News Column

Fitch Rates Lawrence General Hospital's (MA) Series 2014A Bonds 'BBB'; Outlook Stable

January 21, 2014

Fitch Ratings has assigned a 'BBB' rating to approximately $45 million Massachusetts Development Finance Agency revenue bonds, series 2014A bonds to be issued on behalf of Lawrence General Hospital (LGH). The series 2014A bonds are expected to be issued as fixed rate bonds. Proceeds will be used to finance the renovations of patient floors ( $17 million ), routine capital expenditures for next three years ( $21 million ) and costs of issuance. The series 2014A bonds are expected to price the week of Jan. 27 through negotiated sale. LGH recently closed a $15 million series 2013A direct placement which refunded outstanding debt. Fitch was not asked to rate the direct placement but considered the debt in its analysis. The Rating Outlook is Stable. SECURITY The bonds are expected to be secured by a pledge of gross revenues of the obligated group, a first lien mortgage and a debt service reserve fund. KEY RATING DRIVERS ROBUST CAPITAL PLANS: LGH is commencing phase I of a multi-year (fiscal 2013-2019) $127 million master facilities plan. With this financing, Lawrence General Hospital (LGH) is undertaking a number of strategic initiatives that will better position its aging facility including renovations to patient floors and routine capital expenditures. Fitch views the investment in the plant positively as it will provide better access and service capabilities. MANAGEABLE DEBT BURDEN: Despite the issuance of $60 million of bonds in fiscal 2014 ( $45 million expected of new money), LGH is lightly levered with pro forma maximum annual debt service (MADS) equal to 1.9 percent of fiscal 2013 ( Sept. 30 year-end) revenue resulting in a coverage of pro forma MADS of 3.9x. STEADILY IMPROVING LIQUIDITY: LGH had $63.9 million in unrestricted cash and investments at fiscal year-end (FYE) 2013, a 67 percent increase from $38.4 million at fiscal year-end 2011. Days cash on hand of 112.5 has improved over the last three years but still remains light compared to the 'BBB' category median. Pro forma cash to debt and pro forma cushion ratio are in line with the respective 'BBB' category medians. AFFILIATIONS WITH OTHER PROVIDERS: Fitch believes LGH's successful affiliations with other providers in certain service lines have resulted in expanded clinical programs and access to providers and has also helped to curb outmigration into the downtown Boston area. LGH is clinically affiliated with Beth Israel Deaconess Medical Center and Floating Hospital for Children at Tufts Medical Center . RATING SENSITIVITIES SUFFICIENT CAPACITY: Fitch is aware of the potential issuance of additional $30 million in debt to update operating room suites in fiscal 2015. At this time, Fitch believes that LGH has sufficient capacity for the additional debt assuming the corporation maintains its positive operating trend. MAINTENANCE OF FINANCIAL PERFORMANCE: Fitch expects LGH to maintain cash flow consistent with current debt service coverage levels. CREDIT PROFILE LGH is a 189 licensed bed non-profit hospital located approximately 25 miles north of Boston, MA. LGH had total revenue of $221.6 million in fiscal 2013. CAPITAL PLANS UNDERWAY LGH has identified several projects to be undertaken over the next three to six years. Fitch sees LGH's capital plan as manageable and strategic in nature. The total cost of phase I of LGH's master plan is approximately $72 million . Phase I of the plan includes $17 million for inpatient renovations and infrastructure updates. The renovation and upgrading of the surgical suites are expected to cost approximately $55 million and will be funded through cash flow and a potential additional debt issuance. In addition to the infrastructure changes above, routine capital expenditures are expected to approximate $6 million annually over the next three years. LGH was awarded Delivery System Transformation Initiative (DSTI) funding totaling $43.3 million over a three year period ( July 11 - June 14 ), which is supplementing operations and cash flow. On Sept. 30, 2013 the Massachusetts Executive Office of Health and Human Services submitted a Section 1115 Demonstration Project Extension Request to CMS for a higher level of DSTI funding. If approved, LGH will receive a five-year extension commencing on July 1 . IMPROVING LIQUIDITY At Sept. 30, 2013 LGH had $63.9 million in unrestricted cash and investments, a 67 percent increase from $38.4 million at fiscal year- end 2011. Days cash on hand has improved over the last three years to 112.5 days at FYE 2013 from 80.2 days at FYE 2011 but still remains somewhat light compared to the 'BBB' category median of 144.7. Pro forma cash to debt and pro forma cushion ratios of 111.7 percent and 15.6x, respectively, exceed the respective 'BBB' category medians of 91.7 percent and 10.2x. ADEQUATE PROFITABILITY LGH has demonstrated solid revenue growth over the last few years. Operating margin has fluctuated slightly over the last three years (2011-2013). In fiscal 2013 LGH produced a 3 percent operating margin, which remains above the 'BBB' category median of 1.8 percent. Management expects the two midnight rule for observation stays to result in a $3.3 million reduction to revenue in fiscal 2014. However, a mitigation plan has been implemented that will increase revenues by $1.3 million and cut expenses by $2.1 million , which Fitch believes is manageable. MANAGEABLE PRO FORMA DEBT BURDEN After the series 2014A issuance, LGH will have approximately $60 million outstanding, of which 75 percent is fixed and 25 percent is variable. The series 2013A variable rate bonds have been privately placed Pro forma MADS ( $4.1 million ) as a percent of fiscal 2013 revenue is light at 1.9 percent compared to the 'BBB' median of 3.5 percent. Historical coverage of pro forma MADS by EBITDA of 3.9x in both fiscal 2012 and 2013 exceeds the 'BBB' category median of 3.1x. LGH is contemplating an additional $30 million in debt in fiscal 2015. Fitch believes LGH has debt capacity for up to $30 million of additional debt at the current rating level assuming that LGH maintains its positive operating trend. SUCCESSFUL PARTNERSHIPS Fitch believes LGH's successful affiliations with physicians and other clinicians in certain service lines has resulted in expanded clinical programs and access to providers. LGH is focusing on expanding its physician alignment. Its physician hospital organization (PHO) currently has about 360 physician members resulting in 20,000 covered lives. LGH is working to add service capabilities to address needs in the service area, including bariatrics, endocrinology and oncological surgery as well as pediatric specialties. Clinical affiliations with Beth Israel Deaconess Medical Center and Floating Hospital for Children at Tufts Medical Center has helped to stem outmigration to the academic medical centers in downtown Boston . DISCLOSURE LGH will covenant to disclose annual financial statements to EMMA within 150 days of year end in addition to quarterly disclosure within 60 days of the end of each quarter. Additional information is available at 'fitchratings.com ' ((Comments on this story may be sent to newsdesk@closeupmedia.com ))


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