[October 15, 2014]

Fitch Rates Baystate Health's (MA) Series N Rev Bonds 'A+'; Outlook Stable

Fitch Ratings has assigned an 'A+' rating to the proposed $56.6 million, Massachusetts Development Finance Agency,series N revenue bonds to be issued on behalf of Baystate Medical Center (Baystate):

In addition, Fitch affirms the 'A+' rating on the following Massachusetts Health and Educational Facilities Authority bonds issued on behalf of Baystate:

--$7,722,000 revenue bonds, series M-2 (2008)*;

--$6,362,000 revenue bonds, series M-4A (2005)*;

--$20,045,000 revenue bonds, series K-1 (2009);

--$26,365,000 revenue bonds, series K-2 (2009);

--$90,000,000 revenue bonds, series J-1 and J-2 (2009)*;

--$63,380,000 revenue bonds, series I (2009);

--$5,555,000 revenue bonds, series H (2007)*;

--$49,815,000 revenue bonds, series G (2005)*.

*These bonds are variable-rate demand bonds supported by bank letters of credit. Fitch was not asked to provide a rating based on the letters of credit.

The series N bonds are expected to be issued as fixed rate and will be used to finance a multi-story addition at Baystate Medical Center, converting approximately 90,000 square feet of the current shell space to three floors of inpatient beds and support spaces as well as the replacement of the current inpatient pharmacy, and financing of routine capital construction, renovation and equipping of various facilities. The bonds are expected to sell via negotiation the week of October 27.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues of the obligated group. Fitch's analysis is based on the consolidated entity.

KEY RATING DRIVERS

LEADING MARKET SHARE AND INTEGRATED SERVICE NETWORK: Baystate's integrated delivery network includes four hospitals, an employed medical group, a health plan and a physician-hospital organization. Fitch views the network positively and believes it bolsters Baystate's position in an evolving health care environment. Combined, Baystate Health Hospitals controlled 48.9% of market share as of 2012 (most current data available).

MANAGEABLE PRO FORMA DEBT BURDEN AND SOLID COVERAGE: Baystate Medical Center benefits from a low debt burden, which results in solid historical pro forma debt service coverage that compares favorably to Fitch's 'A' category medians. Pro forma maximum annual debt service (MADS) equated to 2% of fiscal 2013 revenues, which is favorable relative to the 'A' category median of 3.1%. Although pro forma coverage of MADS by operating EBITDA declines to 3.7x at June 30, 2014, this remains above the 'A' category median of 3.1x and should improve as new units are brought online.

HEALTHY LIQUIDITY METRICS: Fitch views Baystate's strong liquidity metrics as a key credit strength as it mitigates modest historical profitability relative to Fitch's 'A' category medians. Baystate has consistently grown its balance sheet and had $804.8 million in unrestricted cash and investments at June 30, 2014 (nine-month interim), equating to 174.6 days cash on hand. Pro forma cushion ratio of 23.5x and cash to pro-forma debt of 158.3% exceed the respective 'A' category medians of 17x and 131.2%.

CONSISTENT OPERATING PROFITABILITY: Operating metrics are somewhat modest relative to Fitch's 'A' category peers due to Baystate's health plan, large employed physician group and elevated capital spending, with operating EBITDA margins of 6.6%, 6.8% and 7.1% in fiscal 2011, 2012 and 2013, respectively. For the interim period ended June 30, 2014 operating margin of 2.9% compares favorably to Fitch's 'A' category median of 2.5%. In fiscal 2013, the obligated group, which excludes the insurance plan and the employed physician group, generated an operating EBITDA margin of 13.2% on total revenues of $990.2 million.

STABILITY EXPECTED: Given Baystate's integrated delivery network, market position and sound execution of strategic plans, Fitch expects financial performance to remain stable. While the series N bonds are dilutive on a historical pro forma basis, (3.6x historical pro forma MADS coverage by operating EBITDA based on fiscal 2013 results versus 4.6x at last review), Fitch expects coverage levels to rebound when the new surgical rooms come online in 2016. MADS will also decline by about $5.5 million in 2016 when the new market tax credits unwind.

CREDIT PROFILE

Baystate Health, Inc. (BH) is an integrated health care delivery system headquartered in Springfield, Massachusetts. On a consolidated basis, Baystate consists of four hospitals (including the newly acquired, 74-bed Wing Hospital), Baystate Medical Practices (a multi-specialty academic group practice with over 460 employed physicians FTEs and 150 mid-levels), Health New England (a not-for-profit health maintenance organization with 142.464 covered lives), a physician hospital organization and other ancillary health care entities. On a consolidated basis, total revenues in fiscal 2013 (Sept. 30 year-end) were approximately $1.72 billion. Fitch's analysis was based on the results of consolidated entity, Baystate Health and Subsidiaries, Inc.

EXPANSION AND RENOVATION COMMENCING

Because of continued strong utilization, management is moving forward with the addition of 96 surgical inpatient rooms at Baystate Medical Center and the replacement of the inpatient pharmacy on the fourth floor. This project will align the surgery patient populations with future operating room space to be eventually built-out on the second floor. Construction is scheduled to start in November 2014 and the new space is scheduled to open in spring 2016.

SOLID BUSINESS PLATFORM AND MARKET POSITION

Baystate's integrated delivery network has driven a successful regional expansion and leading market share position despite the competitive service area. Baystate employs 575 physicians at more than 60 locations across western Massachusetts. The service area is somewhat competitive but Baystate's position as the region's only academic tertiary hospital and Level I trauma center helps to stem outmigration and maintain solid market share. The acquisition of Wing Hospital, effective Sept. 1, 2014, should further solidify Baystate's market position in greater western Massachusetts. Combined, all of the hospitals in the system had a 48.9% marketshare (as of 2012, which is the most current data and includes Wing Hospital). The next competitor, Mercy Medical Center, held just 17.6% of marketshare.

MANAGEABLE DEBT BURDEN

Pro forma MADS increases to approximately $34.2 million (includes smoothing of bullet maturity) from $26.2 million and equates to a modest 2% of fiscal 2013 total revenues. Pro forma MADS coverage by EBITDA of 3.4x in fiscal 2013 and 4.0x at June 30, 2014 (nine-month interim) is in line with Fitch's 'A' category median of 3.8x. The pro forma MADS number is somewhat inflated as it includes the new market tax credit bonds, which will unwind in 2016, reducing MADS by about $5.5 million.

STRONG LIQUIDITY

Fitch views Baystate's balance sheet as a credit positive. Unrestricted cash and investments have grown consistently year-over-year and at June 30, 2014, totaled $804.8 million, equating to 174.6 days cash on hand, a 23.5x pro forma cushion ratio and 158.3% cash to pro forma debt. Though days cash on hand is slightly below the 'A' category median of 199.2, cushion and cash-to-debt well exceed the respective 'A' medians of 17.0x and 131.2%. Fitch views Baystate's strong liquidity as a sufficient mitigant to the corporation's somewhat modest operating profitability relative to its 'A' category peer group.

CONSISTENT OPERATING PERFORMANCE

Baystate's profitability and operational ratios are somewhat light for the category but consistent year-over-year with operating margin ranging between 2.7% and 2.8% over the last three years and operating EBITDA between 6.6% and 7.1% (2011-2013). Through the nine months ended June 30, 2014, operating margin was 2.9% and operating EBITDA margin was 7.1% compared to the respective 'A' category medians of 2.5% and 9.5%. However, Fitch notes that profitability reflects the dilutive effects of the large employed physician group and the health plan on overall results. In fiscal 2013 the insurance plan, Health New England, experienced an operating margin of 0.5% on total revenues of $544.6 million. Baystate is budgeted for a 3% operating margin on a consolidated basis in fiscal 2015, which Fitch believes is achievable.

DISCLOSURE

Baystate covenants to provide certain quarterly and annual financial statements, as well as notification of material events disclosure to bondholders via the Municipal Securities Rulemaking Board's (MSRB) EMMA system. Quarterly disclosure should be posted no later than 60 days after the end of the period and annual disclosures no later than 150 days after the year-end date.

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

Applicable Criteria and Related Research:

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=899134

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.

[ Back To TMCnet.com's Homepage ]