Fitch Downgrades Lawrence & Memorial Hospital (CT) Revs to 'A'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has downgraded to 'A' from 'A+' the rating on $50.7 million State of Connecticut Health and Educational Facilities Authority revenue bonds, series F (2011) issued on behalf of Lawrence & Memorial Hospital (LMH).

The Rating Outlook is revised to Stable from Negative.

LMH also has outstanding approximately $61 million in other long-term debt and leases, which are not rated by Fitch.

SECURITY

The bonds are secured by a pledge of gross revenues and a mortgage.

KEY RATING DRIVERS

CONTINUED WEAK PROFITABILITY: The downgrade to 'A' is driven by sustained profitability weakening impacted by a combination of declining utilization and a three-week labor strike in November and December 2013. The strike resulted in volume loss and heightened expenditures, with total impact estimated at 200 discharges or $14.3 million. A new labor contract has been signed through June 30, 2016 which prohibits any additional strikes over its term. Operating margin was a negative 4.7% through the nine months ended June 30, 2014. Without the strike impact, LMH's operations would have been about breakeven in the interim period compared to 1% the same prior year period.

STRONG LIQUIDITY: Despite weaker cash flow and continued capital investments, liquidity metrics remain sound. Cash to debt of 182.3% and cushion ratio of 23.7x at June 30, 2014 well exceeded Fitch's respective 'A' medians of 131.2% and 17x. Days cash on hand of 174.2 is slightly behind the median of 199.2 days, in part due to the one-time expense impact from the strike, as well as some balance sheet dilution due to the Westerly Hospital acquisition.

POSITIVE WESTERLY HOSPITAL OPERATIONS: Management reports that operations at the newly acquired Westerly Hospital (WH) have been ahead of budget to date. WH reported a 4.6% operating margin through the interim period (ended June 30, 2014), improved from a negative 16.8% in 2012, and ahead of the budgeted 1.7%. Fitch views positively the increased revenue diversification and strong post-acquisition operations at the hospital, and will continue to monitor its progress as integration efforts continue.

LOW DEBT BURDEN: LMH's debt burden remains light for the rating category, as evidenced by maximum annual debt service (MADS) at 2.3% of revenue in 2013, which compares favorably against the median of 3.1%. Weak cash flows resulted in MADS coverage of 3.0x in 2013 and 2.4x through the interim period. However, removing the strike impact results in a good 4.5x MADS coverage through the interim.

SOLID MARKET POSITION: LMH has a dominant market share of approximately 68% in its primary service area (PSA). The organization's closest competitor is William W. Backus, recently integrated into the Hartford HealthCare (rated 'A'; Stable Outlook by Fitch), which has a 10.2% market share in the PSA.

RATING SENSITIVITIES

RETURN TO PROFITABILITY: The Stable Outlook is supported by LMH's balance sheet strength, which provides some cushion to weather temporary losses. Fitch expects LMH's operations to continue stabilizing in 2014 and return to a positive operating margin over the next two years.

CREDIT PROFILE

Lawrence and Memorial Hospital operates a 308-licensed-bed hospital in New London, CT, and Westerly Hospital in Washington County, Rhode Island. WH is not part of LMH's obligated group.

Additionally, LMH operates seven ambulatory facilities located off the hospital's main campus. For fiscal year ended Sept. 30, 2013, LMH had total revenues of $380 million.

CONTINUED WEAK PROFITABILITY

LMH continues to be affected negatively by a decline in volumes and lower state and federal reimbursement rates. Further, in 2014, LMH's operations were impacted by a three-week labor event involving the nursing and technician staff, which started in late November of 2013. Management estimates a negative impact to overall volumes of about 200 discharges, while the negative combined effect on revenues and expenses was approximately $14.3 million. A new labor contract has been signed through June 30, 2016, which prohibits any additional strikes over its term, and management reports that employee morale has recovered since the labor action.

With lower utilization and some one-time closing costs related to the WH merger, LMH ended fiscal 2013 with a $7.4 million loss (negative 1.9% operating margin). Further impacted by the strike, operating and operating EBITDA margins of negative 4.7% and positive 2.4% through the nine-month interim were significantly below Fitch's respective category medians of 2.5% and 9.5%. Adjusting for the strike, LMH's operating margin would have been a negative 0.4% through the interim, which is weaker than 1% posted for the same prior year period. Management expects operating results to improve through the last quarter of fiscal 2014 due to a number of revenue-cycle and supply chain initiatives. The majority of the benefits from the initiatives should be realized in fiscal 2015 and are expected to be ongoing.

POSITIVE WESTERLY HOSPITAL OPERATIONS

After a first full year of operations under LMH's management, WH achieved a 4.6% operating margin through the nine-month interim period, ahead of the budgeted 1.7%, improved significantly from a negative 16.8% in fiscal 2012. Management attributes the improvement in operations to volume stabilization and robust expense management, including the introduction of flex-staffing and bringing WH into LMH's group purchasing organization. Fitch views positively management's ability to turn around WH's operations into a financially accretive organization, and will continue to monitor the integration process.

SOLID LIQUIDITY AND LOW DEBT BURDEN

LMH's liquidity in relation to its debt remains solid for the rating category, with cash to debt of 182.3% and cushion ratio of 23.7x at June 30, 2014, both above Fitch's category medians. Days cash on hand of 174.2 trailed the category median of 199.2 days. However, expenses were heightened due to the strike, and days cash on hand adjusted for the strike impact would have been slightly higher at 180.9 days. Overall, Fitch considers LMH's liquidity position as a partial mitigant against its compressed profitability.

LMH's debt burden is light with MADS equal to 2% of revenues through the nine-month interim period. While MADS coverage by EBITDA of 2.4x and by operating EBITDA of 1.2x were both weak against Fitch's 'A' medians at 3.8x and 3.1x, respectively, both were in line with the medians at 4.5x and 3.3x when adjusted for the labor action.

DISCLOSURE

LMH covenants to provide quarterly and annual financial disclosure to the Municipal Securities Rulemaking Board's EMMA system.

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

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria', June 16, 2014

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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=851374

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Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA, +1 212-908-1740
Associate Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Dmitry Feofilaktov, +1 212-908-0345
Analyst
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
Jennifer Kim, CFA, +1 212-908-1740
Associate Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Dmitry Feofilaktov, +1 212-908-0345
Analyst
or
Committee Chairperson
Eva Thein, +1 212-908-0674
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com