Fitch Revises MaineGeneral Health's (ME) Outlook to Negative; Affirms Revs at 'BBB-'

CHICAGO--()--Fitch Ratings has affirmed the 'BBB-' rating on the following Maine Health and Higher Educational Facilities Authority (MHHEFA) bonds issued on behalf of MaineGeneral Health (MGH):

--$280.8 million series 2011;

The Rating Outlook is revised to Negative from Stable.

MGH has an additional $27.6 million in MHHEFA bonds which Fitch rates 'AA', with a Stable Outlook based on the credit quality of the state authority's loan pool. See 'Fitch Rates Maine Health & Higher Educational Facilities Authority's $64MM Revs 'AA',' dated April 19, 2013 for additional information.

SECURITY

A pledge of gross revenues, mortgage on certain hospital property, and fully-funded debt service reserve will provide security for the bonds. As additional security, MGH also obtained a surety bond for $15 million secured by the Harold Alfond Foundation.

KEY RATING DRIVERS

NEAR-TERM PROFITABILITY PRESSURE: MGH is on track to meet its $17 million (-3.9%) operating loss budgeted in fiscal 2014 which was due to the additional depreciation and operating costs in the new facility. Though the 'BBB-'rating incorporates this short-term drop in operating performance, Fitch believes MGH will need to narrow losses significantly to meet debt service demands going forward.

LIQUIDITY REMAINS A CONCERN: The Outlook revision to Negative also reflects ongoing weakness in MGH's liquidity position, which Fitch expected would improve in its prior review. Balance sheet pressure is due in large part from an IT system implementation which negatively impacted receivables. At March 31, 2014, unrestricted liquidity equaled $92.2 million, down from the prior fiscal year level. Days in A/R equaled a very high 93, which will need to improve significantly in the coming months.

REPLACEMENT PROJECT COMPLETED: MGH's $322 million replacement hospital project opened seven months ahead of schedule and under budget in November 2013. Further, MGH successfully sold its prior Augusta and Seton properties, and should complete its Thayer campus renovation project in October 2014. Thus the significant construction risk associated with these projects has decreased significantly, and MGH's future capital needs are minimal.

SIGNIFICANT DEBT BURDEN: The 'BBB-' rating reflects MGH's sizeable debt burden, which Fitch expects will moderate over time. Leverage metrics were elevated through the March 31, 2014 interim period with maximum annual debt service (MADS) as a percent of revenue of 6.2% and debt-to-capitalization of 56.7%, unfavorable to Fitch's 'BBB' category medians of 3.5% and 48.9%, respectively. MGH has no further debt planned.

RATING SENSITIVITIES

IMPROVED CASH FLOW: Better operating performance and collection of receivables will be necessary to replenish MGH's balance sheet as well as generate sufficient debt service coverage. A failure to improve operating cash flow and coverage metrics back in line with projections, or failure to bring liquidity metrics back to expected levels over the next 12-18 months would likely result in a downgrade.

CREDIT PROFILE
MGH is the third largest health system in Maine, with 287 licensed beds on two campuses in Augusta and Waterville (20 miles north of Augusta), along with a full range of primary, secondary, and tertiary services. MGH plans to operate 192 beds in the replacement facility, with no change to licensed bed count. Total revenues were $417.3 million in fiscal 2012.

MEDIUM-TERM IMPROVEMENT KEY
The rating affirmation at 'BBB-' reflects Fitch's expectation that MGH will generate improved operating cash flows which produce adequate debt service coverage and replenish its balance sheet over the next 12-18 months. MGH opened its new facility in November 2013, and 2014 operating results reflect the increased depreciation and interest which have had the effect of suppressing profitability significantly. MGH anticipates it will produce a 5.9% EBITDA margin and 1.8x coverage in fiscal 2014, and reach near breakeven operating results and 2.0x coverage by fiscal 2015. Fitch believes MGH has very limited room for slippage in generating this level of operating performance against its large debt service needs over the near term.

MGH had $320 million in total long-term debt outstanding at March 31, 2013 and MADS was equal to $27.9 million. For fiscal 2014, MGH is budgeting for 1.0x MADS coverage and 1.4x actual annual debt service coverage by EBITDA, and it will make its first full debt service payment in early fiscal 2016 once capitalized interest ends. There are no additional debt plans, and ongoing capital needs are expected to be very modest.

LIQUIDITY REMAINS SUPPRESSED
At March 31, 2014, MGH had $108 million in unrestricted cash and investments, equaling 75.4 days of cash on hand (DCOH), a 3.3x cushion ratio, and 28.7% cash to debt. All remain very light against Fitch's 'BBB' median ratios and below expectations at Fitch's prior rating review. A significant backlog of patient account receivables (A/R) is being addressed, and should provide needed improvement in cash flow over the next three to nine months. Net patient A/R was a high $103.7 million at March 31, 2014, well above the $64.2 million at March 31, 2013. MGH management expects to return to normalized levels by CY2014.

Fitch believes that maintenance of the 'BBB-' rating will be contingent in part upon balance sheet improvement, which Fitch considers necessary to provide cushion against MGH's sizeable debt burden and ongoing pressure on profitability over the near term.

CONTINUING DISCLOSURE
MGH covenants to provide audited annual disclosure within five months and quarterly disclosure within 45 days of each period end to the Municipal Securities Rulemaking Board's EMMA System. Disclosure to Fitch has been timely and thorough.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:
'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014)

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=746860

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834866
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Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1-312-368-3347
70 W. Madison Street, Chicago IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-1674
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1-312-368-3347
70 W. Madison Street, Chicago IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-1674
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com