NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following outstanding debt issued by Berkshire Health System (BHS):
--$93,233,237 Massachusetts Development Finance Agency revenue bonds (Berkshire Health System), series 2012G;
--$34,610,477 Massachusetts Health and Educational Facilities Authority revenue bonds (Berkshire Health System), series 2005F
The Rating Outlook is revised to Positive from Stable.
SECURITY
Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage pledge on the core Berkshire Medical Center (BMC) campus The legal requirements include a liquidity covenant of 65 days cash on hand (DCOH). The BHS obligated group represented 96% of the BHS' fiscal 2012 (Sept. 30 year end) assets and 93% of revenues.
KEY RATING DRIVERS
SOLID OPERATING PERFORMANCE: The benefit of the CMS rural floor wage index reimbursement adjustment (wage index adjustment) in fiscal 2012 and through the five-month interim period ended Feb. 28, 2013 (the interim period) resulted in strong operating and operating EBITDA margins, exceeding Fitch's 'BBB' medians. However, even excluding the wage index adjustment from operating revenues results in operating margin of 3.4% and operating EBITDA margin of 10%, which is consistent with Fitch's 'A' category medians of 2.8% and 9.8%, respectively. The future of the wage index beyond 2013 is uncertain, and BHS does not budget for it.
DOMINANT MARKET SHARE: BHS maintains a dominant presence as the only provider in its primary service area (source of approximately 90% of admissions), which includes most of Berkshire County and portions of eastern New York State, commanding market share of 84%. The only other provider in Berkshire County is the financially weak North Adams Regional Hospital in North Adams with under 20% market share, which only recently emerged from bankruptcy.
STRONG LIQUIDITY: The additional revenues from the wage index adjustment had a favorable impact on cash flow, and BHS' cash and unrestricted investments at Feb. 28, 2013 of $215.9 million translate to 208.7 days cash on hand (DCOH), 19.2x cushion ratio and cash equal to 178% of debt, all comparing favorably to the respective 'A' category medians.
CONSERVATIVE DEBT STRUCTURE: The 2012 issuance resulted in BHS having all fixed-rate debt and eliminated a balloon payment of close to $30 million due in 2019. BHS has a moderate debt burden with MADS coverage by EBITDA of 3.9x in fiscal 2012 and 3.6x though the interim period, even when excluding the wage index adjustment.
CAPITAL PLANS: Despite the strong operating results and balance sheet metrics that are now more consistent with an 'A-' rating, an upgrade is precluded at this time given BHS' potential capital needs, as the scope and timing of its master facility plan is still undetermined. BHS is moving forward with a $30 million cancer center project, which may be funded from cash or additional debt.
RATING SENSITIVITIES
MAINTAINING SOLID FINANCIAL PERFORMANCE: The Positive Outlook is based on BHS' significantly improved balance sheet and Fitch's expectation that BHS will continue to produce solid profitability and cash flow (excluding the wage index adjustment). Positive rating pressure will be reevaluated when BHS' capital plans are finalized.
CREDIT PROFILE
The affirmation of the 'BBB+' rating and the revision of the Outlook to Positive is based on BHS' significant improvement in its balance sheet ratios which are now consistent with Fitch's 'A' category medians and stronger operating performance, even when excluding the impact of the wage index adjustment.
BHS' operating performance started to improve with fiscal 2011 and, driven by approximately $16.3 million benefit of the CMS rural wage index adjustment, fiscal 2012 ended with operating income of $30.2 million, equal to operating margin of 7.1% and operating EBITDA margin of 13.5%. However, even adjusting for the wage index adjustment, which may not be in effect beyond fiscal 2013, operating margin and operating EBITDA margin of 3.4% and 10%, respectively, are consistent with Fitch' 'A' category medians of 2.8% and 9.8%. Operating results for the five-month interim period show operating income of $8 million, equal to operating and operating EBITDA margins of 4.6% and 11.5%. Adjusting for the wage index reduces the respective margins to 1.1% and 8.3%. BHS hopes to outperform the budgeted 1.2% operating margin for the 2013 fiscal year end as a result of the oncology/hematology project coming on board in the summer of 2013.
BHS' service area, which includes Berkshire County and parts of Rensselaer and Columbia Counties in New York, is viewed by Fitch as a credit weakness. Berkshire County is characterized as having stable but aging demographics. Unemployment has shown some improvement and was most recently reported at 6.8%, down from 7.3% a year ago. BHS has also at times faced issues with physician recruitment, particularly struggling to fill neurology slots. Departure of one of the two neurosurgeons was partially responsible for the slight 1.8% dip in acute care admissions in 2012. A second neurosurgeon was recently recruited and will be joining in August 2013.
BHS has acquired an oncology/hematology practice and is renovating part of their old Pittsfield Hillcrest campus into a state of the art cancer center and recently signed a memorandum of understanding with a renowned cancer center. The collaboration with the cancer center will allow BHS to provide cancer services locally for patients that would have had to previously travel to Boston. Over time, BHS expects 20,000 patient encounters annually and a $2 million contribution to the operating margin from the expanded cancer program, which has not been included in the budget. The first phase of the $30 million project is expected to be completed in the summer of 2013, and the final phases will come on line by the end of 2014 or beginning of 2015 calendar year.
Liquidity has shown consistent growth over the last four years and cash and unrestricted investments, driven by the robust cash flow aided by the rural wage index funds, increased to $215.9 million at Feb. 28, 2013 from $126 million at 2009 year-end, translating to 208.7 DCOH, 19.2x cushion ratio and 178% cash to debt, all exceeding Fitch's 'A' category medians of 191 days, 16.3x cushion and 116% cash to debt. BHS has committed to funding the cancer center with internal cash. Using internal cash to fund the project would reduce cash to debt to 152%, still better than Fitch's 'A' median.
Debt service coverage of MADS by EBITDA was a solid 5.6x in fiscal 2012 and 3.9x without the wage index adjustment, just shy of the 'A' rating category median of 4.1x. Coverage by EBITDA was 3.6x through the interim period, without the wage adjustment and 5x including the $6.2 million of the additional revenues from the wage adjustment. BHS is exploring whether to proceed with a couple of projects which would replace an older patient tower in order to increase the number of private rooms at Berkshire Medical Center in Pittsfield and focus on investment in expansion of outpatient facilities at the Fairview campus in Great Barrington (a replacement of the Barrington facility, contemplated in the past, is not in the current plan). However, neither project has been approved by the BHS board and there is currently no estimate as to potential size or timing of the financing, nor is it certain that BHS will proceed with either of the two projects. BHS will also model the potential financing of the cancer center project in order to capture the current favorable financing environment, in which case BHS would fund one or part of these two projects with internal cash.
Berkshire Health System operates two acute care hospitals: Berkshire Medical Center in Pittsfield, MA (40 miles east of Albany) with 284 available acute care beds, and Fairview Hospital in Great Barrington (MA), 20 miles south of Pittsfield, a critical access hospital with 24 available acute care beds. BHS had $422 million in total operating revenue in fiscal 2012. BHS covenants to provide annual and quarterly financial disclosure through the MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012.
Applicable Criteria and Related Research
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789206
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