NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has upgraded the rating on the following revenue bonds
issued by the Vermont Educational and Health Buildings Financing Agency
on behalf of Fletcher Allen Health Care (Fletcher Allen) to 'A-' from
--$54,705,000 series 2008A;
--$55,705,000 series 2007A;
--$143,725,000 series 2004B;
--$30,480,000 series 2004A.
The Rating Outlook is Stable.
Security is provided via a mortgage on Fletcher Allen's core hospital
campus in Burlington, VT and a security interest in the gross receipts
of its two Vermont hospitals. Fitch's analysis is based on Fletcher
Allen Partners (FAP) which includes the consolidated performance of
Fletcher Allen and Central Vermont Medical Center (CVMC) in Vermont, and
the two New York State hospitals in Community Providers, Inc. (CPI) -
Champlain Valley Physicians Hospital (Champlain Valley) and
Elizabethtown Community Hospital (Elizabethtown). The Fletcher Allen
obligated group comprised 81% of total assets and 80% of total revenues
of the consolidated system in fiscal 2013.
KEY RATING DRIVERS:
STABLE CORE OPERATIONS AND SYSTEM EXPANSION: The upgrade to 'A-' is
based on FAP's solid and stable core operations, improved liquidity and
the successful expansion of its system footprint. Operating and
operating EBITDA margins have been stable over the last five fiscal
years and, at 2.9% and 9% for fiscal 2013, respectively, and 4.3% and
10.7% through the eight months ended May 31, 2014 (the interim period),
which includes the CPI facilities, are consistent with Fitch's 'A'
rating category medians.
DEBT CAPACITY FOR THE MASTER FACILITY PLAN: Coverage of maximum annual
debt service (MADS) of $43.5 million of the consolidated system by
EBITDA was 4.1x in 2013 and 4.3x through the 2014 interim period, better
than Fitch's 'A' median. MADS at 2.9% as percent of revenues is
consistent with the 'A' median. Fitch believes that FAP has the capacity
at the 'A-' rating for planned issuance of debt up to a maximum of $145
million over the next two and a half years to fund its facility needs in
Burlington. The larger potential $75 million-$100 million series would
not be issued before early fiscal 2017 and FAP had coverage of the pro
forma MADS of $48.4 million of 3.9x through the interim period.
Scheduled debt amortization of approximately $62 million in fiscal years
2015 through 2017 is expected to mitigate the impact of any new debt.
UNIQUE MARKET POSITION AND CONTINUED SYSTEM EXPANSION: Fletcher Allen is
the dominant provider of high acuity services in a sizable geographic
region that encompasses northern Vermont and adjacent counties in
northeastern New York State. The two CPI hospitals, with which Fletcher
Allen formally affiliated in January 2013, have successfully been
integrated into the FAP with no dilutive impact on either liquidity or
profitability. FAP is also exploring possible additional affiliations to
further increase their presence in northern New York.
LIGHT LIQUIDITY: Historically, liquidity had been light, but even after
the recent addition of the two CPI facilities in 2013 (which was
potentially dilutive), is consistent with Fitch's lower 'A' category
medians. Through May 31, 2014, FAP's $607.7 million of unrestricted cash
and investments translated to 157.6 days cash on hand (DCOH), cushion
ratio of 14x, and 127% cash-to-debt. Management has targeted to maintain
DCOH at a 130-day level including the funding of the capital plan.
NEED TO MAINTAIN PROFITABILITY: Fitch expects FAP to maintain solid
profitability in order to generate sufficient cash flow to execute its
capital plan without materially eroding its coverage and liquidity
FAP is an integrated health care network, providing hospital and
physician services with four hospitals located in Vermont and New York.
Fletcher Allen Health Care (Fletcher Allen), FAP's flagship hospital
located in Burlington, VT is a full-service tertiary and quaternary
academic medical center with 438 operated beds, and is the largest
hospital in Vermont. Also part of FAP are the 84-bed Central Vermont
Medical Center in Berlin, VT, Champlain Valley Physicians Hospital in
Plattsburgh, NY with 274 acute care beds, and 25-bed critical access
hospital Elizabethtown Community Hospital, Elizabethtown, NY. Fletcher
Allen is the teaching hospital for the University of Vermont and a Level
1 Trauma Center. The Faculty Practice includes 620 employed physicians;
the health system as a whole includes over 1,000 physicians. Total
revenues in fiscal 2013 (Sept. 30 year end) were approximately $1.5
In January 2014 FAP implemented a change in their board structure, most
significantly reducing the number of board members to 19 from 27 with
the aim of improving board responsiveness and efficiency. On June 16,
2014, Todd Keating became CFO of FAP, replacing Sophia Holder, who
served as the interim CFO and VP Finance for the several months
following the prior CFO's retirement in November 2013. Mr. Keating has
more than 26 years of experience in health care finance and most
recently served as senior vice president of Business Development at
UMass Memorial Healthcare, Worcester, Massachusetts.
