|[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.
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
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
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.
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
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.
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.
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.
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
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