|[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.
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
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.
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.
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
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
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.
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,
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria - Effective July
23, 2012 to May 20, 2013
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