The upgrade to 'A-' is supported by FAP's stable financial profile, good
coverage, and liquidity, which while modest, is now more in line with
Fitch's low 'A' category peers. Fitch also views as a positive credit
factor FAP's dominant position as the largest healthcare provider in the
state of Vermont and the leading provider of tertiary and quaternary
services to an expansive area covering a 150-mile radius, which includes
several counties in northeastern New York State. It is further supported
by Fitch's belief that FAP has the debt capacity, if profitability is
maintained, for its capital plan, which will require issuance of between
$120 million-$145 million of additional debt over the next two and a
STABLE CORE OPERATIONS
Fletcher Allen's operating and operating EBITDA margins have been stable
over the last four fiscal years. In fiscal 2013 FAP generated operating
income of $43.8 million, meeting its budget of $40 million, for
operating margin of 2.9% and operating EBITDA margin of 9%. Through the
interim period, the consolidated system had operating profit of $44.3
million, resulting in operating margin of 4.3% and operating EBITDA
margin of 10.7%, comparing well to Fitch 'A' respective category medians
of 3.3% and 10.7%. Fiscal 2013 was the first year without the benefit of
the Boston Area Wage Index, which the system was able to offset with
Medicaid Enhanced Graduate Medical Education (GME) funding. In 2013, FAP
received roughly $64.6 million in supplemental funding (Medicare and
Medicaid DSH and GME) which will be reduced to approximately $46.5
million in 2014. Fitch notes that continued funding of these programs is
uncertain and presents a longer term credit concern.
Management has set a 4% operating margin target for Fletcher Allen in
order to be able to fund the multi-year master facility plan (MFP) at
the main facility in Burlington, and to maintain DCOH at a minimum 130
days. Fitch views the attainment of the 4% margin as challenging, but
attainable, based on efforts on both the revenue and the expense side
being implemented systemwide.
CONTINUED SYSTEM EXPANSION
The two New York-based hospitals belonging to CPI: Champlain Valley and
Elizabethtown were successfully integrated into the system without
negative impact on operating or liquidity metrics. Management is engaged
in informal discussions with other hospitals in northern New York State.
Any formal affiliation process is expected to take between 18-30 months.
The rationale for further expansion into New York State is severalfold,
including the historical flow of patients from New York State for
services at Fletcher Allen Health Care in Burlington, who could receive
some of their care locally at a lower costs, the increased leverage with
payors, as well the potential to grow market share outside of its
traditional service area. FAP's ability to increase its market share in
Vermont is limited as it is already dominant in the northern counties
and is not likely to penetrate the three southern counties, dominated by
Dartmouth-Hitchcock Health (rated 'A+' by Fitch).
DEBT CAPACITY FOR THE MASTER FACILITY PLAN
The MFP includes an inpatient stay facility with four inpatient floors,
with the goal of converting existing beds to a level of 90%
single-occupancy rooms. The MFP, not including routine capital
investment, is estimated at $372 million, $175 million of which is
designated for the inpatient tower. As currently envisioned, the
construction would not start until late Fall 2015 at the earliest and
the MFP would require issuance of debt of $75 million-$100 million in
the first quarter of fiscal 2017, with the remaining portion to be
primarily funded from internal cash flow, and $30 million targeted from
philanthropy. An earlier issuance of approximately $45 million is
planned for the first quarter of fiscal 2015 in order to fund the
development and purchase of property at Mountain View Park, which FAP
plans to develop into a major outpatient facility located in South
Burlington. Scheduled debt amortization of approximately $62 million in
fiscal years 2015 through 2017 is expected to mitigate the impact of any
FAP had coverage by EBITDA of its consolidated system MADS of $43.5
million of 4.1x in 2013 and 4.3x through the 2014 interim period, better
than Fitch's 'A' category median of 3.8x. Including the two planned debt
issuances increases MADS to $48.4 million (the system has front-loaded
debt currently and the 2017 issuance is planned to be structured as
interest-only for the initial 20 years to produce level debt service).
FAP had historical coverage of the pro-forma higher MADS of 3.7x in 2013
and 3.9x through the 2014 interim period. Fitch believes that FAP has
the capacity to issue debt up to a maximum of $145 million over the next
two and a half years to fund its facility needs in Burlington at the
'A-' rating level.
Liquidity, which had historically been light, has slowly improved and
except for DCOH is in line with Fitch's 'A' category medians. DCOH at
157.6 days is lower than the median of 196 DCOH. Management's initial
calculation of cash-to-debt post issuance of the MFP 2017 borrowing
projects cash to a level of 114% at its lowest point. Somewhat
offsetting the modest liquidity is FAP's conservative debt structure
with 78% fixed-rate debt. The variable-rate debt has been converted to
synthetic fixed rate under three swaps with an aggregate notional amount
of $64.8 million. The swaps are insured and do not require posting of
collateral, despite a mark-to-market at negative $10.1 million as of May
Fletcher Allen covenants to provide audited financial statements within
180 days of the end of the fiscal year and quarterly statements within
60 days of the end of the quarter to MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Rating
Criteria, this action was additionally informed by information from Citi.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria', June 16, 2014
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30,
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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Source: Fitch Ratings