NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to the following hospital revenue bonds to be issued through the Rhode Island Health and Educational Building Corporation on behalf of Care New England Health System (CNE):
--$85.5 million series 2013A.
In addition, Fitch assigns a 'BBB' rating to approximately $26 million of outstanding Rhode Island Health and Educational Building Corporation series 2010 and 2011 bonds issued on behalf of CNE.
The Rating Outlook is Stable.
The series 2013A bonds will issued as fixed rate debt. Fitch also expects CNE to issue series 2013B bonds, which will be issued in a variable rate mode either as variable rate demand bonds supported by a bank letter of credit or as a direct bank placement. Depending on the final structure, Fitch expects to rate the 2003B bonds closer to issuance.
Proceeds from both the series 2013 A and B bonds will be used to refund CNE's outstanding series 2008 A and B bonds, fund approximately $35 million prior and future capital expenditures, pay for termination of a swap, fund a debt service reserve account and pay costs of issuance. The series 2013A bonds are expected to be priced the week of Nov. 4 through negotiated sale while the series 2013B bonds are expected to be priced at a later date.
The series 2013 bonds are expected to be secured by a pledge of gross revenues, a mortgage interest in certain hospital facilities and debt service reserve fund.
KEY RATING DRIVERS
NEW STRATEGIC DIRECTION: Fitch views positively CNE's change in strategic direction begun in 2010 to a more integrated, physician led model. The acquisition of Memorial Hospital of Rhode Island (294 beds) further builds on this strategy, expanding CNE's primary care base and clinical service offerings in Rhode Island. While these strategic investments have weakened CNE's operating margins and will continue to pressure them over the near term as Memorial is integrated into CNE, Fitch believes that the operating and clinical platform that CNE is establishing will prove strategically, clinically and financially accretive over the longer term.
LIGHT DEBT BURDEN: Pro forma maximum annual debt service (MADS) as a percent of revenue was a manageable 1.4% in fiscal 2012 (FYE Sept. 30) for the combined revenues of CNE and Memorial, which compares very favorably to Fitch's 'BBB' median of 3.3%. Moreover, CNE amortization schedule is front loaded with MADS occurring in 2015 which provides a measure of financial cushion as CNE's strategic initiatives progress. Pro forma MADS coverage of the combined CNE/Memorial organization was an adequate 2.5x in fiscal 2012. However, given the light manageable debt burden, even a slight improvement in operating performance, which is expected, would lift CNE's coverage.
DECLINING PROFITABILITY TREND: CNE's operating profitability has steadily deteriorated since fiscal 2010. In the nine months ended June 30, 2013 and fiscal 2012, CNE's generated operating EBITDA margins of 4.6 and 4.9%, respectively, compared operating EBITDA margins of 5.4% in 2011 and 6.2% 2010; all of which are below the 'BBB' category median of 8.3%. Further, Memorial posted a $15 million loss from operations in fiscal 2012 and an $11 million loss through the nine months ended June 30, which will further challenge CNE's performance in fiscal 2014.
MIXED LIQUIDITY INDICATORS: At June 30, 2013, CNE (not including Memorial) had approximately $154.2 million in unrestricted cash investments, which equated to 67.9 days cash on hand (DCOH), an 11.1x pro forma cushion ratio, and cash to debt of 137.1%. DCOH is light for the rating level but both the cushion ratio and cash to debt are solid and above category medians. Through this bond issuance, CNE does plan to reimburse itself for capital projects already completed, which should modestly improve DCOH.
IMPROVED MARKET SHARE: As the second largest healthcare system in the state, CNE has maintained a steady 31% of total state discharges for more than a decade, despite challenging economic conditions and considerable competition from Lifespan, the state's dominant provider. MHRI's addition is projected to grow CNE's market share to 35%, with the growth coming mostly in Providence.
EXECUTION OF MEMORIAL INTEGRATION: There is a level of execution risk with CNE's integration of Memorial, especially given Memorial's negative operating margins, CNE's recent operating weakness, and a challenging local economy. Successful management of MHRI's financially dilutive effects and timely integration of MHRI into CNE is integral to maintenance of the rating. Fitch reviewed CNE's integration plan for Memorial and associated projections and believes they are reasonable and achievable. However, an inability to reduce operating losses at Memorial or a deterioration in liquidity would likely lead to negative rating pressure.
Headquartered in Providence, RI, CNE operates 167-bed Women's and Infants Hospitals, 143-bed Butler Hospital and 359-bed Kent Hospital. On Sept. 3, 2013, 294-bed Memorial Hospital executed an affiliation agreement with CNE. In fiscal 2012 (year-ended Sept. 30) CNE generated total revenues of $846 million and Memorial generated total revenues of $160 million or $1.06 billion on a combined basis.
Fitch's analysis and financial ratios are based on consolidated financial statements which includes certain non-obligated entities.
New Strategic Direction
Historically, CNE operated under a federation model with each hospital operating more or less independently with separate boards and separate management teams. After a proposed merger with Lifespan was never consummated, the board undertook a new strategic direction to create an integrated, physician-led health system. As part of those efforts, each hospital board is now comprised of the same individuals who serve on the CNE Board and a new CEO was appointed in 2011. The acquisition of Memorial Hospital of Rhode Island (294 beds) further builds on this strategy, expanding CNE's primary care base and clinical service offerings in eastern Rhode Island. While these strategic investments have weakened CNE's operating margins and will continue to pressure them over the near term as Memorial is integrated into CNE, Fitch believes that the operating and clinical platform that CNE is establishing will prove strategically, clinically and financially accretive over the longer term.
Moderate Debt Burden
CNE's light debt burden is considered a key credit strength. Pro forma maximum annual debt service (MADS) of $13.9 million equates to a very light 1.4% of the combined CNE and Memorial fiscal 2012 (FYE Sept 30.) revenues as compared to the 'BBB' median of 3.3%. As a result, historical pro forma MADS coverage by EBITDA of the combined CNE-Memorial organization was an adequate 2.5x in fiscal 2012 and 2.9x through the nine months ended June 30th. Given the CNE's light debt burden, slight improvement in operating performance, which is expected, will lift CNE's coverage.
Weaker Operating Performance
CNE's operating profitability has steadily deteriorated since fiscal 2010. In the nine months ended June 30, 2013 and fiscal 2012, CNE's generated operating EBITDA margins of 4.6 and 4.9%, respectively, compared to operating EBITDA margins of 5.4% in 2011 and 6.2% 2010 (all of which are below the 'BBB' category median of 8.3%). Further, Memorial's operating losses will further challenge CNE in 2014.
CNE's profitability has been negatively impacted by Rhode Island's high unemployment rate, reimbursement reductions under the Medicaid program and a ruling by the State Insurance Commissioner that restricted proposed managed care rate increases. Management has identified certain expense savings and revenue enhancements at Memorial which Fitch believes are achievable. Further, the addition of Memorial will allow for a better allocation of clinical services across the four facilities.
CNE expects to provide annual audited financial statements within 120 days of each fiscal year-end and quarterly unaudited financial statements with 60 days of each fiscal quarter end to the MSRB's EMMA system. In addition, CNE has agreed to conduct an investor call on at least an annual basis commencing in 2014 for the benefit of bondholders.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria