NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Berkshire Health System, MA (BHS) outstanding debt at 'A-':
--$83,676,575 Massachusetts Development Finance Agency revenue bonds (Berkshire Health System), series 2012G;
--$23,459,764 Massachusetts Health and Educational Facilities Authority revenue bonds (Berkshire Health System), series 2005F.
The Rating Outlook is Stable.
SECURITY
Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage pledge on the core Berkshire Medical Center (BMC) campus The legal covenants include a liquidity covenant of 65 days cash on hand (DCOH). The Obligated Group accounted for 96% of fiscal 2015 consolidated system assets and 91% of revenues.
KEY RATING DRIVERS
CONTINUED SOLID OPERATING PERFORMANCE: The 'A-' rating is based on BHS' continued solid operating performance, aided by the benefit of the CMS rural floor wage index reimbursement adjustment (wage index adjustment), leading to a good coverage of maximum annual debt service (MADS) and solid balance sheet metrics, consistent with Fitch 'A' rating category medians.
DOMINANT MARKET SHARE: BHS maintains a dominant presence as the only provider in its primary service area, which includes most of Berkshire County and portions of eastern New York State and southern Vermont. The most recent market share is reported at 77.3% (2014 data) but is likely to increase based on more recent data that will include added market share from the acquisition of North Adams Regional Hospital (NARH).
SOLID LIQUIDITY: The additional revenues from the wage index adjustment have had a favorable impact on cash flow, and BHS' cash and unrestricted investments at June 30, 2016 of $246 million translate to 171.9 days cash on hand (DCOH), 21.9x cushion ratio and cash equal to 247.9% of debt. BHS was able to maintain strong liquidity levels despite internally funding the entire $45 million cost of completing the renovating of portions of the Hillcrest campus to house a new cancer center.
NARH ACQUISITION ACCRETIVE: Fitch views the acquisition of NARH, which closed on Sept. 4, 2014, as positive. The $4 million acquisition price did not involve assumption of any of NARH's liabilities. BHS currently provides outpatient and emergency services at the former NARH site while meeting the inpatient needs at its main campus.
CONSERVATIVE DEBT STRUCTURE AND STRONG COVERAGE: BHS has an all fixed-rate debt structure and a moderate debt burden with MADS coverage by EBITDA of 6.2x in fiscal 2015 (4.7x when excluding the wage index adjustment) and 5.6x through the nine months interim period (3.3x excluding the wage index), and MADS equal to a moderate 2% of revenues.
RATING SENSITIVITIES
MAINTAINING BALANCE SHEET STRENGTH AND SOLID COVERAGE: Fitch expects Berkshire Health System to maintain a solid balance sheet and coverage of debt consistent with the 'A' rating category even with the expected reduction in the level of the rural floor index.
CREDIT PROFILE
Berkshire Health System (BHS) operates two acute care hospitals: Berkshire Medical Center in Pittsfield, MA (40 miles east of Albany) with 228 acute care beds, and Fairview Hospital in Great Barrington (MA), 20 miles south of Pittsfield, a critical access hospital with 24 available acute care beds. Following its acquisition of NARH I n 2014, BHS operates a freestanding emergency department and a wide array of outpatient services at the former NARH site. BHS had $533.4 million in total operating revenues in fiscal 2015 (year-end Sept. 30).
CONTINUED SOLID OPERATING PERFORMANCE
Fiscal 2014 and 2015 ended with solid operating income, partially benefiting from the rural floor index, which was $11.7 million in fiscal 2014 and increased to $14 million in 2016. However, going forward management expects the level to stabilize around $6-$7 million, as an adjustment is made to the wage index correcting a math error by a rural hospital in the state. Operating income, including the rural wage index, was reported at $14.3 million in fiscal 2014 and $18.2 million in 2015. The 2015 operating margin was 3.4% and operating EBITDA margin was 9.8%, both consistent with Fitch's 'A' category medians of 3.8% and 10.3%. Operating results for the nine-month interim period ending June 30, 2016 show operating income of $10.1 million, including the rural wage index benefit of $10 million, equal to operating and operating EBITDA margins of 2.4% and 8.6%. Management expects to finish the 2016 fiscal year with operating income of approximately $18 million, close to the $19 million budget.
