NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on approximately $87.8 million of New Hampshire Health and Education Facilities Authority Series 2011A bonds issued on behalf of Wentworth-Douglass Hospital (WDH).
The Rating Outlook has been revised to Positive from Stable.
SECURITY
Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage.
KEY RATING DRIVERS
SUSTAINED OVERALL IMPROVEMENT: The Positive Outlook reflects WDH's multi-year trend of improving profitability and strengthening balance sheet metrics. WDH generated a 12.8% operating EBITDA margin in fiscal years 2014 and 2015 and is on track to post similar results in 2016. The Positive Outlook is also supported by robust days cash on hand (DCOH) of 309.8 days as of June 30, 2016. As the debt load moderated and liquidity increased, cash-to-debt improved to 210.5% as of June 30, 2016 from 152.5% in fiscal year end 2013, comfortably above the 143.7% category median.
EXPECTED BENEFIT FROM ACQUISITION AGREEMENT: WDH and Massachusetts General Hospital (MGH) entered into an agreement on July 21 for the acquisition of WDH by MGH. The acquisition will not be finalized until it receives the necessary approvals from various regulatory agencies, a process which is expected to take at least until the end of the year. If approved, Fitch expects the agreement to yield significant operational advantages for WDH in the future. WDH has had a successful clinical affiliation with MGH for the past eight years.
IMPROVED LEVERAGE POSITION: With the refinancing of the Series 2011B bonds and a note payable in March 2016, maximum annual debt service (MADS) decreased to $9.9 million. Consequently, MADS coverage increased to 4.4x as of fiscal year end 2015 and measures at 4.0x for the six months of fiscal 2016 (June 30), which is comfortable for the rating category.
MANAGEABLE CAPITAL PLANS: WDH's five-year capital plans reflect increased investment in an ambulatory expansion as well as an EPIC installation in 2018 and 2019. Fitch expects the increased capital targets (ranging from approximately $27 million to $43 million annually) to be relatively manageable given the average annual $42 million in EBITDA over the past three years and the system's adequate cash position. The ambulatory expansion is still under consideration as management is conservative in managing the system's balance sheet strength.
PHYSICIAN COMPENSATION: An important strategy for WDH has been to continue growing its employed physician group, which now numbers 116 employed providers. The group is a key contributor to the revenue growth at WDH, but the physician losses remain high. As WDH continues to grow the employed practice combined with future revenue pressure from changing payor contracts, minimizing the loss per physician will be an important determinant of future profitability.
RATING SENSITIVITIES
OPERATING PROFILE ELEVATED BY ACQUISITION: Fitch expects that Wentworth-Douglass Hospital's (WDH) planned acquisition by Massachusetts General Hospital will be accretive and will provide WDH greater access to clinical and data analytic expertise that is needed as payments continue to transition to value-based reimbursement. The acquisition should also provide branding opportunities and operational savings. Even without the acquisition, WDH has demonstrated steady improvement in its metrics, which Fitch expects will continue in 2016 and 2017 and may be the basis of a possible upgrade consideration in a future rating review.
CREDIT PROFILE
WDH is a 178 bed acute care hospital located in Dover, NH, which is situated in the center of the Seacoast region of New Hampshire, approximately 60 miles from Boston, MA and Portland, ME. Along with WDH, the other obligated group member on the bonds is Wentworth-Douglass Physician Corporation, which employs over 100 Family Practice, Internal Medicine and Specialty physicians, physician assistants and nurse practitioners. Fitch's analysis is based on the full consolidated Wentworth-Douglass Health System (WDHS).
SOLID OPERATING HISTORY
The 'A' rating and Positive Outlook are supported by strong operating EBITDA margins and comfortable balance sheet metrics. The solid operating performance and liquidity levels offset Fitch's concerns regarding WDH's small revenue base for an 'A' rated credit and presence in a market where there are other similarly-sized providers. The competitive environment in the Seacoast region is reportedly limited by the fact that most of the area's hospitals operate within their own discrete markets. WDH employs almost all its primary care medical staff but specialists do split their referrals between WDH and its closest competitor, Frisbie Memorial Hospital.
Fiscal 2014 and 2015 yielded improved results as utilization stabilized or increased in most clinical lines, uncompensated care decreased with the ACA and Medicaid expansion in New Hampshire, and the hospital received additional disproportionate share (DSH) revenue as a result of a settlement between the state and hospitals on the distribution of Medicaid Enhancement Tax (MET) program funds. Due to the settlement, Medicaid DSH payments to WDH increased significantly from -$158.6 thousand in fiscal 2014 to $4.8 million in fiscal 2015 and a projected $6.9 million in fiscal 2016. The current agreement extends through 2019, but early expectations are that the final settlement after 2019 will not deviate significantly from the current terms for the distribution of MET funds.
For fiscal 2015, the consolidated financial results yielded a 5.1% operating margin, 12.8% operating EBITDA margin, a 24.2% cushion ratio and 200.2% cash-to-debt. Unrestricted cash and investments grew again to $240.5 million (303.9 DCOH). These metrics comfortably exceed Fitch's 'A' category medians.
STRATEGIC DEVELOPMENTS
In preparation for risk contracts and population health, WDH has continued to focus on building its employed physician network in recent years. Also, through its membership in Granite Health (a collaboration with four other New Hampshire providers) WDH has begun to explore and gather data needed for the shift to value-based contracting. In addition, WDH participates in a captive insurance and as a member/owner for a health plan, the Tufts Health Freedom Plan, with its Granite partners. This small plan was launched in 2015 and is and primarily made up of the employees of the member organizations (approximately 15,000 lives).
In order to better prepare for population health as well as increase its access to tertiary clinical education and support, WDH has pursued a full acquisition by one of its existing clinical partners, MGH. The parties are planning a conservative, gradual approach to the acquisition with WDHS maintaining its local board and legal independence for an initial period. MGH would be the parent organization, but WDH would not initially join MGH's obligated group.
Given the more cautious approach and test period of the proposed agreement, Fitch does not expect to see an immediate impact or change in WDH's financial profile even if the acquisition is approved. However, Fitch does expect that if the acquisition is successful, it will yield long-term opportunities in savings and marketing for WDH as MGH is a recognized tertiary provider with a strong brand name.
WDH is planning to build an ambulatory presence in the Seacost market as well as convert to the EPIC system in 2018 and 2019 ($30 - $35 million project). WDH expects to open a physician practice site with imaging and lab in Portsmouth in the fall of 2016.
DEBT PROFILE
WDH's debt structure is conservative with 81% fixed-rate debt and no defined benefit plan liability. The system refinanced its Series 2011B bonds with the $16 million direct bank purchase of Series 2016A bonds, thereby addressing the LOC that was due to expire in April 2016. The 2016B bonds ($6 million, direct bank purchase) repaid a note payable that was previously outstanding to Bank of America. Two fixed payor swaps, each for $9.9 million, serve as hedges for the variable rate Series 2016A bonds. WDH has no collateral posting requirements.
DISCLOSURE
WDH provides annual and quarterly financial information to the market through EMMA. Quarterly statements include a balance sheet, income statement, and utilization statistics.
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
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Solicitation Status
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