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TMCNet:  Fitch Affirms Holyoke Medical Center's (MA) Revenue Bonds at 'BB'; Outlook Stable

[April 10, 2014]

Fitch Affirms Holyoke Medical Center's (MA) Revenue Bonds at 'BB'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'BB' rating on the following bonds issued on behalf of Holyoke Medical Center (Holyoke, formerly known as Holyoke Hospital), an affiliate of Valley Health System (VHS):

--$3,125,000 Massachusetts Health and Educational Facilities Authority revenue bonds, Holyoke Hospital Issue, series B, 1994.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a lien on the gross receipts of the obligated group and a debt service reserve fund.

KEY RATING DRIVERS

ADEQUATE OPERATING PROFITABILITY: Profitability remains adequate for the rating category at a 0.8% operating margin in fiscal year (FY) 2013. However, operations continue to rely heavily on funds from the Medicaid Section 1115 Waiver program ($8.2 million in FY13).

DECLINING DEBT BURDEN: Holyoke's outstanding bonds mature in July 2015. Overall, maximum annual debt service (MADS) remained low at 2.2% of operating revenues in FY13, with MADS coverage by EBITDA at 2.0x, above Fitch's category median.

IMPROVING LIQUIDITY: At Sept. 30, 2013 $17.7 million in unrestricted cash and investments translated to 164.4% cash to debt and a 5.7x cushion ratio, both above category medians. Days cash on hand (DCOH) improved to 47.4 but is still weak for the category.

DEFERRED CAPITAL SPENDING: Capital spending increased in FY13 to 130.4% of depreciation, but VHS' high Average Age of Plant of 24.8 is indicative of deferred capital projects and remains a credit concern.

RATING SENSITIVITIES

GOVERNMENTAL FUNDING: Medicaid's Waiver 1115 program will expire at the end of FY14, and management has stated that a renewal waiver is currently being negotiated. Fitch will continue to monitor the development of the program and its impact on Holyoke.

CREDIT PROFILE

Fitch's analysis is based upon the consolidated financial statements of VHS, the parent and sole corporate member of Holyoke Medical Center. Holyoke Medical Center is a community hospital located in Holyoke, MA, approximately 10 miles north of Springfield, MA. Holyoke is the sole member of the obligated group for the series B bonds and accounted for approximately 85% of VHS' operating revenue of $141.7 million in FY13 and for 84% of its assets, including $10.7 million of $17.7 million of unrestricted cash and investments at Sept. 30, 2013.

ADEQUATE OPERATING PROFITABILITY

VHS' operating profitability, while down from FY12 levels, remained adequate for the rating category. Lower volumes in 2013, as well as certain non-recurring revenue boosts in FY12, contributed to the gap between VHS' 4.4% operating margin in FY12 and 0.8% in FY13. Additionally, the loss at the physician practice of $2.8 million in FY13 negatively affected operating performance. VHS operations continue to rely on funds from Massachusetts' Medicaid Waiver 1115 program ($8.1 million in FY12 and $8.2 million in FY13), which offers governmental subsidies to providers with a high Medicaid load. The program expires at the end of FY14, and management has stated that negotiations are underway for a renewal in FY15. Management expects the new program to be further accretive to VHS' operations. The obligated groups' financial results in the four-month interim period (ended Jan. 31, 2014) were consistent with Holyoke's typical results for the four-month interim period.

DECLINING DEBT BURDEN

VHS' declining debt burden continues to be a credit positive. As of Sept. 30, 2013 VHS had $9.7 million in long-term indebtedness, consisting of $3.1 million in 1994 series B bonds and $6.6 million in direct placement loans and capital leases, with payments extending out to 2024. MADS as a percent of revenue was light at 2.2% in FY13, and MADS coverage by EBITDA was an adequate 2.0x. The 1994 series B bonds are expected to mature in July 2015, and VHS has a reserve fund in connection with the bonds. Certain capital lease financing is expected in the near to medium term, but it should not materially affect VHS' debt burden.

IMPROVING LIQUIDITY

VHS' $17.7 million in unrestricted cash and investments at Sept. 30, 2013 equated to 164.4% cash to debt (significantly above the category median of 53%) and to a 5.7x cushion ratio, which is in line with the 5.4x median. VHS' liquidity relative to expenses improved in FY13 with 47.4 DCOH compared to 39.4 days in FY11 but still remains below the category median of 73.2 days.

DEFERRED CAPITAL SPENDING

VHS' capital spending of $5.3 million in FY13 equated to an increased 130.4% of depreciation. However, the system's very high average age of plant of 24.8 is indicative of deferred capital spending and remains a credit concern. Management revealed plans of a possible renovation or replacement of their emergency department. The project is expected to be undertaken in the medium term and various funding possibilities are being reviewed.

CONTINUING DISCLOSURE

Holyoke covenants to provide quarterly and annual financial disclosure to the trustee and to bondholders upon request. However, the documents governing the rated issue predate Rule 15c2-12, and Holyoke does not provide disclosure through the Municipal Securities Rulemaking Board's EMMA system, which Fitch views negatively.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826607

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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