used to refinance a
taxable line of credit used to redeem the Backus Hospitals' outstanding
bonds, fund various capital projects including construction of a new
cancer center and pay costs of issuance. The series D/E bonds are
expected to price the week of March 17, 2014.
The bonds are secured by a pledge of the gross revenues of the obligated
group and mortgages on the primary hospital facilities of certain
obligated group members.
KEY RATING DRIVERS
BROAD OPERATING FOOTPRINT: HHC operates five acute care hospitals and is
one of the two largest hospital systems in Connecticut. Additionally,
HHC benefits from a leading 36.5% market share in its primary service
WEAKENED OPERATING PROFITABILITY: Operating profitability materially
declined in fiscal 2013 primarily due to pressured Medicaid and Medicare
reimbursement and a weakening payor mix. Management implemented
operating improvement initiatives, resulting in improved profitability
in the three-month interim period ending Dec. 31, 2013 (the interim
LOW DEBT BURDEN: HHC's credit profile benefits from a very low debt
burden with pro forma maximum annual debt service (MADS) equal to 2.0%
of revenue in fiscal 2013. Despite the decline in operations in fiscal
2013, MADS coverage by EBITDA remained solid at 4.3x (including 12
months of Backus operations); however, MADS coverage by operating EBITDA
of 2.5x was light for the rating category.
MIXED LIQUIDITY METRICS: Unrestricted cash and investments increased
significantly, primarily due to the Backus acquisition. Liquidity
metrics are solid relative to pro forma debt with a 19.3x cushion ratio
at Dec. 31, 2013. However, liquidity remains somewhat low relative to
operating expenses with 142.8 days cash on hand.
INCREASED CAPITAL SPENDING: Capital spending is expected to increase
over the next five years with significant projects including a new
cancer center and implementation of a new information technology system.
In addition, subject to CON and final board approval, HHC has plans to
construct a new bone and joint institute. Despite the sizeable capital
plans, Fitch expects HHC's debt profile to remain acceptable for the
--IMPROVED OPERATING CASH FLOW: Improved operating cash flow will be
necessary to increase MADS coverage by operating EBITDA to levels
consistent with the 'A' rating and to support projected capital and debt
plans. While Fitch expects that operating improvement initiatives will
continue to gain traction and that operating cash flow will improve,
failure to demonstrate improvements could lead to negative rating
Headquartered in Hartford, Connecticut, HHC operates five acute care
hospitals, a behavioral health hospital, an employed multispecialty
physicians group with over 190 physicians, 49 physician office
locations, 28 ambulatory care centers, a clinical lab company, long-term
care, home health and a rehab network. Operating revenue totaled $2.1
billion in fiscal 2013. HHC and the William W. Backus Hospital (Backus)
signed an affiliation agreement effective Aug. 1, 2013 under which the
two organizations are now merged. Backus is a 233-licensed bed acute
care hospital located in Norwich, Connecticut approximately 40 miles
from Hartford Hospital. HHC added Backus to its obligated group in
January 2014 upon redmption of Backus' outstanding bonds. The Backus
acquisition is accretive to HHC's profitability and liquidity metrics.
Fitch's analysis is based upon HHC's consolidated financial statements.
Consolidated results for fiscal 2013 include two months of Backus'
operating results. Assuming Backus had been in the obligated group for
the entire year, the obligated group accounted for approximately 88% of
consolidated operating revenue and 100% of consolidated total assets in
BROAD OPERATING FOOTPRINT
HHC's large operating footprint and market share are key credit
strengths and are expected to provide increased operating stability. HHC
holds a leading 36.5% market share in its PSA and the second leading
market share in Connecticut (21.6%). Additionally, HHC is one of the two
largest healthcare systems in Connecticut with over $2.4 billion of
revenue and a broad market footprint spanning seven of Connecticut's
eight counties, including over 160 facilities.
WEAKENED OPERATING PROFITABILITY
After improving three years in a row, operating profitability materially
declined in fiscal 2013. Operating margin decreased from 2.9% in fiscal
2012 to negative 1.6% in fiscal 2013, including two months of Backus'
operations. Including the full year of Backus' operations, operating
margin would have equaled negative 0.6%. The material decline was due to
a combination of factors including greater than expected Medicaid cuts,
sequestration cuts, a shift in the payor mix from commercial to both
Medicare and Medicaid, as well as the continuing volume shift from
inpatient to outpatient services.
