NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following New Hampshire Health and Education Facilities Authority bonds issued on behalf of The Memorial Hospital (TMH):
--$17.8 million series 2006.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by TMH's gross receipts and equipment, and a mortgage lien on the facility.
KEY RATING DRIVERS
ROBUST LIQUIDITY POSITION: TMH's liquidity position is very healthy for the rating category with 182.2 days cash on hand (DCOH), a 21.0x cushion ratio and 172.7% cash to debt at Feb. 29, 2016. All of TMH's liquidity metrics compare very favorably to Fitch's 'BBB' category medians, which is expected given its small revenue base.
LOW DEBT BURDEN: TMH's debt burden is low as indicated by maximum annual debt service (MADS) equating to only 2.3% of fiscal 2015 revenues, favorable to Fitch's 'BBB' median of 4.4%. TMH's debt to EBITDA and debt to capitalization metrics have also been historically favorable to category medians.
MIXED HISTORICAL PROFITABILITY: Profitability has been mixed over the last three fiscal years, and TMH posted a negative 4.2% operating margin through the five-month interim period of 2016 (ended Feb. 29, 2016). However, management notes that its revenues are seasonal and the operating shortfall is expected to be made up during the summer months. Management is expecting to achieve its budgeted 2% operating margin for fiscal 2016.
CRITICAL ACCESS DESIGNATION: TMH's critical access hospital (CAH) designation helps mitigate the operating risks inherent to small rural facilities. Management reports that TMH's CAH designation is not currently at risk as its closest competitor is located over 28 miles away and any changes to the program will likely be targeted towards facilities that are within a 10-mile radius of other providers. Additionally, TMH maintains a leading market share of over 80% in its primary service area (PSA), which Fitch views as a key credit strength.
MAINEHEALTH AFFILIATION: On Jan. 1, 2014, TMH became a member of MaineHealth (MH), with MH becoming the sole corporate member of TMH. TMH did not join MH's obligated group (OG) and continues to be solely obligated on its debt. The affiliation allows for TMH to benefit from a number of financial and operating synergies, which Fitch views favorably.
RATING SENSITIVITIES
OPERATING IMPROVEMENT EXPECTED: Fitch expects The Memorial Hospital's operations to improve through the remainder of fiscal 2016 and for the budgeted 2% operating budget to be met. Any significant deviation from budget which negatively impacts debt service coverage, or any large deterioration to The Memorial Hospital's liquidity position could result in negative rating pressure.
CREDIT PROFILE
Located in North Conway, NH, approximately 80 miles northeast of Concord, NH, TMH is a CAH with 25 acute care/swing beds and a 45-bed intermediate care facility. In 2015, TMH had total revenues of $67 million. In 2014, TMH changed its fiscal year-end to Sept. 30 (from June 30) to be consistent with MH's fiscal year-end.
ROBUST LIQUIDITY POSITION
TMH's $32.5 million in unrestricted cash and investments at Feb. 29, 2016 equated to 182.2 DCOH, a 21.0x cushion ratio and 172.7% cash to debt, all of which exceeded Fitch's 'BBB' category medians of 161.5 days, 11.1x, and 89.5%, respectively. TMH has exhibited stable year-over-year growth in unrestricted liquidity over the last four audited years, due largely to positive cash flows and tempered capital spending (averaging 75% of depreciation). TMH's fiscal 2016 capital budget calls for an increased capital spend of $6.2 million (approximately 160% of depreciation), which is expected to be funded out of cash flows and cash reserves. A large portion of the capital spend ($3.7 million) will be targeted towards renovations to TMH's primary care and oncology facilities. Fitch believes that this level of capital spend is manageable and any impact on liquidity can be absorbed at the current rating level.
Fitch notes that TMH's carries an $11.5 million third-party payable liability on its balance sheet. Approximately $8.9 million is attributed to TMH's estimated liability for prior year cost report settlements for fiscal years ranging from 2011 to 2015. The difference between amounts previously estimated and amounts determined to be recoverable from third party payors increased net patient service revenue by $1.2 million in fiscal 2015 and decreased it by $1.2 million through the nine-month period ended Sept. 30, 2014. Fitch believes TMH is conservative in its budgeting practices and reserve policies and does not view the liability as a credit concern.
LOW DEBT BURDEN
TMH's MADS of $1.6 million (including a TD Bank note) equated to just 2.3% of total operating revenues in fiscal 2015, comparing favorably to Fitch's 'BBB' median of 3.6%. Debt to capitalization of 11.2% and debt to EBITDA of 2.8x also compared well to category medians of 11.4% and 4.4x, respectively. TMH's debt service coverage averaged 4.9x over the last four audited years, and coverage was a strong 4.4x in fiscal 2015. However, due to the variability in operating performance and its small revenue base, the negative performance through the five months ended Feb. 29, 2016 resulted in only 0.7x coverage.
Debt service payments are level through the life of the bonds and TMH does not have any additional debt plans at this time.
MIXED HISTORICAL PROFITABILITY
TMH's profitability has been mixed over the last three fiscal years, ranging from a 1.7% operating margin in fiscal 2013 to a negative 1.4% margin in fiscal 2014, and a 1.9% margin in fiscal 2015. Profitability fell again through the five-month interim period of 2016 (ended Feb. 29, 2016) with a negative 4.2% operating margin. Although, TMH's revenues are seasonal, the losses in fiscal 2016 are much higher than the same prior year period. The failure to reverse the operating shortfall over the summer months, which generally result in higher volumes due to local area tourism, or large deviations from its 2% operating margin budget for fiscal 2016, could result in negative rating action.
DEBT PROFILE
The 2006 bonds are fixed rate and have level debt service. In addition, TMH executed a 10-year loan fixed rate from TD bank for $1.4 million in 2015. TMH does not have any outstanding swaps.
DISCLOSURE
TMH covenants to provide annual financial statements and quarterly disclosure to the Municipal Securities Rulemaking Board'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=1003740
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