Fitch Rates Baystate Health's (MA) Rev Bonds 'A+'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned an 'A+' rating to the following Massachusetts Health and Educational Facilities Authority revenue bonds issued on behalf of Baystate Medical Center (Baystate):

--$7,722,000 revenue bonds, series M-2 (2008)*;

--$6,362,000 revenue bonds, series M-4A (2005)*;

--$20,045,000 revenue bonds, series K-1 (2009);

--$26,365,000 revenue bonds, series K-2 (2009);

--$90,000,000 revenue bonds, series J-1 and J-2 (2009)*;

--$63,380,000 revenue bonds, series I (2009)*;

--$5,555,000 revenue bonds, series H (2007)*;

--$49,815,000 revenue bonds, series G (2005)*.

*These bonds are variable rate demand bonds supported by bank letters of credit. Fitch was not asked to provide a rating based on the letters of credit.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues of the obligated group. Fitch's analysis is based on the consolidated entity.

KEY RATING DRIVERS

LOW DEBT BURDEN AND STRONG DEBT SERVICE COVERAGE: Baystate Medical Center benefits from a low debt burden, which results in solid historical debt service coverage that compares favorably to Fitch's 'A' category medians. Maximum annual debt service (MADS) equated to 1.5% of fiscal 2013 revenues (unaudited), which is light relative to the 'A' category median of 3.1%. Coverage of MADS by operating EBITDA was a solid a 4.6x in 2013 and 4.2x in fiscal 2012 despite modest historical operating profitability of the system.

STRONG LIQUIDITY METRICS: Fitch views Baystate's strong liquidity metrics as a key credit positive as it mitigates constrained profitability performance over the last four years. Baystate has maintained strong liquidity with more than $778 million in unrestricted cash and investments at Sept. 30 equating to 176.6 days cash on hand. This provides a cushion ratio of 29.7x and 171.2% cash to debt compared to the respective 'A' category medians of 196.3, 15.6x and 129.2%.

LEADING MARKET SHARE AND INTEGRATED SERVICE NETWORK: Baystate maintains the leading market share positions in both its primary and secondary service areas of 47.7% and 39.9%, respective in 2012. Inpatient volumes increased by approximately 2% at Baystate despite a declining trend across the region. Baystate's integrated delivery network includes three hospitals, an employed medical group, a health plan and a physician-hospital organization. Fitch views the network positively and believes it bolsters Baystate's position in an evolving health care environment.

MODEST OPERATING PROFITABILITY: Relative to Fitch's 'A' category peers, Baystate's operating profitability is modest with operating EBITDA margins of 6.6%, 6.8% and 7.1% in fiscal 2011, 2012 and 2013, respectively. However, Fitch notes that profitability on a consolidated basis reflects the impact of the health plan, a large employed physician group and elevated capital spending. In fiscal 2013, the obligated group, which excludes the insurance plan and the employed physician group, generated an operating EBITDA margin of 13.2% on total revenues of $990.2 million.

RATING SENSITIVITIES

MAINTAIN STRONG FINANCIAL PROFILE: The Stable Outlook is based on Fitch's expectation that Baystate will maintain its solid liquidity position and generate sufficient operating profitability to maintain recent debt service coverage. Growing into and realizing the benefits associated with the updated, expanded space at the flagship location is expected to improve Baystate's operating profile in the mid to long term.

POTENTIAL FOR NEW DEBT: Management is considering plans for the expansion and renovation of the Baystate Franklin Medical Center (BFMC) surgical suites in the next two to three years. In addition, Baystate has signed a letter of intent for the acquisition of Wing Memorial Hospital (74 beds). Fitch believes there is some room at the current rating level for the issuance of additional debt. However, Fitch will review the impact of any additional debt on the financial profile of Baystate at the time of issuance when the size and scope of the projects are determined.

