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Fitch Affirms Memorial Hospital (NH) Revs at 'BBB'; Outlook StableFitch Ratings has affirmed the 'BBB' rating on the following New Hampshire Health and Education Facilities Authority bonds issued on behalf of The Memorial Hospital (TMH): --$18,100,000 series 2006. The Rating Outlook is Stable. SECURITY The bonds are secured by TMH's gross receipts and equipment, and a mortgage lien on the facility. KEY RATING DRIVERS SOLID LIQUIDITY: At March 31, 2015 (six-month interim period; unaudited), TMH continued to have solid liquidity metrics highlighted by 209.3 days cash on hand (DCOH), 21.2x cushion ratio, and 190.4% cash to debt. Each of TMH's balance sheet indicators compared favorably against Fitch's 'BBB' category medians of 145 days, 10.5x, and 93.6%, respectively. WEAK OPERATIONS: Since fiscal year (FY) 2011, TMH has experienced year-over-year profitability deterioration, which reached its lowest point in fiscal 2014 (year-ended June 30) with a negative 1.4% operating margin, down from 5.1% in FY 2011. However, operations have shown some improvement through March 31 reflecting certain benefits of its affiliation with MaineHealth (MH). Management expects to end fiscal 2015 (new fiscal year ending Sept. 30) with a 1.5% operating margin. Fitch believes this is reasonable as TMH's business is somewhat seasonal with better performing months typically in the summer and winter, as well as TMH realizing benefits from further cost savings with a focus on labor, benefits, and energy, among other things. CRITICAL ACCESS DESIGNATION: The achievement of the 'BBB' rating is in part due to TMH's critical access hospital (CAH) designation, which helps to mitigate the risks inherent to small rural facilities. Management reports that TMH's CAH designation is not currently at risk. Additionally, TMH maintains a leading market share of approximately 82% in its primary service area (PSA), which Fitch views as a key credit strength. MAINE HEALTH AFFILIATION: On Jan. 1, 2014, TMH became a member of MaineHealth, with MH becoming the sole corporate member of TMH. TMH did not join MH's obligated group (OG) and continues to be solely obligated on its debt. The affiliation allows for TMH to benefit from a number of financial and operating synergies, which Fitch views favorably. MANAGEABLE DEBT BURDEN: Maximum annual debt service (MADS) of $1.6 million represented a manageable debt burden of 2.6% of total revenue through the 2015 interim period. Further, over the past five fiscal years MADS coverage by EBITDA has averaged 4.1x, which compares favorably against Fitch's median of 2.6x. RATING SENSITIVITIES STABILIZATION OF OPERATIONS: Fitch expects TMH's operations to return to levels consistent with the rating category in the near term. Although unexpected, a material decline in operations leading to weakened debt service coverage could result in negative rating pressure. CREDIT PROFILE Located in North Conway, NH, approximately 80 miles northeast of Concord, NH, TMH is a critical access hospital with 25 acute care/swing beds and a 45-bed intermediate care facility. In 2014 (Sept. 30, 2014; audited nine-months), TMH had total revenues of $63.3 million. In 2014, TMH changed its fiscal year-end to Sept. 30 (from June 30) to be consistent with MH's fiscal year-end. SOLID LIQUIDITY TMH has seen robust balance sheet growth since fiscal 2009 as the organization's unrestricted cash and investments position increasd from $18.4 million in FY 2009 to $32.4 million in FY 2014. TMH's $34.7 million in unrestricted cash and investments at March 31, 2015 equated to a solid 209.3 DCOH, 21.2x cushion ratio, and 190.4% cash to debt, all comparing favorably against Fitch's 'BBB' category medians of 145 days, 10.5x, and 93.6%, respectively. Fitch views TMH's solid liquidity position as a primary credit strength, and a necessity in maintaining the current rating. WEAK OPERATIONS Since FY 2011, TMH has experienced year-over-year profitability deterioration, which reached its lowest point in fiscal 2014, with a negative 1.4% operating margin, down from 5.1% in FY 2011. Through March 31, 2015, TMH recorded an operating loss of $428,000 (negative 1.3% operating margin and 6.5% operating EBITDA margin), which is slightly improved from the prior year's $553,000 loss (negative 1.8% operating margin and 5.8% operating EBITDA margin). However, the summer months are usually busier and various cost containment initiatives centered around labor, benefits and energy usage should allow for better profitability on a full year basis relative to 2014 performance. By fiscal year-end TMH expects to record approximately $959,000 (1.5% operating margin) in operating income, which Fitch believes is achievable. MAINE HEALTH AFFILIATION On Jan. 1, 2014, TMH became a member of MaineHealth (MH), with MH becoming the sole corporate member of TMH. TMH did not join MH's OG and continues to be solely obligated on its debt. The affiliation allows TMH access to a number of financial and operational opportunities including group purchase ordering, MH's legal counsel, revenue-cycle enhancements, as well as financial support designated for the installation of the EPIC platform on TMH's campus. Management reported to Fitch that while the affiliation transition is continuing, a majority of the shared service integration is complete, which Fitch views positively. MANAGEABLE DEBT BURDEN TMH's debt burden remains manageable with a strong cash position relative to debt and MADS of $1.6 million representing 2.6% of total revenue through the 2015 interim period. Further, over the past five fiscal years MADS coverage by EBITDA has averaged 4.1x, which compares favorably against Fitch's median of 2.6x. MADS coverage was satisfactory at 3.1x through the interim period. All of TMH's outstanding debt is fixed rate with in swaps. Fitch views the organization's debt profile as conservative. DECLINING HISTORICAL VOLUME TREND Since fiscal 2013 various utilization measures including inpatient admissions, births, inpatient and outpatient surgeries, and outpatient visits have all been on a declining trend. However, 80% of TMH's revenue is generated from outpatient activities. Through the March interim period, inpatient admissions, inpatient and outpatient surgeries, and outpatient visits have all increased from prior year levels which should benefit expected 2015 operating results. CONTINUING DISCLOSURE TMH covenants to provide annual financial statements and quarterly disclosure to 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', dated May 30, 2014; --'Revenue-Supported Rating Criteria', dated June 16, 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 Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984203 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. |
