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Fitch Affirms Cape Cod Healthcare (MA) Revs at 'A-'; Outlook StableFitch Ratings affirms the following Cape Cod Healthcare (CCHC) Obligated Group bonds at 'A-': -- $50 million Massachusetts Development Finance Agency (Cape Cod Healthcare Obligated Group) hospital revenue bonds, series 2013; -- $56.53 million Massachusetts Health and Educational Facility Authority revenue bonds, Cape Cod Healthcare Obligated Group Issue bonds, series D. The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of the gross receipts and mortgages on the property and equipment of the core hospital campuses. KEY RATING DRIVERS SUSTAINED STRONG FINANCIAL PERFORMANCE: The 'A-' rating reflects CCHC's solid financial performance over in recent years, with an average 5% operating margin over the prior four years despite some volatility in volumes. MODERATE DEBT BURDEN: CCHC's light debt burden, with maximum annual debt service (MADS) equal to a low 2.3% of 2014 revenues, allows for solid MADS coverage by EBITDA equal to 4.3 times (x) in 2014, well above Fitch's 'A' category median of 3.8x. SOLID LIQUIDITY GROWTH: Unrestricted cash and investments increased 29% to $360 million as of March 31, 2015, from $278 million at fiscal year-end 2012. While 188 days cash on hand (DCOH) is slightly below the rating category median, CCHC's 21% cushion ratio and 188% cash-to-debt ratio compare favorable to category medians. STRONG MARKET POSITION: CCHC is a sole community provider hospital with a dominant market share consistently above 70% in its primary service area. Fitch believes that CCHC's strong physician alignment and relationships with other providers, including its clinical affiliation with Brigham and Women's Hospital (part of Partners Healthcare System, rated 'AA'; Stable by Fitch), will result in a continued strong market position. HIGH DEPENDENCE ON (News - Alert) GOVERNMENT PAYORS: A critical credit concern is CCHC's high exposure to government payors, which leaves the organization vulnerable to state and federal budget cuts. RATING SENSITIVITIES LIQUIDITY GROWTH: Continued solid financial performance together with liquidity growth could provide positive rating momentum in the medium term. CREDIT PROFILE CCHC operates the only two hospitals -- Cape Cod Hospital and Falmouth Hospital -- in Cape Cod, Massachusetts, with a combined total of 372 licensed beds. In fiscal 2014, CCHC had consolidated revenues of $730 million. Obligated group assets and revenue were 92% and 83%, respectively, of the consolidated system 2014 assets and revenues. CCHC's physicians' groups are not part of the obligated group. CCHC covenants to submit certain annual and quarterly financial and utilization information to EMMA. CONTINUED SOLID FINANCIAL OPERATIONS CCHC's operating profitability has been solid over the prior four years, averaging 5% operating margin. In 2014, operating margin was 4%, above Fitch's 'A' category median of 2.5% and CCHC's budgeted 2.3%. Operations are somewhat depressed but consistent with prior year performance in the six-month interim period through March 31, 2015, to at a 1.3% operating margin, which reflects seasonality in CCHC's utilization. However, operations compare favorably to budget, with $11 million in operating income compared to a $1 million budgeted deficit. CCHC is budgeting $18.3 million in operating income representing 2.4% operating margin, which Fitch believes is reasonable given CCHC's conservative budgeting practics. CCHC's profitability has been bolstered by the expansion of its ambulatory strategy with the addition of several new outpatient centers in the service area. Profitability has been sustained despite some volatility in ambulatory services and a marginal acute inpatient volume decline over the past four years. Outpatient revenue accounted for 68% of revenues in 2014. Fitch views positively CCHC's continued collaborative clinical relationships with such notable entities as Brigham and Women's Hospital and Brigham and Women's Hospital Physician Group. Fitch's primary credit concern is CCHC's exposure to government payors. Medicare and Medicaid as a percentage of gross revenues has consistently been over 60%, which Fitch views negatively, as the organization remains vulnerable to reimbursement pressure at the state and federal level. STRONG MARKET SHARE CCHC's dominant market position is a credit strength, augmented by its designation as Sole Community Provider under Medicare. CCHC has consistently maintained strong inpatient primary market share, above 70% for the past ten 10 years. CCHC operates 96 locations throughout Falmouth County and added Emerald Physicians, a physician's group, in 2014, which serves 38,000 patients. HEIGHTENED CURRENT CAPITAL INVESTMENT Capital spending remains elevated, with CCHC's plans to finish emergency room renovations at both hospitals projected to be completed in 2015. Roughly half of these expansions were funded though philanthropy, continuing CCHC's significant philanthropic efforts. Management is undertaking capital planning and currently projects capital spending at the level of depreciation after 2015. CONTINUED IMPROVEMENT IN LIQUIDITY Unrestricted cash and investments increased 29% to $360 million as of March 31, 2015, from $278 million at fiscal year-end 2012. While 188 days cash on hand (DCOH) is slightly below the rating category median, CCHC's 21% cushion ratio and 188% cash-to-debt ratio compare favorably to category medians. Although CCHC's allocation to alternative investments is somewhat high relative to other 'A' category credits, further liquidity growth could provide positive rating momentum in the medium term. LIGHT DEBT BURDEN; SOLID COVERAGE The combination of solid profitability and light debt burden allowed for solid MADS coverage in fiscal 2014 and the interim period. MADS coverage by EBITDA and operating EBITDA equaled 4.3x and 3.8x, respectively, in 2014, above Fitch's respective 'A' category medians of 3.8x and 3.1x. Debt is structured conservatively, with front-loaded debt service and MADS occurring in 2015. Total debt outstanding was $188.5 million as of Feb. 28, 2015 and MADS was $17.1 million, equating to a low 2.3% of fiscal 2014 revenue. CCHC's debt mix is 89% fixed and 11% synthetically fixed. CCHC's fixed payor swap was marked to market at negative $2.7 million as of Feb. 28, 2015. The swap does not require collateral posting. Additional information is available on 'www.fitchratings.com'. Applicable Criteria and Related Research: -- 'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014); -- 'Revenue-Supported Rating Criteria' (June 16, 2014). Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria Additional Disclosure
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