NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to the following revenue bonds issued by the Vermont Educational and Health Buildings Financing Agency on behalf of University of Vermont Medical Center (UVMMC, f/k/a Fletcher Allen Health Care):
--$72,585,000 series 2016A.
In addition, Fitch has affirmed the 'A-' rating on the following parity debt issued by the Vermont Educational and Health Buildings Financing Agency:
--$54,705,000 series 2008A;
--$55,265,000 series 2007A;
--$140,975,000 series 2004B.
The Rating Outlook is Stable.
The series 2016A bonds will be issued as tax-exempt fixed rate bonds. Proceeds of the series 2016A, together with the release of debt service reserve funds will be used to fully refund the series 2007A bonds and partially refund the series 2004 bonds. The bonds are expected to sell via negotiation the week of Jan. 18, 2016.
Concurrent with assigning rating to the series 2016A bonds, Fitch will withdraw the rating assigned to the $100 million series 2015B bonds, which were not issued. UVMMC expects to issue the approximately $100 million of bonds for the partial funding of the Master Facility Plan (MFP) in the first half of calendar 2016.
SECURITY
Bonds are secured by a security interest in the obligated group's gross receipts and a mortgage on UVMMC's hospital facility in Burlington. Fitch's analysis is based on University of Vermont Health Network (UVMHN) which includes the consolidated performance of UVMMC and Central Vermont Medical Center (CVMC) in Vermont, and the two New York State hospitals under Community Providers, Inc. (CPI) - Champlain Valley Physicians Hospital (Champlain Valley), and Elizabethtown Community Hospital (Elizabethtown). The UVMMC obligated group comprised 83% of total assets and 80% of total revenues of the consolidated system in fiscal 2015 (year-end Sept. 30). Fitch bases its analysis on the consolidated system.
KEY RATING DRIVERS
STABLE CORE OPERATIONS AND SYSTEM EXPANSION: Over the last four years UVMHN has produced solid and stable core operations and successfully expanded its system's footprint into New York State through the acquisition of the two CPI hospitals, increasing revenues by 51%. The system's operating margin has consistently improved every year since 2012 and in fiscal 2015 the system reported operating margin of 4.5% and operating EBITDA margin of 10.1%, exceeding Fitch's 'A' category medians.
DEBT CAPACITY FOR INPATIENT BED REPLACEMENT PROJECT: Our analysis includes the expected issuance of the $100 million for the MFP later in 2016, as well as additional debt of approximately $70 million for other projects including several lease replacements.
UNIQUE MARKET POSITION AND CONTINUED SYSTEM EXPANSION: UVMMC is the dominant provider of high acuity services in a sizable geographic region that encompasses northern Vermont and several adjacent counties in northeastern New York State. The two CPI hospitals, with which UVMMC formally affiliated in January 2013, have successfully been integrated into UVMHN with no dilutive impact on either liquidity or profitability. UVMNH is also actively pursuing additional affiliations to further increase their presence in northern New York and has signed an agreement with one hospital (Alice Hyde Medical Center) and signed Letters of Intent (LOI) to affiliate with two additional providers in New York.
LIGHT LIQUIDITY: Historically, liquidity had been light, but even after the addition of the two CPI facilities in 2013 (which was potentially dilutive), is consistent with Fitch's lower 'A' category medians. UVMHN's $640.2 million of cash and unrestricted investments translated to 156 days cash on hand (DCOH), cushion ratio of 13x, and 144% cash-to debt, but cash to debt will be somewhat diluted by the planned issuance of a new money issue in 2016 to 117%%. Management's target is to achieve DCOH of 150 days including the funding of the capital plan.
RATING SENSITIVITIES
NEED TO MAINTAIN PROFITABILITY: Fitch expects University of Vermont Health Network to maintain solid profitability in order to generate sufficient cash flow to execute its capital plan without materially eroding its coverage and liquidity metrics.
CREDIT PROFILE
Effective Nov. 12, 2014, Fletcher Allen Health Care formally changed its corporate name to The University of Vermont Medical Center (UVMMC), and Fletcher Allen Partners, the consolidated system's name, was changed to The University of Vermont Health Network (UVMHN). UVMHN is an integrated health care network, providing hospital and physician services with four hospitals located in Vermont and New York.
UVMMC, the system's flagship hospital located in Burlington, VT is a full-service tertiary and quaternary academic medical center with 447 operated beds, and is the largest hospital in Vermont. Also part of UVMHN are the 84-bed Central Vermont Medical Center in Berlin, VT, Champlain Valley Physicians Hospital in Plattsburgh, NY with 274 acute care beds, and 25-bed critical access hospital Elizabethtown Community Hospital, Elizabethtown, NY. UVMMC is the teaching hospital for the University of Vermont and a Level I Trauma Center. The Faculty Practice includes 640 employed physicians; the health system as a whole includes over 760 employed physicians. Total revenues in fiscal 2015 (Sept. 30 year end) were approximately $1.53 billion.