CREDIT PROFILE

Baystate Health, Inc. (BH) is an integrated health care delivery system headquartered in Springfield, Massachusetts. On a consolidated basis, Baystate consists of three hospitals (including 716-bed Baystate Medical Center), Baystate Medical Practices (a multi-specialty academic group practice with 460 employed physicians FTEs and 150 mid-levels), Health New England (a for-profit health maintenance organization with 137,000 covered lives), a physician hospital organization and other ancillary health care entities. On a consolidated basis, total revenues (unaudited) in fiscal 2013 (Sept. 30 year-end) were approximately $1.71 billion. Fitch's analysis was based on the results of consolidated entity, Baystate Health and Subsidiaries, Inc.

LOW DEBT BURDEN

One of Baystate's primary credit strengths is their low debt burden and solid debt service coverage despite light operating results. MADS of $26.2 million equates to a very light 1.5% of fiscal 2013 total revenues (interim results) compared to Fitch's 'A' category median of 3.1%. MADS coverage by operating EBITDA of 4.6x in fiscal 2013 and 4.2x in fiscal 2012 exceeds Fitch's 'A' category median. Additionally, debt to capitalization of 37.9% at Sept. 30 is below the 'A' category median of 40.7%. Fitch believes that Baystate has some debt capacity at the current rating; however, a material increase in debt would require Baystate to maintain their balance sheet strength and improve profitability to maintain debt service coverage consistent with the current rating.

STRONG LIQUIDITY

Fitch views Baystate's balance sheet as a credit positive. Cash has grown consistently year-over-year since fiscal 2009 with a compound annual growth rate over the last five years of 7.34%. At Sept. 30, 2013, Baystate's unrestricted cash and investments totaled $778 million which equated to 176.6 days cash on hand, a 29.7x cushion ratio and 171.2% of cash to debt. Though days cash on hand is slightly below the 'A' category median of 196.3, cushion and cash-to-debt well exceed the respective 'A' medians of 15.6x and 129.2%. Baystate's balance sheet mitigates Baystate's somewhat light operating profitability.

MARKET LEADERSHIP

Baystate's integrated service network has provided for a successful regional expansion and leading market share position despite some recent market contraction in inpatient services. As of Oct. 31, 2013 Baystate employed over 580 physicians (460 physician FTEs) at more than 60 locations across western Massachusetts. The service area is somewhat competitive but Baystate's position as the region's only academic tertiary hospital and Level I trauma center helps to stem outmigration and maintain solid market share.

ADEQUATE OPERATING PERFORMANCE

Baystate's profitability and operational ratios are low for the category but have been consistent over the last three years. Operating margin and operating EBITDA margin have averaged 2.9% and 6.7%, respectively over the last four fiscal years (2010-2013). Profitability reflects the dilutive effects of the large employed physician group and the health plan on overall results. In fiscal 2012 and 2013 the insurance plan, Health New England, experienced operating margins of 0.1% and 0.5% on total revenues of $494.6 million and $544.6 million, respectively.

On an obligated group only basis, Baystate generated a 6.6% operating margin and a 13.2% operating EBTIDA margin in fiscal 2013 on total revenues of $990.2 million (unaudited).

DISCLOSURE

Baystate covenants to provide certain quarterly and annual financial statements, as well as notification of material events disclosure to bondholders via the Municipal Securities Rulemaking Board's (MSRB) EMMA system. Quarterly disclosure should be posted no later than 60 days after the end of the period and annual disclosures no later than 150 days after the year-end date.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=815248

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Contacts

Fitch Ratings
Primary Analyst
Dana Sodikoff, +1-312-368-3215
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street, Chicago IL 60602
or
Secondary Analyst
Katie Proux, +1-312-368-3348
Analyst
or
Committee Chairperson
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Dana Sodikoff, +1-312-368-3215
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street, Chicago IL 60602
or
Secondary Analyst
Katie Proux, +1-312-368-3348
Analyst
or
Committee Chairperson
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com