CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following Maine Health and Higher Educational Facilities Authority (MHHEFA) bonds issued on behalf of MaineGeneral Health (MGH):
--$288.8 million Series 2011.
The Rating Outlook is Negative.
SECURITY
A pledge of gross revenues, mortgage on certain hospital property, and fully-funded debt service reserve will provide security for the bonds. As additional security, MGH also obtained a surety bond for $15 million secured by the Harold Alfond Foundation.
KEY RATING DRIVERS
PROFITABILITY REMAINS WEAK: The maintenance of the Negative Outlook reflects ongoing pressure on MGH's operating performance, driven in significant part by a $14.6 million reserve adjustment which is expected to impact fiscal results (June 30 year-end). Through the nine-month interim period ended March 31, 2015, MGH generated an operating loss of $13.3 million, or 3.8%, and operating EBITDA of 7.2%. Coverage of maximum annual debt service (MADS) was thin at 1.2x by operating EBITDA. Fiscal 2015 results are likely to remain weak for the rating, though fiscal 2016 is expected to produce a better 8.4% operating EBITDA margin.
SOLID MARKET PLATFORM: The 'BBB-' continues to reflect MGH's leading market position with over 60% share, as well its success in recruitment and retention of a stable to growing medical staff in its new facility. Further, a highly regulated operating environment limits material competitive activity.
LIQUIDITY STILL A CONCERN: The Negative Outlook also reflects MGH's weak liquidity position, which has remained flat due in large part to a significant write-down of accounts receivable near $17 million, expected at 2015 fiscal year-end. At March 31, 2015, unrestricted liquidity equaled $92 million and 74.2 days of cash on hand (DCOH), well below expected levels and pressuring MGH's 75 DCOH covenant requirement. Though not anticipated, should MGH have less than the 75 DCOH required for its annual covenant test, trustee approval of the current consulting efforts already well underway is likely. MGH is expected to remain well above the 50 DCOH event of default threshold.
SIZEABLE DEBT BURDEN: The rating continues to reflect MGH's sizeable debt burden. Leverage metrics remain elevated through the March 31, 2015 interim period with MADS as a percent of revenue of 6.2% and debt-to-capitalization of 56.9%, unfavorable to Fitch's 'BBB' respective category medians of 3.6% and 44.9%. MGH has no further debt planned, and leverage is expected to moderate over time.
MINIMAL CAPITAL NEEDS: With the completion of its replacement hospital and Thayer Campus renovation, MGH's future capital needs are minimal. Spending will likely remain well below depreciation through the near term, allowing for balance sheet replenishment.
RATING SENSITIVITIES
MAINTENANCE OF LIQUIDITY: Fitch anticipates MaineGeneral Health (MGH) to preserve its balance sheet, with modest improvement expected by fiscal 2016. Given persistent performance below budget, a failure to achieve fiscal 2016 liquidity targets near 90 DCOH and near 2.0x coverage will result in a downgrade. Over the longer term, Fitch anticipates narrowed operating losses will further support liquidity growth and improved debt service coverage, both of which will be necessary to maintain the 'BBB-' rating.
CREDIT PROFILE
MGH is the third largest health system in Maine, with 287 licensed beds on two campuses in Augusta and Waterville (20 miles north of Augusta), along with a full range of primary, secondary, and tertiary services. MGH plans to operate 192 beds in the replacement facility, with no change to licensed bed count. Total revenues were $441.7 million in fiscal 2014.
PROFITABILITY PRESSURED
Following the implementation of a revenue cycle system upgrade in 2013, MGH's accounts receivable has been elevated and leadership has since identified a portion of 'at-risk' receivables of approximately $19 million. Through March, approximately $5 million has been written down, pressuring net patient revenue through the nine-month interim period. Fitch anticipates fiscal 2015 could be further affected by adjustments, some of which may be reflected as prior year adjustments.
Still, Fitch notes that no covenant violations are expected, and these adjustments are not anticipated to persist into fiscal 2016. Absent further adjustments, MGH is expected to narrow its operating losses and achieve modest growth in liquidity in fiscal 2016. Its budget currently reflects a breakeven operating margin, 2x coverage of MADS, and approximately 100 DCOH.
DEBT PROFILE
At March 31, 2015, MGH had a total $318 million in long-term debt outstanding (including current portion), with no short-term debt and no swaps. MADS is measured at $27.8 million, which includes outstanding debt and term loans. Included in long-term debt is a $13.3 million fixed-rate (3.16%) Bangor Savings term loan, which matures April 19, 2018. The bank loan terms mirror those under the master indenture.
MGH has a 1.2x debt service coverage covenant based on actual annual debt service, and produced 2.05x coverage in fiscal 2014 under that calculation.
DISCLOSURE
MGH covenants to provide audited annual disclosure within five months and quarterly disclosure within 45 days of each period end to the Municipal Securities Rulemaking Board's EMMA System. Disclosure to Fitch has been timely and thorough.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986418
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986418
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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