Fitch Ratings has affirmed the rating on the following revenue bonds issued by the Massachusetts Health and Educational Facilities Authority on behalf of Winchester Hospital (Winchester) at 'BBB+':
--$75.5 million series 2010H.
The Rating Outlook has been revised to Positive from Stable.
KEY RATING DRIVERS:
--STRENGTHENED BALANCE SHEET: The Positive Outlook is supported by Winchester's improved unrestricted liquidity position combined with solid debt service coverage and decreased projected capital spending now that all major capital projects are completed.
--STRONG LIQUIDITY METRICS: Winchester's liquidity is strong for the rating category with 160.3 days cash on hand, 16.2 times (x) cushion ratio, and 119.2% cash to debt at March 31, 2013 relative to Fitch's 'BBB' category medians of 138.9 days, 9.4x and 82.7%.
--LEADING MARKET SHARE IN A FAVORABLE SERVICE AREA: Winchester maintains a stable and leading 22.5% market share in a very competitive service area with favorable demographics and a good payor mix.
--CONSISTENT OPERATING PROFITABILITY: Operating profitability has been consistent with an average 2.3% operating margin since fiscal 2007 and equal to 2% in fiscal 2012 and in the six-month interim period ending March 31, 2013 (the interim period).
--MANAGEABLE DEBT BURDEN: The debt burden is manageable with maximum annual debt service (MADS) equal to 2.6% of revenue in fiscal 2012 and MADS coverage equal to 3.1x operating EBITDA relative to Fitch's 'BBB' category median of 2.6x.
POTENTIAL FOR UPWARD RATING MOVEMENT: Further improvement in liquidity metrics and sustained debt service coverage by operating EBITDA at or above 3.0x could result in upward rating movement.
SECURITY: The bonds are secured by a gross revenue pledge and mortgage pledge.
The 'BBB+' rating affirmation is supported by Winchester's leading market position in a favorable service area, consistent operating profitability, strong liquidity metrics for the rating category and a moderate debt burden.
The Positive Outlook reflects Fitch's expectation that liquidity metrics will continue to strengthen now that all major capital projects are completed and that capital spending is expected to decrease. Continued strengthening of unrestricted liquidity combined with stable operations and maintenance of coverage by operating EBITDA could result in upward rating movement.
Winchester maintains a leading 22.5% market share in an affluent suburb of Boston with above average wealth indicators and relatively low unemployment. Fitch views the service area characteristic as a credit positive. The favorable service area characteristics are reflected in Winchester's minimal exposure to Medicaid which accounted for a low 6% of gross revenues in fiscal 2012.
However, the service area remains highly competitive which Fitch views as a continued credit concern. Winchester faces competition from local hospitals in addition to major academic medical centers located in Boston. Further consolidation activity within the market could increase competitive pressure.
Capital spending equaled $36.2 million in fiscal 2012, $33.8 million in fiscal 2011 and is expected to decline going forward. Recently completed major capital projects include a cancer center in fiscal 2011 and an ambulatory surgery center in fiscal 2012. No major capital projects are planned in the near to midterm and capital spending is expected to average $18 million per year for the next three years.
Unrestricted cash and investments increased 23% since fiscal 2011 to $131.4 million at March 31, 2013 despite robust capital spending. This equates to 160.3 days cash on hand, 16.2x cushion ratio, and 119.2% cash to debt which are strong relative to Fitch's 'BBB' category medians of 138.9 days, 9.4x and 82.7%. The balance sheet provides solid cushion for timely payment of principle and interest. The projected decrease in capital spending should allow for continued strengthening of liquidity metrics.
Operating profitability has been stable with operating margin averaging 2.3% since fiscal 2007 and equal to 2% in fiscal 2012 and in the interim period. Management's 2013 budget calls for system-wide operating margin to equal 1.9%. While stable, operating profitability remains light relative to Winchester's 'BBB+' category peers. Fitch expects operating profitability to improve over the medium term due to its recently completed capital projects.
Winchester's debt burden remains manageable with $110.2 million of total debt outstanding as of March 31, 2013. MADS accounted for a light 2.6% of revenues in fiscal 2012. Coverage is solid for the rating category with MADS coverage equal to 3.1x operating EBITDA in fiscal 2012 and 3.4x in the interim period relative to Fitch's 'BBB' category median of 2.5x.
In November 2012, Winchester directly placed its series F bonds (not rated by Fitch) with People's United Bank (Fitch rated 'A-/F1') with an 18-year term equaling the remaining life of the bonds. The direct placement effectively eliminates renewal, remarketing and put risk. Fitch views the decreased risk profile favorably.
Winchester Hospital is a 229 licensed bed community hospital located in Winchester, MA, approximately eight miles northwest of Boston. Total operating revenues equaled $310.1 million in fiscal 2012. Winchester covenants to provide annual disclosure no later than 120 days following the end of its fiscal year and quarterly disclosure no later than 45 days following the end of each fiscal quarter. Disclosure is provided through 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 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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