Management conservatively budgets for operating income without the rural floor adjustment to reimbursement and has conservatively budgeted operating income of $3 million for fiscal 2017 before the projected $7.4 million of the rural floor boost to revenues. The lower profitability is partially the results of the lower wage index, as well as an anticipated reduction of several millions in revenue from the decision of an orthopedic surgery group to perform surgeries using a Vermont facility. BHS management is actively recruiting to backfill the orthopedic volume loss and expects the negative impact to be temporary in nature. Additionally, BHS historically budgets conservatively and can potentially exceed the budget.
Responding to the North Adams community needs, starting on May 19, 2014, BHS opened a free standing ED at the North Adams campus and has gradually been adding other outpatient services at the site, including outpatient surgery. BHS is not planning to operate Inpatient beds at NARH.
DOMINANT MARKET SHARE
BHS's market share, as the only provider of acute care in the service area, is slightly increasing and reported at 77.3% in 2014, up from 74.7% in the prior year. BHS' service area, which includes Berkshire County and parts of Rensselaer and Columbia Counties in New York, is viewed by Fitch as a credit weakness. Berkshire County is characterized as having stable but aging demographics and a difficult payor mix with combined Medicare and Medicaid at over 68% of gross revenues.
BHS completed the last phase of renovations of part of their Pittsfield Hillcrest campus into a state of the art cancer center in the spring of 2016, adding radiation oncology to the comprehensive array of services. The $45 million cost of the project was entirely funded from internal cash flow over the last several years. In September 2015 BMC became the first member of the new Dana-Farber/Brigham and Women's Cancer Care Collaborative (Dana Farber), which will allow BHC to provide cancer services locally for patients that would have had to previously travel to Boston for cancer care. The affiliation will enable BMC to have access to Dana Farber clinical protocols, participate in educational programs, offer Dana Farber second opinions to BMC patients and give local patients access to Dana Farber clinical trials. Over time, BHS expects 20,000 patient encounters annually from the expanded cancer program.
STRONG LIQUIDITY
Liquidity has shown slow but consistent growth over the last four years. With robust cash flow boosted by rural wage index funds, cash and unrestricted investments increased to $246 million at June 30, 2016. This translates to 172 DCOH, a 21.9x cushion ratio and cash equal to 248% of debt, all in line with Fitch's 'A' category medians of 215 DCOH, 19.4x cushion and 148.6% cash to debt.
CONSERVATIVE DEBT STRUCTURE AND SOLID DEBT SERVICE COVERAGE
Coverage of MADS by EBITDA was a strong 6.2x in fiscal 2015 and 4.7x even when excluding the rural wage index benefit, and continues to be adequate through the 2016 interim period with coverage of 5.6x (3.3x without the rural wage index adjustment). The coverage levels are better than or consistent with the 'A' rating category median of 3.8x when excluding the rural wage index.
BHS has a conservative all fixed rate debt structure with a relatively short 2033 final maturity and declining debt service. BHS is planning to refinance the series 2005F with a fixed rate private bank placement later this fall, keeping the current final October 2020 final maturity. As part of the transaction, the 2005F debt service reserve fund in the amount of $5.1 million will be released.
The organization has a $35 million capital budget for fiscal 2017, slightly more than 100% of depreciation, which includes $15 million for IT, and approximately $10 million each for various facility improvements and clinical investment including equipment. BHS is holding off with a master facility plan at the main campus that would have potentially replaced and older patient tower and instead opted to renovate all inpatient units, with the last underway, which will leave the facility with 75% private patient rooms. Similarly, a project to expand outpatient services at the Fairview facility will not be undertaken unless the net costs to BHS, including philanthropy, can come closer to $25 million.
DISCLOSURE
BHS covenants to provide annual and quarterly financial disclosure through the 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/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013255
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