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TMCNet:  Fitch Affirms Winchester Hospital (MA) Revs at 'BBB+'; Outlook Positive

[May 16, 2014]

Fitch Affirms Winchester Hospital (MA) Revs at 'BBB+'; Outlook Positive

CHICAGO --(Business Wire)--

Fitch Ratings has affirmed the 'BBB+' rating on the following revenue bonds issued on behalf of Winchester Hospital (Winchester):

--$73.1 million Massachusetts Health and Educational Facilities Authority revenue bonds, series 2010H.

The Rating Outlook remains Positive.

SECURITY

Bond payments are secured by a pledge of the gross revenues of the obligated group and a mortgage pledge on the inpatient hospital campus.

KEY RATING DRIVERS

PENDING LAHEY HEALTH SYSTEM AFFILIATION: Winchester signed a definitive agreement in September 2013 to join Lahey Health System (LHS, Lahey Clinic rated 'A+' by Fitch). The transaction received federal and state regulatory approvals and is pending finalization of the Massachusetts Health Policy Commission cost and market impact review. The transaction is expected to close in summer 2014. Fitch expects Winchester to benefit from operational efficiencies and synergies with the affiliation.

STRONG LIQUIDITY METRICS: Winchester's liquidity continues to strengthen with 187.0 days cash on hand, 18.0x cushion ratio, and 136.6% cash to debt at March 31, 2014, easily exceeding Fitch's 'BBB' category medians of 144.7 days, 10.2x and 91.7%.

LEADING MARKET SHARE IN A FAVORABLE SERVICE AREA: Winchester maintains a leading 21.4% market share in a very competitive service area with favorable demographics and a good payor mix. However, market share declined slightly in 2012 (most recent data available).

COMPRESSED INTERIM PROFITABILITY: Operating profitability has been historically consistent with operating EBITDA margin averaging 7.6% since fiscal 2010 and equal to 7.9% in fiscal 2013 (Sept. 30 year end). However, operating EBITDA margin compressed to 7.3% in the six month interim period ending March 31, 2014 reflecting decreased inpatient volumes.

MANAGEABLE DEBT BURDEN: Maximum annual debt service (MADS) equaled 2.6% of revenue in fiscal 2013 and is light relative to Fitch's 'BBB' category median of 3.5%. MADS coverage by operating EBITDA of 3.1x in fiscal 2012 and 2013 was solid for the 'BBB+' rating. However the compressed interim profitability decreased MADS coverage to 2.7x.

RATING SENSITIVITIES

POSITIVE OUTLOOK MAINTAINED: The maintenance of the Positive Outlook reflects Winchester's strengthened liquidity metrics and Fitch's expectation that operating profitability and coverage metrics will improve from the compressed interim performance. Improved operating performance resulting in MADS coverage by operating EBITDA equal to or greater than 3.0x would likely lead to upward rating movement.

CREDIT PROFILE

Winchester Hospital is a 229 licensed bed community hospital located in Winchester, MA, approximately eight miles northwest of Boston. Total operating revenues equaled $316.4 million in fiscal 2013.

PENDING AFFILIATION WITH LAHEY HEALTH SYSTEM

Winchester signed a definitive agreement in September 2013 to join LHS via a membership substitution whereby LHS would become the sole corporate member of Winchester's parent, Winchester Healthcare Management, Inc. The transaction received federal and state regulatory approvals and is pending finalization of the Massachusetts Health Policy Commission cost and market impact review. The transaction is expected to close in summer 2014.

Under the terms of the agreement, LHS made a capital commitment to install its electronic health record system at Winchestr and for capital expenditures at 110% of depreciation expense over the next five years. Preliminary integration planning is ongoing and will accelerate when the transaction closes. Fitch expects the affiliation to generate operating efficiencies at Winchester. At this time Winchester's bonds will remain separately obligated, although this will be evaluated by LHS in the future. Fitch views the transaction favorably as it should create opportunities for improved operating performance.

STRONG LIQUIDITY METRICS

The Positive Outlook continues to reflect Winchester's strengthening liquidity position. Unrestricted cash and investments increased 11% from $131.4 million at March 31, 2013 to $146.5 million at March 31, 2014, equating to 187.0 days cash on hand, 18.0x cushion ratio and 136.6% cash to debt. Liquidity ratios exceed Fitch's 'BBB' category medians of 144.7 days, 10.2x and 91.7%. The continued liquidity improvement reflects decreased capital spending, operating cash flow and investment gains. Fitch expects Winchester's liquidity metrics to continue to improve given LHS's capital commitment and decreased projected capital spending requirements.

LEADING MARKET SHARE IN A FAVORABLE SERVICE AREA

Winchester maintains a leading 21.4% market share in an affluent suburb of Boston with above average wealth indicators and relatively low unemployment. Fitch views the service area characteristics as a credit positive. The favorable service area characteristics are reflected in Winchester's comparatively lower exposure to Medicaid which accounted for a low 6.6% of gross revenues in fiscal 2013.

However, the service area remains highly competitive which Fitch views as a continued credit concern. Winchester faces competition from local hospitals in addition to major academic medical centers located in Boston. Further consolidation activity within the market could increase competitive pressure.

CONSISTENT OPERATING PROFITABILITY

Operating profitability has been historically stable but compressed in the interim period. Operating and operating EBITDA margins averaged 1.9% and 7.6%, respectively, since fiscal 2010 and equaled 1.6% and 7.9% in fiscal 2013. However, operating profitability decreased in the interim period with operating margin decreasing to 0.1% and operating EBITDA margin decreasing to 7.3%.

The compression was primarily due to decreasing inpatient utilization. Operating revenue decreased 5.9% in the interim period. The negative impact was mitigated by expense controls, including labor productivity and supply chain initiatives, which decreased operating expenses 4.1%.

Management budgeted for breakeven profitability in fiscal 2014, which Fitch believes is attainable.

MANAGEABLE DEBT BURDEN

Winchester's debt burden remains manageable with $107.2 million of total debt outstanding at March 31, 2014. Leverage metrics are light for the rating category with 32.0% debt to capitalization at March 31, 2014 and MADS equal to 2.6% of revenue in fiscal 2013 relative to Fitch's 'BBB' category medians of 48.9% and 3.5%. Coverage is solid for the rating category with MADS coverage by operating EBITDA equal to 3.1x fiscal 2012 and fiscal 2013, exceeding Fitch's 'BBB' category median of 2.7x. MADS coverage decreased to 2.7x in the interim period reflecting the compressed operating profitability. Upward rating movement is currently precluded by the decreased coverage in the interim period.

DISCLOSURE

Winchester covenants to provide annual disclosure no later than 120 days following the end of each fiscal year and quarterly disclosure no later than 45 days following the end of each fiscal quarter. 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, 2013).

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria - Effective July 23, 2012 to May 20, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830535

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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