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TMCNet:  Fitch Upgrades Fletcher Allen Health Care's (VT) Revs to 'A-'; Outlook Stable

[July 17, 2014]

Fitch Upgrades Fletcher Allen Health Care's (VT) Revs to 'A-'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has upgraded the rating on the following revenue bonds issued by the Vermont Educational and Health Buildings Financing Agency on behalf of Fletcher Allen Health Care (Fletcher Allen) to 'A-' from 'BBB+':

--$54,705,000 series 2008A;

--$55,705,000 series 2007A;

--$143,725,000 series 2004B;

--$30,480,000 series 2004A.

The Rating Outlook is Stable.

SECURITY

Security is provided via a mortgage on Fletcher Allen's core hospital campus in Burlington, VT and a security interest in the gross receipts of its two Vermont hospitals. Fitch's analysis is based on Fletcher Allen Partners (FAP) which includes the consolidated performance of Fletcher Allen and Central Vermont Medical Center (CVMC) in Vermont, and the two New York State hospitals in Community Providers, Inc. (CPI) - Champlain Valley Physicians Hospital (Champlain Valley) and Elizabethtown Community Hospital (Elizabethtown). The Fletcher Allen obligated group comprised 81% of total assets and 80% of total revenues of the consolidated system in fiscal 2013.

KEY RATING DRIVERS:

STABLE CORE OPERATIONS AND SYSTEM EXPANSION: The upgrade to 'A-' is based on FAP's solid and stable core operations, improved liquidity and the successful expansion of its system footprint. Operating and operating EBITDA margins have been stable over the last five fiscal years and, at 2.9% and 9% for fiscal 2013, respectively, and 4.3% and 10.7% through the eight months ended May 31, 2014 (the interim period), which includes the CPI facilities, are consistent with Fitch's 'A' rating category medians.

DEBT CAPACITY FOR THE MASTER FACILITY PLAN: Coverage of maximum annual debt service (MADS) of $43.5 million of the consolidated system by EBITDA was 4.1x in 2013 and 4.3x through the 2014 interim period, better than Fitch's 'A' median. MADS at 2.9% as percent of revenues is consistent with the 'A' median. Fitch believes that FAP has the capacity at the 'A-' rating for planned issuance of debt up to a maximum of $145 million over the next two and a half years to fund its facility needs in Burlington. The larger potential $75 million-$100 million series would not be issued before early fiscal 2017 and FAP had coverage of the pro forma MADS of $48.4 million of 3.9x through the interim period. Scheduled debt amortization of approximately $62 million in fiscal years 2015 through 2017 is expected to mitigate the impact of any new debt.

UNIQUE MARKET POSITION AND CONTINUED SYSTEM EXPANSION: Fletcher Allen is the dominant provider of high acuity services in a sizable geographic region that encompasses northern Vermont and adjacent counties in northeastern New York State. The two CPI hospitals, with which Fletcher Allen formally affiliated in January 2013, have successfully been integrated into the FAP with no dilutive impact on either liquidity or profitability. FAP is also exploring possible additional affiliations to further increase their presence in northern New York.

LIGHT LIQUIDITY: Historically, liquidity had been light, but even after the recent addition of the two CPI facilities in 2013 (which was potentially dilutive), is consistent with Fitch's lower 'A' category medians. Through May 31, 2014, FAP's $607.7 million of unrestricted cash and investments translated to 157.6 days cash on hand (DCOH), cushion ratio of 14x, and 127% cash-to-debt. Management has targeted to maintain DCOH at a 130-day level including the funding of the capital plan.

RATING SENSITIVITIES

NEED TO MAINTAIN PROFITABILITY: Fitch expects FAP to maintain solid profitability in order to generate sufficient cash flow to execute its capital plan without materially eroding its coverage and liquidity metrics.

CREDIT PROFILE

FAP is an integrated health care network, providing hospital and physician services with four hospitals located in Vermont and New York. Fletcher Allen Health Care (Fletcher Allen), FAP's flagship hospital located in Burlington, VT is a full-service tertiary and quaternary academic medical center with 438 operated beds, and is the largest hospital in Vermont. Also part of FAP are the 84-bed Central Vermont Medical Center in Berlin, VT, Champlain Valley Physicians Hospital in Plattsburgh, NY with 274 acute care beds, and 25-bed critical access hospital Elizabethtown Community Hospital, Elizabethtown, NY. Fletcher Allen is the teaching hospital for the University of Vermont and a Level 1 Trauma Center. The Faculty Practice includes 620 employed physicians; the health system as a whole includes over 1,000 physicians. Total revenues in fiscal 2013 (Sept. 30 year end) were approximately $1.5 billion.

In January 2014 FAP implemented a change in their board structure, most significantly reducing the number of board members to 19 from 27 with the aim of improving board responsiveness and efficiency. On June 16, 2014, Todd Keating became CFO of FAP, replacing Sophia Holder, who served as the interim CFO and VP Finance fr the several months following the prior CFO's retirement in November 2013. Mr. Keating has more than 26 years of experience in health care finance and most recently served as senior vice president of Business Development at UMass Memorial Healthcare, Worcester, Massachusetts.

