NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'BBB+' rating on the following bonds issued on behalf of Lowell General Hospital (LGH):
--$65.4 million of Massachusetts Development Finance Agency revenue bonds, The Lowell General Hospital Issue, series G (2013).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a gross revenue pledge and a mortgage on LGH's main campus.
KEY RATING DRIVERS
SOLID FISCAL YEAR 2015 (FY15) PERFORMANCE: Lowell General Hospital's (LGH) consolidated performance improved in FY15 (Sept. 30 year end) after a breakeven performance in FY14 and an operating loss in FY13. The improved performance helped the operating EBITDA climbed to 8.2% from 7% in FY14, above the 'BBB' category median of 7.7%. Maximum annual debt service (MADS) coverage by operating EBITDA of 2.4x is consistent with 'BBB' category median and is improved from 2x in FY14 and 1.5x in FY13. MADS coverage by EBITDA was lower at 2.2x due to realized losses on investments.
VOLUME GROWTH: The improved performance reflects incremental improvement in most of LGH's patient volumes, including a 1% increase in inpatient admissions. The growth continued into the first quarter of FY16, with inpatient admissions up 5% year-over-year (YOY). Inpatient market share has grown steadily as well, rising to 59.2% in FY14 from 58.5% in FY11. The continued growth in volumes and market share reflects the strategies that LGH has put in place since its merger with Saints Medical Center.
ADEQUATE LIQUIDITY: LGH had $127.2 million in unrestricted cash and investments at Sept. 30, 2015, down slightly from the year before. The drop in cash and investments was driven by a realized loss of $4.5 million on investments. Over all, liquidity remained adequate at year end FY15, with days cash on hand (DCOH) of 106.6, cushion ratio of 8x, and cash to debt of 68.6%, all below the category medians.
OTHER UNDERLYING CREDIT STRENGTHS: Fitch views LGH's leading market share position and low cost structure as key credit strengths. LGH is the only acute care provider in its primary service area (PSA) and had a leading inpatient market share of 59.6% in 2013. Additionally, LGH has approximately 25,000 patient lives under risk based reimbursement arrangements which combined with its low cost structure positions LGH well for health care reform.
WELLFORCE ADVANCING: In October 2014, LGH and Tufts Medical Center (general revenue bonds rated 'BBB'/Stable Outlook) formed a new parent company, Wellforce. Currently, the new parent approves budgets and capital plans for both organizations, but LGH and Tufts Medical Center have maintained separate obligated groups and have not combined their financial statements. Fitch views the partnership as a credit neutral and will continue to monitor the relationship for credit implications as it evolves.
RATING SENSITIVITIES
SUSTAINING PERFORMANCE: Fitch expects Lowell General Hospital's (LGH) recent performance levels to be sustained with modest liquidity. A material improvement in liquidity metrics coupled with continued strength in operating performance could lead to an upgrade. A longer trend of negative performance would be needed to cause a downgrade.
WELLFORCE INTEGRATION: The integration of LGH and Tufts Medical Center into Wellforce is modestly progressing, with management being the highest integrated area. The further development of Wellforce could impact the rating but that will depend on the pace of integration, especially financially, the shape the integration takes, and any additional partners that are added to Wellforce.
CREDIT PROFILE
Lowell General Hospital is a 434-licensed bed hospital system located in Lowell, MA approximately 35 miles northwest of Boston. LGH ranks as the eighth largest hospital and the second largest community hospital in Massachusetts in FY13 by number of discharges. In 2013, LGH merged with Saints Medical Center. LGH had total operating revenue of $465.3 million in FY15.
Fitch's analysis is based largely on the consolidated results, but the OG results are reviewed as well. Figures quoted in this press release are for the consolidated entity, Circle Health, unless otherwise noted. Circle Health is the corporate parent of LGH. Circle Health oversees and coordinates a series of affiliated entities that provide a range of health care and related services in Lowell, including Circle Health Physicians, Inc., which employs LGH physicians. In fiscal 2015, the OG comprised 95.3% of the system's assets and 90.7% of its operating revenue.
Financial Profile
In FY15, LGH continued its positive trend in performance for a second year posting a 1.2% operating margin and an 8.2% operating EBITDA margin. This up from a negative 0.2% operating margin and a 7% operating EBITDA margin in FY14, and much improved over FY13's negative 1.7% operating margin and 5.1% operating EBITDA margin. First quarter FY16 OG results show continued good performance, with a 2.5% operating margin, a 9.1% operating EBITDA margin, and 2.8x debt service coverage.
Fitch believes the improved performance reflects the realization of the benefits of the merger with Saints. The integration with Saints led to efficiencies and cost savings, which helped improve performance over the last two years. LGH has now begun to execute on growth strategy investments, including in cardiology and outpatient centers. As a result, volumes have grown steadily YOY. LGH opened a successful outpatient center in Westford and plans to open another one in Billerica.
LGH continues to maintain a leading inpatient market share of approximately 60%. Fitch believes the strong market share coupled with LGH's IT platform, expense management, and quality indicators, position it well for value based purchasing and population management. LGH already has nearly 25,000 lives within risk arrangements with several payors and has done well reducing costs while maintaining quality. The closer clinical relationship with Tufts Medical Center through Wellforce has also helped LGH grow certain specialty areas, including in pediatrics, keeping more care in the local community.
Debt Profile
All of the OG's long-term outstanding debt, $166.5 million as of Dec. 31, 2015, is fixed rate. Fitch views this conservative debt structure as a credit positive, helping to offset the lighter liquidity. LGH has no swaps.
LGH's debt burden is elevated but continues to moderate. MADS as percentage of revenue at year end FY15 lowered to 3.4%, which is now better than Fitch's 'BBB' median of 3.6%. Consolidated results show debt to capitalization at 55.5% and debt to EBTIDA of 5.2x, both above Fitch's 'BBB' category medians of 48.1% and 4.4x, respectively.
Fitch expects LGH's capital needs to remain manageable, with the Dahod Tower complete and no major IT needs. LGH is a HIMSS level six hospital. Fitch expects capital spending to focus on LGH's outpatient strategy. However, no debt issuance is expected, as LGH has little room for additional borrowing at the current rating.
Disclosure
LGH covenants to provide both annual and quarterly disclosure for the OG to the MSRB's EMMA system. LGH has begun to voluntarily post its Circle Health audit, which is the consolidated entity, and Fitch views this action positively.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Not-for-Profit Hospitals Rating Criteria (pub. 04 Dec 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874120
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001888
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001888
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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