NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by the Maine Health and Higher Educational Facilities Authority on behalf of MaineGeneral Health (MGH):
--$280.75 million revenue bonds, series 2011.
The Rating Outlook is Negative.
SECURITY
The bonds are secured by a pledge of gross receipts, mortgage on certain hospital property, and a debt service reserve fund. As additional security, MGH has a $15 million surety bond from the Harold Alfond Foundation.
KEY RATING DRIVERS
WEAK BUT IMPROVING PROFITABILITY: The maintenance of the Negative Outlook reflects ongoing pressure on operating earnings after very weak fiscal 2015 (June 30 year-end) results that were partially due to a $19 million reserve adjustment. However, performance improved through the nine-month interim period ended March 31, 2016, with MGH generating a negative 1% operating margin, up from negative 3.8% during the prior year's nine-month interim period. The nine-month fiscal 2016 operating EBITDA margin of 9.4% is also improved from the prior year's 7.2% and is above Fitch's 'BBB' category median of 7.7%.
MODEST LIQUIDITY: The Negative Outlook also reflects MGH's weak liquidity position, which has continued due to accounts receivable challenges and unrealized investment losses. At March 31, 2016 unrestricted liquidity equaled $101.85 million and 79.8 DCOH on a combined basis, slightly below expected levels and just above 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 an outside consultant would be required. MGH is expected to end the current fiscal year with liquidity balances above the covenant requirement and remain well above the 50-DCOH event of default threshold.
SOLID MARKET PLATFORM: The 'BBB-' rating continues to reflect MGH's leading market position with about 60% inpatient market share that is buoyed by its new replacement facility, as well as success in growing its medical staff and outpatient business. Further, a highly regulated operating environment limits material competitive activity.
HEAVY DEBT BURDEN: The rating continues to reflect MGH's sizeable debt burden. Leverage metrics remain elevated through the March 31, 2016 interim period with MADS as a percent of revenue of 5.7% and debt to capitalization of 58.8%, unfavorable to Fitch's respective 'BBB' category medians of 3.6% and 48.1%. MGH has no further debt plans and leverage is expected to moderate over time.
MINIMAL CAPITAL NEEDS: With the completion of its replacement hospital and Thayer Campus renovation projects, MGH's future capital needs are minimal. Spending will likely remain well below depreciation through the near term, allowing for liquidity growth given the operating cash flow improvements.
RATING SENSITIVITIES
MAINTENANCE OF LIQUIDITY AND COVERAGE: Fitch anticipates MaineGeneral Health strengthening its balance sheet, with modest improvement expected by fiscal 2017. Failure to achieve liquidity targets and actual annual debt service coverage that are expected to be above fiscal 2016 levels could result in a downgrade. Over the medium term, Fitch expects adequate operating cash flow will further support liquidity growth and steady debt service coverage, both of which will be necessary to return the rating to a Stable Outlook.
CREDIT PROFILE
MGH is the third-largest health system in Maine, operating 192 licensed beds in Augusta and another health care center in Waterville (20 miles north of Augusta), along with a full range of primary, secondary, and tertiary services and a 208-member employed physician network. Total revenues were $448.7 million in fiscal 2015.
WEAK BUT IMPROVING PROFITABILITY
Following the difficult implementation of a revenue-cycle information system upgrade in 2013, MGH's working capital management has been challenged and has led to accounts receivables write-offs. For fiscal 2015, about $19 million was written down, reducing net patient revenue and increasing the operating loss. However, management has been proactive in addressing the working capital issues by replacing staff and using an outside consultant to review and implement new policies and procedures. Also negatively affecting fiscal 2015's operating earnings were consulting costs and an additional $12.5 million of depreciation and interest expenses from the completion of the replacement hospital project. As a result, the operating margin declined to negative 5.4% in fiscal 2015 from negative 3.2% in fiscal 2014.
Nonetheless, given the heightened depreciation and interest expenses, the operating EBITDA margin increased to 6.1% in fiscal 2015 and 9.4% for the nine-month period ending March 31, 2016. These improvements are impressive in light of the increased costs for the working capital management consultants which are not expected to continue much longer. Also improving operating performance in the current fiscal year are solid revenue gains, primarily from increased volumes, particularly from outpatient and physician services. For instance, discharges increased 6.5% and physician clinic visits jumped 6.3% through the first nine months of fiscal 2016. Importantly, as a result of the improved cash flow during the nine-month interim period, MADS debt service coverage increased to 1.8x from 1.1x for fiscal 2015.
Fitch expects operating performance and liquidity growth will continue to improve by the end of fiscal 2016 and persist through fiscal 2017. MGH's fiscal 2017 projections currently reflect a slightly positive operating margin, improved coverage of actual annual debt service, and increasing liquidity balances.
MODEST LIQUIDITY
MGH's liquidity position has remained modest due to accounts receivable challenges and unrealized investment losses. Accounts receivable balances jumped to a high 94 days in fiscal 2014 due to the problematic revenue-cycle information system upgrade in 2013. After the write-down and consultant engagement, days in accounts receivable declined to 82.5 days at fiscal year-end 2015 and about 84 days as of March 31, 2016. Management anticipates further improvement by the end of the current fiscal year and into fiscal 2017 as the fully implemented system benefits from the enhanced working capital management policies and procedures are realized.
Unrestricted cash balances were also negatively affected by unrealized investment losses of $3.5 million and $3.3 million, respectively, in fiscal 2015 and the nine-month interim fiscal 2016 period. At March 31, 2016 unrestricted liquidity equaled $101.85 million, 79.8 DCOH and 32.3% of long-term debt on a combined basis.
SERVICE AREA AND MARKET POSITION
MGH's primary service area is defined as Kennebec County, which includes the state capital of Augusta. Overall service area economic and demographic characteristics have been mixed, but relatively stable with lower than average unemployment, a stable and aging population, and below-average income levels. The presence of the state capital and several higher educational institutions are stabilizing factors.
MGH enjoys a leading market position with about 60% inpatient market share that is buoyed by its new replacement facility, as well as success in growing its medical staff and outpatient business. The nearest competitor is 48-bed Inland Hospital, located about 16 miles north of Augusta in Waterville, and is part of the large Bangor-based Eastern Maine Health System. Other competition comes from the Portland, ME health systems that are located about 55 miles south, one of which (Mercy Medical Center) is also part of Eastern Maine Health System. A few years ago, Franklin Hospital (65-beds, 36 miles northwest in Farmington, ME) joined Portland-based Maine Health System, the largest system in the state. This has not affected MGH significantly, since Franklin Hospital's programmatic offerings and service area does not overlap much with MGH.
Further, a highly regulated operating environment limits material competitive activity. Maine's certificate of need program that regulates beds, major medical equipment, capital expenditures, new health services and other related projects has limited competition and provides for somewhat stable marketplace dynamics.
DEBT PROFILE
At March 31, 2016, MGH had a total $315 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 fully amortized term loans. Included in long-term debt is an $11.75 million fixed-rate (3.16%) Bangor Savings Bank term loan, which matures on April 19, 2018 with a $7.5 million balloon payment. The bank loan's terms mirror those under the master indenture and it is expected to be refinanced prior to or at maturity.
MGH has a 1.2x debt service coverage covenant based on actual annual debt service, and produced 1.3x coverage in fiscal 2015 under that calculation. For the nine-month ended March 31, 2016, coverage based on actual annual debt service was 2x.
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=1005068
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005068
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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