The upgrade to 'A-' is supported by FAP's stable financial profile, good coverage, and liquidity, which while modest, is now more in line with Fitch's low 'A' category peers. Fitch also views as a positive credit factor FAP's dominant position as the largest healthcare provider in the state of Vermont and the leading provider of tertiary and quaternary services to an expansive area covering a 150-mile radius, which includes several counties in northeastern New York State. It is further supported by Fitch's belief that FAP has the debt capacity, if profitability is maintained, for its capital plan, which will require issuance of between $120 million-$145 million of additional debt over the next two and a half years.

STABLE CORE OPERATIONS

Fletcher Allen's operating and operating EBITDA margins have been stable over the last four fiscal years. In fiscal 2013 FAP generated operating income of $43.8 million, meeting its budget of $40 million, for operating margin of 2.9% and operating EBITDA margin of 9%. Through the interim period, the consolidated system had operating profit of $44.3 million, resulting in operating margin of 4.3% and operating EBITDA margin of 10.7%, comparing well to Fitch 'A' respective category medians of 3.3% and 10.7%. Fiscal 2013 was the first year without the benefit of the Boston Area Wage Index, which the system was able to offset with Medicaid Enhanced Graduate Medical Education (GME) funding. In 2013, FAP received roughly $64.6 million in supplemental funding (Medicare and Medicaid DSH and GME) which will be reduced to approximately $46.5 million in 2014. Fitch notes that continued funding of these programs is uncertain and presents a longer term credit concern.

Management has set a 4% operating margin target for Fletcher Allen in order to be able to fund the multi-year master facility plan (MFP) at the main facility in Burlington, and to maintain DCOH at a minimum 130 days. Fitch views the attainment of the 4% margin as challenging, but attainable, based on efforts on both the revenue and the expense side being implemented systemwide.

CONTINUED SYSTEM EXPANSION

The two New York-based hospitals belonging to CPI: Champlain Valley and Elizabethtown were successfully integrated into the system without negative impact on operating or liquidity metrics. Management is engaged in informal discussions with other hospitals in northern New York State. Any formal affiliation process is expected to take between 18-30 months. The rationale for further expansion into New York State is severalfold, including the historical flow of patients from New York State for services at Fletcher Allen Health Care in Burlington, who could receive some of their care locally at a lower costs, the increased leverage with payors, as well the potential to grow market share outside of its traditional service area. FAP's ability to increase its market share in Vermont is limited as it is already dominant in the northern counties and is not likely to penetrate the three southern counties, dominated by Dartmouth-Hitchcock Health (rated 'A+' by Fitch).

DEBT CAPACITY FOR THE MASTER FACILITY PLAN

The MFP includes an inpatient stay facility with four inpatient floors, with the goal of converting existing beds to a level of 90% single-occupancy rooms. The MFP, not including routine capital investment, is estimated at $372 million, $175 million of which is designated for the inpatient tower. As currently envisioned, the construction would not start until late Fall 2015 at the earliest and the MFP would require issuance of debt of $75 million-$100 million in the first quarter of fiscal 2017, with the remaining portion to be primarily funded from internal cash flow, and $30 million targeted from philanthropy. An earlier issuance of approximately $45 million is planned for the first quarter of fiscal 2015 in order to fund the development and purchase of property at Mountain View Park, which FAP plans to develop into a major outpatient facility located in South Burlington. Scheduled debt amortization of approximately $62 million in fiscal years 2015 through 2017 is expected to mitigate the impact of any new debt.

FAP had coverage by EBITDA of its consolidated system MADS of $43.5 million of 4.1x in 2013 and 4.3x through the 2014 interim period, better than Fitch's 'A' category median of 3.8x. Including the two planned debt issuances increases MADS to $48.4 million (the system has front-loaded debt currently and the 2017 issuance is planned to be structured as interest-only for the initial 20 years to produce level debt service). FAP had historical coverage of the pro-forma higher MADS of 3.7x in 2013 and 3.9x through the 2014 interim period. Fitch believes that FAP has the capacity to issue debt up to a maximum of $145 million over the next two and a half years to fund its facility needs in Burlington at the 'A-' rating level.

LIGHT LIQUIDITY

Liquidity, which had historically been light, has slowly improved and except for DCOH is in line with Fitch's 'A' category medians. DCOH at 157.6 days is lower than the median of 196 DCOH. Management's initial calculation of cash-to-debt post issuance of the MFP 2017 borrowing projects cash to a level of 114% at its lowest point. Somewhat offsetting the modest liquidity is FAP's conservative debt structure with 78% fixed-rate debt. The variable-rate debt has been converted to synthetic fixed rate under three swaps with an aggregate notional amount of $64.8 million. The swaps are insured and do not require posting of collateral, despite a mark-to-market at negative $10.1 million as of May 31, 2014.

DISCLOSURE

Fletcher Allen covenants to provide audited financial statements within 180 days of the end of the fiscal year and quarterly statements within 60 days of the end of the quarter to MSRB's EMMA system.

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

In addition to the sources of information identified in Fitch's Rating Criteria, this action was additionally informed by information from Citi.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria', June 16, 2014

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840296

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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