NEW YORK--(BUSINESS WIRE)--Fitch Ratings has removed from Rating Watch Evolving and upgrades to 'A-' from 'BBB+' the rating on the following outstanding debt issued by Berkshire Health System (BHS):
--$86,792,281 Massachusetts Development Finance Agency revenue bonds (Berkshire Health System), series 2012G;
--$27,332,686 Massachusetts Health and Educational Facilities Authority revenue bonds (Berkshire Health System), series 2005F.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage pledge on the core Berkshire Medical Center (BMC) campus The legal requirements include a liquidity covenant of 65 days cash on hand (DCOH). The Obligated Group accounted for 95.7% of fiscal 2013 consolidated system assets and 91.8% of revenues.
KEY RATING DRIVERS
CONTINUED SOLID OPERATING PERFORMANCE: The upgrade to 'A-' is based on BHS' continued solid operating performance, aided by the benefit of the CMS rural floor wage index reimbursement adjustment (wage index adjustment), leading to a good coverage of maximum annual debt service (MADS) and strengthened balance sheet metrics, all of which are now consistent with, or exceed, Fitch 'A' rating category medians.
NORTH ADAMS REGIONAL HOSPITAL ACQUISITION ACCRETIVE: The acquisition of the North Adams Regional Hospital (NARH), which closed on Sept. 4, 2014, is viewed as positive by Fitch. The $4 million acquisition price did not involve assumption of any of NARH's liabilities. BHS currently provides outpatient and emergency services at the former NARH site while meeting the inpatient needs at its main campus.
DOMINANT MARKET SHARE: BHS maintains a dominant presence as the only provider in its primary service area (source of approximately 90% of admissions), which includes most of Berkshire County and portions of eastern New York State and southern Vermont, and market share is likely to further strengthen from the closure of inpatient services at NARH.
STRONG LIQUIDITY: The additional revenues from the wage index adjustment have had a favorable impact on cash flow, and BHS' cash and unrestricted investments at Aug. 31, 2014 of $231.8 million translate to 197.6 days cash on hand (DCOH), 20.6 cushion ratio and cash equal to 203% of debt, all comparing favorably to the respective 'A' category medians.
CONSERVATIVE DEBT STRUCTURE: The 2012 issuance resulted in BHS having all fixed-rate debt and eliminated a balloon payment of close to $30 million due in 2019. BHS has a moderate debt burden with MADS coverage by EBITDA of 3.6x in fiscal 2013 and 3.7x through the interim period, even when excluding the wage index adjustment and MADS equal to a still moderate 2.5% of revenues.
MAINTAINING BALANCE SHEET STRENGTH AND SOLID COVERAGE: Fitch expects BHS to maintain its significantly improved balance sheet and coverage of debt consistent with the 'A' category even without the benefit of the rural floor adjustment.
Berkshire Health System (BHS) operates two acute care hospitals: Berkshire Medical Center in Pittsfield, MA (40 miles east of Albany) with 228 acute care beds, and Fairview Hospital in Great Barrington (MA), 20 miles south of Pittsfield, a critical access hospital with 24 available acute care beds. BHS had $428.3 million in total operating revenue in fiscal 2013.
CONTINUED SOLID OPERATING PERFORMANCE
Fiscal 2013 ended with operating income of $17.6 million, equal to operating margin of 4.1% and operating EBITDA margin of 10.9%, including $12.9 million of the rural floor reimbursement benefit, slightly exceeding the $16.8 million budget and better than the 'A' medians of 2.5% and 9.5%. Adjusting for the wage index impact, which may not be in effect beyond fiscal 2015, operating margin and operating EBITDA margin were 1.1% and 8.2%, respectively. Operating results for the eleven-month interim period ending Aug. 31, 2014 show operating income of $11.6 million, equal to operating and operating EBITDA margins of 2.7% and 9.4%. Adjusting for the year-to-date $10.7 million rural wage index reduces the respective margins to 0.2% and 7%.
