NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following expected issuance of bonds by the New Hampshire Health and Education Facilities Authority on behalf of Wentworth-Douglass Hospital (WDH):
--$88,250,000 fixed-rate revenue bonds, series 2011A;
--$18,390,000 variable-rate demand bonds, series 2011B.
The series 2011A bonds will be issued as fixed-rate bonds. The rating for the series 2011B bonds, which will be issued as variable-rate demand bonds supported by a letter of credit, is an underlying rating.
In addition, Fitch assigns an 'A' rating to $10.3 million of outstanding New Hampshire Health and Education Facilities Authority, Wentworth-Douglass Hospital issue, fixed-rate revenue bonds, series 1994 bonds.
The Rating Outlook is Stable.
Proceeds from the 2011 bonds will be used to fund a tower project, refinance outstanding debt including a $30 million short-term capital anticipation note, reimburse WDH for prior capital expenditures, and pay the cost of issuance. The 2011A bonds are expected to sell the week of March 28. Total long-term debt after the issuance will be approximately $131.9 million, with all the debt fixed except the $18.4 million 2011B bonds.
RATING RATIONALE:
--WDH's operational performance is strong for the 'A' category.
--Pro forma liquidity and capital metrics are adequate for the category, with the strongest metric, days cash on hand of 219.8 days as of Dec. 31, 2010, exceeding Fitch's 'A' category median.
--WDH's leading inpatient market share (over 60% in 2009) in a stable service area, characterized by relatively low unemployment (below 6%) and a diversity of employers, is a credit strength.
--WDH's physician staff is a credit strength as a long-standing physician hospital organization has created strong physician alignment, and, through a physician corporation, WDH employs approximately a third of its physicians, including most of the service area's primary care physicians.
--A more recent clinical affiliation with Massachusetts General Hospital has advanced specialty services, especially oncology, at WDH and been a key driver of growth and market share gain.
--Inpatient admissions have shown steady growth of 4 to 5% a year since 2005.
--Fitch believes that while the new tower project will increase WDH's leverage, the debt and the scope of the project are manageable, with the project providing essential upgrades to WDH's current facility.
--Other credit concerns include the hospital's small revenue and bed size for the rating category, which is reflected in the top 10 admitting physicians representing a high 36.6% of admissions.
KEY RATING DRIVERS:
--WDH's overall financial profile should remain stable supported by the continued strength of its medical staff and stability in its service area.
--Inpatient and outpatient surgery utilization continue modest growth.
--The tower project is completed on time and on budget.
SECURITY:
Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage.
CREDIT SUMMARY:
The 'A' rating reflects WDH's solid operating performance, leading market share position in a stable service area and excellent physician alignment. Credit concerns include the new tower project, and the associated debt issuance for the project, as well as WDH's small revenue and bed size for the rating category.
Over the last three years, WDH's operating margin and operating EBITDA margin have averaged, 3.9% and 12.5%, respectively, per year, well ahead of Fitch's 2010 'A' category medians of 3% and 10%. The solid operating performance is supported by management's focus on cost control (WDH has one of the lowest cost per patient discharge figure in the region), WDH's growth in acute care services, and the strength of its service area. Unemployment is below 6% in WDH's primary service area, a nine-town region around Dover, New Hampshire, including two towns in Maine. The area has a good mix of employers, due in a part to its proximity to Pease International Tradeport, a converted Air Force base, which has over 250 businesses and 7,000 employees and is located approximately 10 miles from the hospital in Portsmouth, NH. WDH's inpatient market share in its primary service area is just above 60% and the area is expected to grow by about 4.7% by 2014, with most of that growth in older populations, who have higher utilization rates for hospital services. In addition, WDH's market position and low cost provider status have resulted in favorable managed care contracting terms with its largest commercial payor.