Management is implementing several initiatives which are expected to
improve operating profitability in the near- to mid-term. HHC
implemented $94 million of operational improvements in fiscal 2013 which
are expected to be realized in fiscal 2014 and is implementing an
additional $67 million in fiscal 2014 that are expected to be realized
in fiscal 2015. Initiatives include consolidation of administrative and
shared services at the system level supported by regionalization of
operations, labor productivity, supply chain, benefit redesign and
revenue cycle. For example, HHC eliminated 179 positions, including 99
management positions, in November 2013, resulting in $23.9 million in
savings per year. Additionally, revenue cycle improvements are expected
to yield $30 million per year in recurring benefit.
Operating profitability in the interim period improved with operating
margin equal to 1.7%. HHC's fiscal 2014 budget targets an operating
margin of 1.5% which Fitch views as reasonable. Management expects to
restore operating margin to 3.0% by fiscal 2016.
LIGHT DEBT BURDEN
In addition to the series D/E bonds, HHC expects to enter into a $75
million taxable bank loan in April 2014. Proceeds will be used to
finance HHC's implementation of a new Epic IT system. Fitch's analysis
and MADS assumption includes the $75 million debt issuance.
Total debt outstanding is expected to increase by approximately $136
million to $741.8 million (including capital leases). Pro-forma MADS is
expected to equal approximately $48 million (including capital leases),
increasing from the current MADS of $25.3 million. Despite the
additional debt, HHC's pro forma debt burden remains light with pro
forma MADS equal to 2.0% of operating revenue in fiscal 2013 (including
a full year of Backus' operations) relative to Fitch's 'A' category
median of 3.1%. Despite the material decline in operating profitability,
MADS coverage by EBITDA equaled 3.5x in fiscal 2013 (4.3x including a
full year of Backus' operations) and is consistent with Fitch's 'A'
category median of 3.8x. However, MADS coverage by operating EBITDA
equaled 1.7x (2.5x including a full year of Backus' operations) and was
light relative to Fitch's 'A' category median of 3.4x. MADS coverage by
EBITDA and operating EBITDA improved to 4.1x and 4.0x, respectively, in
the interim period.
Subject to CON and board approval, HHC expects to issue an additional
$100 million of bonds in summer 2015 to fund construction of a bone and
joint institute on the campus of Hartford Hospital. Construction is
expected to begin in fall 2014, but timing is subject to certificate of
need approval. Fitch will assess the impact of the additional debt on
HHC's overall credit profile as plans become more certain.
MIXED LIQUIDITY METRICS
Unrestricted cash and investments increased 58% since fiscal 2012 to
$926 million at Dec. 31, 2013. The increase was due to the addition of
Backus (which added approximately $244.5 million to HHC's consolidated
balance sheet) and investment returns. Liquidity metrics are solid
relative to HHC's debt burden with 124.9% cash to pro forma debt and
19.3x cushion ratio. However, liquidity remains light relative to
operating expenses with 142.8 days cash on hand.
INCREASED CAPITAL SPENDING
Forecasted capital spending is expected to increase in the near- to
mid-term. Management is in the process of updating its five-year capital
plan; however, capital spending under the previous plan was forecasted
to average $218.4 million per year between 2014 and 2018, representing a
significant increase from historical levels. HHC's capital plans are
contingent upon the system meeting certain operating targets. Capital
plans could be decreased if certain targets are not achieved.
Significant projects include completion of the new cancer center,
implementation of the new Epic IT system and continued investments in
HHC's ambulatory expansion and physician alignment strategies. Subject
to CON and final board approval, HHC has plans to construct a new bone
and joint institute. Additionally, the Backus affiliation included a
capital commitment of $200 million over 10 years that is not included as
part of HHC's capital plan.
Fitch will continue to assess any potential credit impact of HHC's
capital plans. A material increase in HHC's debt burden or decrease in
liquidity metrics could negatively pressure the rating absent a
corresponding improvement in profitability.
HHC covenants to provide annual disclosure within 150 days of each
fiscal year end and quarterly disclosure within 60 days of the end of
the first three fiscal quarters. Disclosure is provided through the
Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20,
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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