Management conservatively budgets for operating income without the rural floor adjustment to reimbursement and has budged operating income of $0.5 million for fiscal 2015 before the $13.2 million of the rural floor boost to revenues. While there are discussions to eliminate or curtail the rural floor wage index program, from which Massachusetts has benefited significantly and more so than other states, no action is likely to take place before April 2015 and the worst case scenario would see the benefit for BHS cut by 50% in the 2015 fiscal year. The continuation of the rural floor wage index beyond 2015 is uncertain.
NORTH ADAMS REGIONAL HOSPITAL ACQUISITION
NARH, which had been experiencing serious financial problems, closed its doors on March 28, 2014 and declared bankruptcy on April 3, 2014. NARH is located only 23 miles from BHS' main campus in Pittsfield. The hospital served a population with a significant senior component and was therefore left without acceptable access to care, particularly an issue for emergency care. BHS closed on the purchase on NARH on Sept. 4, 2014. The acquisition price was $4 million and BHS purchased only the hard assets including equipment; no other liabilities were assumed (NARH had a large pension liability).
Responding to the North Adams community needs, starting on May 19, 2014, BHS opened a free standing ED at the North Adams campus and has gradually been adding other outpatient services at the site. Endoscopy service will be added in November and minor outpatient surgery will commence in January 2015. All activities at NARH are operated under the BHS 'satellite' license. BHS' capital plan includes $6 million spend at North Adams, most of which will be to bring IT in line BHS' Electronic Medical Record platform. BHS used a Needs Report commissioned by the state from Stroudwater Associates consultants to help determine the healthcare needs of the north Berkshire community. The report confirms BHS' decision not to resume inpatient operations at NARH unless a critical access designation can be obtained for the former NARH facility.
DOMINANT MARKET SHARE
BHS market share, as the only provider of acute care in the service area, is reported as being stable at approximately 85%. BHS' service area, which includes Berkshire County and parts of Rensselaer and Columbia Counties in New York, is viewed by Fitch as a credit weakness. Berkshire County is characterized as having stable but aging demographics and a difficult payor mix with combined Medicare and Medicaid at 66% of gross revenues. BHS continues to struggle filling neurosurgery slot and have none at the moment. A neurosurgeon, who had served as a LOCUM, is expected to join starting Dec. 1.
BHS has acquired an oncology/hematology practice and is renovating part of their old Pittsfield Hillcrest campus into a state of the art cancer center which is expected to be completed in June 2015. The approximately $30 million cost of the project is being funded from internal cash flow. A potential collaboration with a major cancer center will allow BHS to provide cancer services locally for patients that would have had to previously travel to Boston. Over time, BHS expects 20,000 patient encounters annually from the expanded cancer program.
Liquidity has shown consistent growth over the last four years and cash and unrestricted investments, driven by the robust cash flow aided by the rural wage index funds, increased to $231.8 million at Aug. 31, 2014, translating to 197.6 DCOH, 20.6x cushion ratio and 203% cash to debt, all exceeding Fitch's 'A' category medians of 199 days, 17x cushion and 131% cash to debt, despite funding the cancer center with internal cash.
SOLID DEBT SERVICE COVERAGE
Coverage of MADS by EBITDA was 4.7x in fiscal 2013 and 3.6x without the wage index adjustment, consistent with the 'A' rating category median of 3.8. Coverage by EBITDA was 3.7x through the interim period, without the wage adjustment and 4.7x including the $10.7 million of the additional revenues from the wage adjustment. BHS is exploring whether to proceed with a couple of projects which would replace an older patient tower in order to increase the number of private rooms at Berkshire Medical Center in Pittsfield and focus on investment in expansion of outpatient facilities at the Fairview campus in Great Barrington (a replacement of the Great Barrington facility, contemplated in the past, is not in the current plan). However, neither project has been approved by the BHS board and there is currently no estimate as to potential size or timing of the financing, nor is it certain that BHS will proceed with either of the two projects. Renovations of existing inpatient areas are ongoing and management reports that 70% of the time patients are being placed in private accommodations.
All of BHS' long term debt is fixed rate.
BHS covenants to provide annual and quarterly financial disclosure through 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', May 30, 2014;
--'Revenue-Supported Rating Criteria', June 16, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria