CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded to 'A+' from 'A' the rating on the following New Hampshire Health and Education Facilities bonds issued on behalf of Concord Hospital and Subsidiaries (Concord):
--$46.7 million, series 2013A revenue bonds;
--$37.4 million, series 2011A revenue bonds.
The Rating Outlook is Stable.
SECURITY
Debt payments are secured by a pledge of the gross revenues of the obligated group.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The upgrade to 'A+' from 'A' is based on Concord's steady core operating performance over the last three years, exceeding Fitch's 'A' category medians, combined with robust liquidity and a declining leverage position. For the most recent fiscal year ended Sept. 30, 2014, Concord had operating income of $19.1 million, equal to operating margin of 4.3% and operating EBITDA margin of 11%. The profitability was boosted in fiscal 2014 by reinstated DSH funding from the state of New Hampshire by $5 million but operating and operating EBITDA margins would have been solid at 3.2% and 10%, respectively, excluding the supplemental funding.
HEALTHY BALANCE SHEET: Concord had $288.6 million in cash and unrestricted investments in fiscal 2014 (Sept. 30 year-end), equaling a solid 258.5% cash to debt and 23.9x cushion ratio, both favorable to the respective 'A' category medians of 131.2% and 17x.
LOW DEBT BURDEN AND MANAGEABLE CAPITAL NEEDS: In fiscal 2014 MADS declined to $12.7 million from $14.4 million, representing a light 2.7% of fiscal 2014 revenue. MADS coverage by EBITDA was a solid 5.0x in fiscal 2014, well exceeding the 'A' category median of 3.8x. Capital needs going forward are manageable.
STRATEGIC INITIATIVES CONTINUE: Strategic initiatives including physician development and expansion, investment in information technology and plant and participation in the Granite Healthcare Network's five hospital collaboration, created to better leverage intellectual and clinical resources, continue and are viewed favorably by Fitch.
LEADING MARKET SHARE POSITION: Concord has a dominant market share position in a favorable service area.
RATING SENSITIVITIES
MAINTAIN SOLID FINANCIAL PERFORMANCE: Fitch expects Concord to maintain a healthy balance sheet and strong operating profitability supporting good debt service coverage. Although not expected, significant deterioration to the financial profile could pressure the rating.
CREDIT PROFILE
Concord Hospital is a 295-bed acute care hospital located on a 111-acre campus in Concord, NH, approximately 65 miles from Boston. Total revenue for fiscal 2014 was $440.3 million. The upgrade to 'A+' reflects Concord Hospital's strong financial operations, improving liquidity position, moderating debt burden and leading market share position in a stable service area. The primary credit concern is competition for and alignment with area physicians.
SOLID CORE OPERATING PERFORMANCE
New Hampshire reinstated its disproportionate share funding (DSH) in 2014 after suspending the program in the middle of 2011. Despite contributing to the Medicaid enhancement tax (MET) without the benefit of DSH funding, Concord was able to maintain stable operating results because of expense management, adherence to LEAN management philosophy and expansion of specialty service lines despite. In fiscal 2014, Concord met its planned budget and profitability was boosted by an unbudgeted $5 million in reinstated DSH funding and also from about $12 million in net realized gains. Operating margin, operating EBITDA margin and excess margin in fiscal 2014 including the benefit of DSH were 4.3%,11% and 6.9%, respectively, exceeding the 'A' category medians of 2.5%, 9.5% and 4.1%. Excluding the DSH payment, the ratios remained strong at 3.2%, 10% and 5.9%, respectively. Management has budgeted for a 3.1% operating margin in fiscal 2015, which Fitch believes is achievable and sufficient for the higher rating level.
Concord's consistent core operating performance is supported by management's focus on cost control, physician alignment and growth in acute care services, robust IT systems and the strength of its service area. Furthermore, Concord has benefited from its participation in the Granite Healthcare Network, a five-hospital regional collaboration, which has formed a captive insurance company, established a common reference lab, common broker of record and advisor for health and welfare benefits, and developed medical management resources to support a risk-based/shared savings approach to insurance contracting. In addition, Concord's strong operations have benefited from its position as the leading provider in the primary service area with over 70% marketshare (2010 data is the most recent available).
Concord has a long-standing relationship with Dartmouth-Hitchcock Clinic-Concord (the Clinic), located adjacent to Concord, and is working on establishing a shared-administrative model with the Clinic in certain service lines. Concord has expanded its physician alignment, acquiring several physician groups over the last few years, and although Fitch views an expanded physician alignment system positively, physician competition is an ongoing challenge.
ROBUST LIQUIDITY
Liquidity has continued to improve year-over-year and now all indicators exceed 'A' category medians. At Sept. 30, 2014 Concord had $288.6 million in unrestricted cash and investments, equating to 266.1 days cash on hand, 258.5% cash to debt and 23.9x cushion ratio, all well exceeding the respective 'A' category medians of 199.2 days, 131.2% and 17x. Concord's pension plan is 76% funded, an improvement from 63% at last review and future contributions could slow future liquidity growth. However, Fitch believes the current strength of the balance sheet offsets concerns with pension funding as well as fluctuations in supplemental funding.
Concord Hospital has completed the last phase of a three-phase facility expansion and renovation project, most recently converting shared rooms to private, renovating operating room suites and the emergency department and upgrading the boiler plant and there are no significant capital plans over the near term.
SOLID DEBT RATIOS
Concord's debt profile is conservative with all fixed-rate debt and no swaps, which is viewed favorably by Fitch. Total long-term debt is $103.5 million. Debt service is front-loaded and dropped to approximately $12.1 million in fiscal 2014 from $14.4 million at last review and then further declines to about $7.6 million by 2021. MADS is a low 2.7% of fiscal 2014 revenue and coverage of MADS by EBITDA in fiscal 2014 was strong at 5x and favorable compared to the 'A' category median of 3.8x but is somewhat inflated because of the $12 million of net realized gains in fiscal 2014. However, MADS coverage by operating EBITDA was also very strong at 4.0x against the 'A' category median of 3.1x.
DISCLOSURE
Concord covenants to disclose annual and quarterly financial information. Quarterly statements include a balance sheet, income statement, cashflow statement and utilization statistics.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from the Underwriter.
Applicable Criteria & Related Research:
--'Revenue-Supported Rating Criteria', dated June 16, 2014;
--'Non-Profit Hospitals and Health Systems Rating Criteria', dated 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=964035
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