Fitch Affirms Lowell General Hospital's (MA) 2013G Revs at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms its 'BBB+' rating on the following bonds issued on behalf of Lowell General Hospital (LGH):

--$65.4 million of Massachusetts Development Finance Agency Revenue Bonds, The Lowell General Hospital Issue, Series G (2013)

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge and mortgage on certain OG properties, including LGH's main campus.

KEY RATING DRIVERS

STRONG MARKET POSITION: Fitch views Lowell General Hospital's (LGH) strong market share position ( 58.4% in 2012) and limited competitive landscape, with LGH being the only acute care provider in its primary service area (PSA), as key credit strengths.

SOLID OG DEBT COVERAGE: The obligated group, composed of LGH's two campuses, generated coverage of maximum annual debt service coverage (MADS) by EBITDA of 3x in fiscal 2013 (Sept. 30 year end), which compares well to Fitch's 'BBB' category median of 3.1x. MADS coverage on a consolidated basis was lighter at 1.8x reflecting the impact of losses from employed physicians and additional non-recourse debt, but is largely unchanged from prior year coverage.

BELOW BUDGET FY2013 OPERATING RESULTS: A combination of Medicare sequestration cuts, physician alignment costs and accelerated IT investments at the Saints campus caused LGH to miss its budgeted operating targets. While the impact of sequestration remains a credit concern, Fitch believes the investment in physicians and IT will be financially beneficial to LGH over the medium term.

ADEQUATE LIQUIDITY: LGH had $124.7 million in unrestricted cash and investments as of Sept. 30, 2013, which was up 6% year over year, and equated to 109.4 days cash on hand, an 8.5x cushion ratio, and 64.5% cash to debt. While LGH's liquidity metrics lag the 'BBB' category medians, LGH's liquidity is adequate given the year over year improving trend and an all fixed-rate debt structure.

MAJOR CAPITAL SPENDING CYCLE ENDING: LGH has completed its Legacy Project, which included the new 'Dahod Tower' and an associated debt issuance back in 2010. Going forward LGH's capital needs are moderate and do not require the issuance of additional debt. Fitch expects LGH's debt and leverage metrics to moderate over time as operations and liquidity strengthen.

RATING SENSITIVITIES

OPERATING PERFORMANCE IMPROVEMENT: Fitch believes the benefits of LGH's market position and strategic investments will result in improving operating performance more in line with 'BBB' category medians which management anticipates over the next 12-24 months. A failure to realize those improvements could put negative pressure on the rating.

CREDIT PROFILE

Lowell General Hospital is a 434-licensed bed hospital system located in Lowell, MA approximately 35 miles northwest of Boston. Until July 2012, it had a single campus with 217 licensed beds, when it acquired Saints and added the second campus. LGH ranks as the eighth largest hospital and the second largest community hospital in Massachusetts in fiscal year 2013 by number of discharges.

LGH had total operating revenue of $431 million in fiscal 2013. Fitch's analysis is based on both consolidated and obligated group results, but this press release reports on the consolidated entity unless otherwise noted. Circle Health is the corporate parent of LGH. Circle Health oversees and coordinates a series of affiliated entities that provide a range of health care and related services in Lowell, including Circle Health Physicians, Inc., which employs LGH physicians. In fiscal 2013, the OG comprised 96.3% of the system's assets and 93.3% of its operating revenue.

FINANCIAL PROFILE

Audited fiscal 2013 results show LGH finished with a negative 1.7% operating margin and a 5.1% operating EBITDA margin, lower than the prior year and below Fitch's 'BBB' category medians. LGH had budgeted for breakeven operation in fiscal 2013, as the new patient tower fully ramped up and the integration of Saints continued with additional one-time expenses. However, fiscal 2103 performance was impacted by sequestration cuts, higher than anticipated physician losses at CHP, and IT costs required to bring Saints onto LGH's platform. On an OG only basis, performance was stronger at a 0.6% operating margin and 7.4% operating EBITDA margin.

LGH sold its dialysis business in fiscal 2013 for a gain of $19 million which provided additional funds for capital, and helped buoy LGH's liquidity position. The sale of the dialysis business had a negligible impact on profitability.

First quarter fiscal 2014 performance for the OG continued to trail budget. However, the operating margin of a 0.2% and operating EBITDA of 7.7% were consistent with the year- end performance, and OG MADS coverage remained solid at 3.5x. Management reported that the main driver of the year to date below budget performance was LGH's more conservative reserving related to the potential impact of Medicare's 'two midnight' rule, which led to an increase in observation stays. Fitch believes as LGH enters its busier season and implements a strategy to address observation stays profitability should improve. Overall, Fitch expects LGH to reach near median operational performance by 2015.

LGH's near dominant inpatient market share of approximately 60% after its 2012 merger with Saints is key credit strength that mitigates certain of LGH's weaker financial ratios. Fitch believes LGH's strong market share position, bodes well for value based purchasing and population management and provides LGH the flexibility to integrate the two campuses and make further investments in service lines within a manageable competitive landscape. LGH has plans to further strengthen its market position with an outpatient strategy in its southern and western service areas.

DEBT PROFILE

All of the OG's long-term outstanding debt, $172.2 million as of Dec. 31, 2013, is fixed rate. In fiscal 2013, LGH terminated its only swap. Fitch views as a credit positive LGH's conservative debt profile. LGH debt burden is elevated for the rating level. Three month fiscal 2014 results show debt to capitalization at 52.2% and Debt to EBITDA of 4.4x, both above Fitch's 'BBB' category medians of 48.9% and 3.8x respectively. Fitch expects these figures to moderate over time. With the Legacy Project near finished and minimal capital needs at Saints, Fitch does not expect LGH to issue any additional debt as any further elevation of LGH's debt burden could pressure the rating.

DISCLOSURE

LGH covenants to provide both annual and quarterly disclosure to the MSRB's EMMA system

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:

Nonprofit Hospitals and Health Systems Rating Criteria - Effective July 23, 2012 to May 20, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826143

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow, +1 212-908-9186
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Jennifer Kim, +1 212-908-1740
Associate Director
or
Committee Chairperson
Eva Thein, +1 212-908-0674
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow, +1 212-908-9186
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Jennifer Kim, +1 212-908-1740
Associate Director
or
Committee Chairperson
Eva Thein, +1 212-908-0674
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com