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TMCNet:  Fitch Affirms Tufts Medical Center, MA's Revs at 'BBB'; Outlook Stable

[July 18, 2014]

Fitch Affirms Tufts Medical Center, MA's Revs at 'BBB'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'BBB' rating on following bonds issued on behalf of Tufts Medical Center (Tufts MC):

--$209.9 million Massachusetts Development Finance Authority revenue bonds series I (2011);

--$100 million Tufts Medical Center taxable bonds, series 2013.

The Rating Outlook is Stable.

SECURITY

A lien on and security interest in the gross receivables of the Obligated Group, a mortgage interest in certain property and a debt service reserve fund.

KEY RATING DRIVERS:

CHALLENGES EARLY IN FISCAL YEAR (FY) 2014: Softer volumes and a couple of one-time expense items early in the year has contributed to a negative 0.2% operating margin (a $1 million loss on operations) through the first nine months of fiscal 2014 (Sept. 30 year end). The first quarter was the weakest quarter with a negative 2.5% operating margin, and operations have improved since then. In spite of the lower operating performance, maximum annual debt service (MADS) has remained good at 2.6 times (x), in line with Fitch's expectations.

SOLID EXPENSE MANAGEMENT CONTINUES: Tufts MC's expense management remains strong, with total expenses increasing just 1.1% from FY2012 to FY2013, and personnel expenses up just 2.2% year over year in the nine month 2014 interim period. Tufts MC's management has engaged Huron Consulting to maximize additional efficiency opportunities. The nine month interim results were impacted by the consulting costs, but Tufts MC reports that it has begun to see the benefits and expects that it should positively affect the operating results in the fourth quarter and in FY2015.

NEW CORPORATE AFFILIATION PENDING: Tufts MC has signed a letter of intent with Lowell General Hospital (general revenue bonds rated 'BBB+' by Fitch) to form a new corporate entity. The obligated groups of both organizations would remain separate. In the very near term, Fitch believes the affiliation would be a credit neutral, but that overall the affiliation would advance Tufts MC's strategy to grow complex surgical volumes, expand its catchment area, and strengthen alignment with community based physicians and providers.

LIQUIDITY POSITION REMAINS SOLID: At June 30, 2014, Tufts MC had unrestricted cash and investments of $375.2 million which equates to 155.5 days cash on hand, a 15.1x cushion ratio and 123.9% cash to debt. The unrestricted cash and investments include $100 million of taxable debt that Tufts borrowed for strategic purposes. Tufts MC liquidity metrics compare well to Fitch's 'BBB' medians backing out the $100 million.

RATING SENSITIVITIES

RETURN TO PROFITABILITY: Fitch expects Tufts MC operating performance to continue to improve in the fourth quarter of FY2014 and for operations to remain stable in FY2015.

CREDIT PROFILE

Tufts Medical Center is a 415 licensed bed academic medical center located in downtown Boston adjacent to the Tufts University School of Medicine. In fiscal 2013, Tufts MC reported $866.3 million of total revenues. The rating is based on the consolidated system. In FY2013, the obligated group comprised 79% of the system's total assets and 76% of its total revenues.

The affirmation of the 'BBB' rating reflects Tufts MC's manageable debt burden, improved liquidity metrics, and solid expense management. Credit concerns include competitive service area and a softer FY2014 operating performance.

Financial Profile

Through the frst nine months of FY2014, Tufts MC posted a slight negative operating margin and a thin 4.5% operating EBITDA margin. The results are weaker year over year; however, operations have improved as the fiscal year has progressed. The first half of the year was impacted by one-time expenses related to a Huron consulting engagement and a malpractice adjustment. The total impact of these two items was approximately $15 million.

The benefits of the Huron engagement, which include a focus on revenue cycle, clinical operations, and documentation, started to positively impact operations in the third quarter and is expected to continue to help operations in the fourth quarter and in FY2015. The malpractice adjustment was approximately $5 million over the figure that Tufts MC had budgeted. Tufts MC management reported that the adjustment was more a matter of the timing on the resolution of a few outstanding cases, and Fitch does not anticipate this to be an ongoing credit concern.

Additional negative factors affecting FY2014 was a 68% year over year increase in observation cases, as observation cases rose to approximately 19% of total admission compared to approximately 10% in the prior fiscal year. Inpatient adult admissions were down 13% year over year for the nine month interim period. While the softer volumes are a concern, Tufts MC has shown an ability to adjust operations and the patient acuity of Tufts MC patients continues to be high, with Tuft MC's Medicare CMI remaining over 2.0 in the nine month interim period.

With a good cash flow year in FY2013, Tufts MC was able to continue to grow its liquidity adding approximately $70 million in unrestricted cash and investments (not including the $100 million from the 2013 taxable bond issue, which is also sitting in unrestricted investments on the balance sheet). Liquidity, which was a credit concern of Fitch when Tufts MC was first rated in 2011, has now become a positive credit factor at the current rating level, as unrestricted cash and investments (not including the $100 million in taxable bond proceeds) increased approximately 75% over this time.

Strategic Update

Tufts MC is in the process of due diligence for an affiliation with Lowell General Hospital that would form a new system. In the near term, the two obligated groups would remain separate, and the system board would have reserve powers related to the financial framework. It is also anticipated that funds would be upstreamed to the system to undertake system level initiatives. Fitch views the merger as a credit neutral with strategic gains, including synergies around quality, managing populations, and operational efficiencies, offset by the uncertainty around the financial profile of the new entity.

Tufts MC's continues to pursue the strategy of growing complex surgical volumes, expanding in its catchment area, and strengthening alignment with community based physicians and providers. To that end, the number of physicians in the New England Quality Care Alliance (NEQCA) grew by 17% year over year and now approximately 17% of Tufts MC's admissions come from physicians in NEQCA.

Debt Profile

Fitch views Tufts MC's debt profile as a credit positive. All of Tufts MC's $302.7 million is fixed rate and Tufts has no outstanding swaps. In addition, Tufts MC debt burden remains manageable as indicated by MADS equating to 2.7% of total revenues compared to the 'BBB' category median of 3.5%. Coverage of MADS by EBITDA has averaged 2.5x over the last four audited years and stood at 2.6x in the nine-month interim period.

Disclosure

As part of its continuing disclosure agreement, Tufts MC covenants to provide annual audited financial statements within 120 days of each fiscal year-end and unaudited quarterly statement within 60 days of each fiscal quarter-end to bondholders.

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

Applicable Criteria and Related Research:

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

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=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840514

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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