STABLE CORE OPERATIONS
UVMHN's operating and operating EBITDA margins have been stable over the last four fiscal years. In fiscal 2015 UVMHN generated operating income of $74.8 million, equal to an operating margin of 4.5%, the highest of the last four years and exceeding the budgeted 3.6% margin and operating EBITDA margin of 10.1%, both comparing well to respective Fitch 'A' category medians of 3.6% and 10.3%. The consolidated system performance was achieved reflecting the benefit of the 'hundred-day plan' adopted at CVMC and the two CPI hospitals. The budget for fiscal 2016 is for operating income of $59.6million (3.6% operating margin), which Fitch believes is achievable. While future disproportionate share (DSH) and graduate medical education (GME) supplemental funding are subject to uncertainty, the funding level appears to be stable for the time being.
PLANNED 2016 ISSUANCE FOR THE MASTER FACILITY PLAN
UVMHN did not issue the $100 million of series 2015 tax-exempt series as expected due to conditions in the Certificate of Need (CON) approval issued in July 2015. UVMHN expects satisfy the CON conditions in 2016.
The $175 million inpatient building project, excluding capitalized interest, is a seven-story building with four inpatient floors containing 128 single-room occupancy patient rooms at the main flagship UVMMC campus in Burlington. The project will increase the private bed complement to approximately 85%-90% from the current 30%, but will not increase the number of licensed beds. Site work for the construction was already started and construction could begin in the spring of 2016, with occupancy of the new inpatient facility scheduled for fall 2018, subject to satisfying the CON conditions.
Management is evaluating the appropriate scale of a project to fund the development and purchase of property at Mountain View Park located in South Burlington, not to exceed $52 million, which the system plans to develop into a major outpatient facility. UVMMC currently leases a portion of this property and as such the proposed debt would not materially impact any credit metrics.
PRO FORMA DEBT PROFILE
The proposed 2016 new money transaction is the culmination of long-term planning for a master facility plan (MFP), which was fully disclosed in Fitch's prior press releases and which Fitch believes UVMHN has sufficient debt capacity for at the current rating level. Pro-forma maximum annual debt service (MADS) of $49.1 million, which includes a planned $100 million new money issuance as well as certain other financings planned in 2016, was provided by the underwriter. Historical coverage of pro-forma MADS by EBITDA was a solid 3.6x and 3.7x in fiscal 2014 and 2015, respectively, slightly below Fitch's 'A' category median of 4.2x. Further, pro forma MADS equates to a relatively manageable 3% of fiscal 2015 revenues, close to the 'A' category median of 2.8%. The system has a front-loaded debt profile and the amortization of the proposed $100 million series 2016A will be structured with principal payments in the last eight years starting with 2038, but still resulting in slowly declining overall debt service.
The system has seven swaps with an aggregate notional amount of $103.2 million. None of the swaps require posting of collateral and the mark-to-market was a negative $24.8 million as of Sept. 30, 2015.
CONTINUED SYSTEM EXPANSION
The two New York-based hospitals belonging to CPI: Champlain Valley and Elizabethtown, were successfully integrated into the system without negative impact on operating or liquidity metrics. Management is engaged in informal discussions with other hospitals in northern New York State and has signed an affiliation agreement with Alice Hyde Hospital in Malone, NY (75 acute care beds) and signed Letters of Intent to affiliate with two additional health systems in New York - St. Lawrence Health System and Interlakes Health.
The rationale for further expansion into New York State is several-fold, including the historical flow of patients from New York State for services at UVMMC in Burlington, who could receive some of their care locally at a lower cost, the increased leverage with payors, as well as the potential to grow market share outside of its traditional service area. UVMHN's ability to increase its market share in Vermont is limited as it is already dominant in the northern counties and is not likely to penetrate the three southern counties, dominated by Dartmouth-Hitchcock Health (rated 'A+' by Fitch).
LIGHT LIQUIDITY
Liquidity, which had historically been light, has slowly improved; cash and unrestricted investments of $640.2 million at fiscal year-end 2015 have doubled since 2011. DCOH at 156 days is lower than the median of 205.3 DCOH and cash-to-debt post issuance of the 2016 new money transaction will be reduced to 117% from the current 144%, as compared to the 'A' category median of 143.7%. Given the systems' cash flow generation, Fitch expects that the equity contribution will not materially impact liquidity levels and management is focused on achieving liquidity at close to the 150 DCOH level.
DISCLOSURE
CVMC covenants to provide audited financial statements within 180 days of the end of the fiscal year and quarterly statements within 60 days of the end of the quarter to MSRB's EMMA system.
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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997441
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