Further supporting WDH's operating performance is its clinical affiliations, which have enabled WDH to provide a level of acute care atypical of community hospitals, and its strong physician alignment. WDH has two clinical affiliations. One is with the Children's Hospital at Dartmouth for specialty children's services, and WDH has a level II nursery. The other one is with Massachusetts General Hospital, which was just renewed for five years and includes collaboration around stroke, trauma, vascular, cancer, and genetics. WDH has strong physician alignment through two separate entities, a highly functioning physician hospital organization (PHO) that was established in the 1990s, and a physician corporation, Wentworth-Douglass Physician Corporation (WDPC), which is part of the obligated group. Through WDPC, WDH employs approximately a third of its physicians, including most of the area's primary care physicians. The PHO links WDH with independent and employed physicians, providing managed care contracting and a high level of clinical integration. These two entities have created strong physician alignment and positions WDH well for health care reform.
Liquidity indicators are adequate for the rating level. DCOH at year end 2010 was 219.8 days, above the category median, but the pro forma cushion ratio of 9.7 times (x) and cash to debt of 99.7% trail category medians. However, the cushion ratio and cash to debt reflect the effect of the new debt issuance and Fitch expects these figures to improve over time as WDH grows into the debt. Maximum annual debt service (MADS) is $13.5 million, but this figure includes a bullet payment of $5 million in 2016. Without the bullet payment, MADS is closer to $10.9 million. Pro forma debt service coverage on the $13.5 million was 2.6x in 2010 and a stronger 3.2x for the $10.9 million, but both trailed the category median of 3.3x. While the lower coverage is a concern, it is offset by the stability in WDH's operating platform.
Credit concerns include the new tower project and the associated debt, as well as WDH's relatively small revenue and bed size for the rating category. The new tower project, including an expanded parking deck, brings with it the typical risks of such projects, including potential service disruptions, cost overruns, and ramp up on the new building, as well as the effect of the additional debt. Fitch believes the scope of the project is manageable as it is a four-story building that will be contiguous with WDH's current hospital building and should not disrupt hospital operations. A guaranteed maximum price contract is in place. A pro forma analysis shows that the new debt is manageable (the total project cost is $51.3 million) and Fitch would expect WDH to grow into the debt over time. Fitch also believes that the new tower will significantly enhance the current physical plant at WDH. A new women and children's center, including a new nursery, will be housed in the tower, and this will provide a major upgrade to the current obstetrics floor and nursery. Two floors will have 32 private inpatient rooms each, and that will allow WDH to renovate existing inpatient rooms to create all private rooms, a major upgrade to the facility. Overall, Fitch believes that the projects will position WDH well to handle future levels of patient growth.
WDH's revenue and bed size are small relative to the 'A' category. Concerns about these are mitigated by WDH's leading inpatient market share and the lack of a large tertiary competitor in the seacoast region. Most of WDH's competitors are approximately its revenue or bed size or smaller, and operate within fairly discrete service areas, providing a measure of competitive cushion for WDH. The top 10 admitting physicians do represent a high 36.6% of admissions, but this is offset as nine out of 10 physicians are employed, which enables WDH to work more closely with these physicians for succession planning, relative to smaller hospitals with a staff of more independent physicians.
The Stable Outlook reflects Fitch's expectation that WDH's operating performance and debt service coverage will remain stable over the near term. A key driver of this stability is the strength of WDH's payor mix and payor contracts. WDH's overall exposure to government payors is manageable at around 50% and Medicaid as a percentage of gross revenue is a low 8%. WDH is in the first year of a four-year contract with Anthem, its largest private payor, that includes yearly increases, which Fitch believes will enable WDH to sustain its current levels of operations. Additionally, Fitch expects liquidity to improve due to manageable future capital needs.
Wentworth-Douglass Hospital is a 178 bed acute care hospital (122 available beds) located in Dover, NH, which is situated in the center of the Seacoast region of New Hampshire, approximately 60 miles from Boston, MA and Portland, ME. WDH covenants to disclose annual and quarterly financial information. Quarterly statements include a balance sheet, income statement, and utilization statistics.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from the Underwriter and Wentworth-Douglass Hospital.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;
--'Rating Guidelines For Nonprofit Hospitals and Health Systems', dated Dec. 29, 2009.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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