GOOD READS

Fitch Affirms MaineGeneral Health (ME) Revs at 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the 'BBB-' rating on the following Maine Health and Higher Educational Facilities Authority (MHHEFA) bonds issued on behalf of MaineGeneral Health (MGH):

--$280.8 million series 2011.

MGH has an additional $31 million in MHHEFA bonds which Fitch rates 'AA', with a Stable Outlook based on the credit quality of the authority's loan pool. See 'Fitch Rates Maine Health & Higher Educational Facilities Authority's $64MM Revs 'AA', dated April 19, 2013' for additional information.

The Rating Outlook is Stable.

SECURITY

A pledge of gross revenues, mortgage on certain hospital property, and fully-funded debt service reserve will provide security for the bonds.

KEY RATING DRIVERS

LIQUIDITY REMAINS A CONCERN: The rating affirmation reflects expected improvement in MGH's weakened liquidity position. At March 31, 2013, unrestricted liquidity equaled $94.4 million, down from prior year levels. However, in April management refinanced a bank loan and was able to unrestrict the associated $14 million in collateral, which would bring its unrestricted cash to $108.4 million equating to 92.3 days of cash on hand and a 4.2x cushion ratio. Additional improvement is expected due to a sizeable Medicaid settlement payment anticipated during fiscal 2014.

REPLACEMENT PROJECT AHEAD OF SCHEDULE: MGH's $322 million replacement hospital project remains several months ahead of schedule and under budget, with an expected opening in November 2013. The likelihood of any delays and cost overruns has diminished, as construction should be completed early, by August 2013. Further, philanthropic support has exceeded initial expectations.

PROFITABILITY PRESSURE: While operating performance remained steady through the nine-month interim period, MGH is budgeting for a $17 million (-3.9%) operating loss in fiscal 2014 due to the additional depreciation and operating costs in the new facility. Though the 'BBB-' rating incorporates a short-term drop in operating performance, it is expected to improve significantly in fiscal 2015 and reach breakeven by fiscal 2016.

SIGNIFICANT DEBT BURDEN: MGH's rating reflects its sizeable debt burden, which Fitch expects will moderate over time. Leverage metrics were high through the March 31, 2013 interim period with debt to EBITDA of 9.0x and debt to capitalization of 60.1%, against Fitch's 'BBB' category medians of 4.2x and 49.1%, respectively. MGH has no further debt planned, and has limited capital needs going forward.

RATING SENSITIVITIES

BALANCE SHEET IMPROVEMENT: Balance sheet replenishment will be essential to maintaining the 'BBB-' rating, as Fitch believes balance sheet strength is necessary to provide cushion against MGH's substantial debt burden and expected operating pressures over the near term. A failure to bring liquidity metrics back to prior year levels would likely prompt rating pressure.

ACHIEVE OPERATING BUDGET: The rating could be pressured should MGH fail to meet its fiscal 2014 operating budget, which calls for an approximate 4% operating loss and 1.3x coverage of actual debt service by operating EBITDA. Fitch notes management believes this is a conservative budget and plans to aggressively work to manage operating costs in the new facility. Further, the new facility coupled with MGH's good relationship with managed care payors in a narrow network environment are likely to drive additional patient volume growth and market draw, which are not reflected in fiscal 2014's budget.

CREDIT PROFILE

MGH is the third largest health system in Maine, with 287 licensed beds on two campuses in Augusta and Waterville (20 miles north of Augusta), along with a full range of primary, secondary, and tertiary services. MGH plans to operate 192 beds in the replacement facility, with no change to licensed bed count. Total revenues were $417.3 million in fiscal 2012.

MEDICAID PAYMENT

The rating affirmation at 'BBB-' reflects Fitch's expectation that MGH will replenish its balance sheet in fiscal 2014, via an anticipated Medicaid payment from the state, and generate operating cash flow at levels which sustain its balance sheet over the longer term.

As of fiscal year ended June 30, 2012, MGH was owed approximately $38 million from the state of Maine for Medicaid services provided in prior years. The state has now identified a funding source for these back payments, and MGH's balance sheet will be greatly strengthened upon receipt of these funds which are likely to occur within six months. Fitch believes balance sheet improvement is necessary to provide cushion against MGH's sizeable debt burden and expected pressure on profitability over the near term.

REPLACEMENT FACILITY PROJECT

MGH expects to occupy its new facility in November 2013, and fiscal 2014 operating results will reflect increased depreciation and interest which will suppress profitability significantly. MGH anticipates it will produce a 5.9% EBITDA margin in fiscal 2014, and reach a breakeven operating margin by fiscal 2015. Fitch believes MGH has very limited room for error in generating this level of operating performance against its large debt service needs over the near term.

SIZEABLE DEBT BURDEN

MGH had $320 million in total long-term debt outstanding at March 31, 2013 and maximum annual debt service (MADS) was equal to $26.1 million. For fiscal 2014, MGH is budgeting for 1.0x MADS coverage and 1.4x actual annual debt service coverage by EBITDA, and it will make its first full debt service payment during fiscal 2015 once capitalized interest ends. There are no additional debt plans, and ongoing capital needs are expected to be very modest.

CONTINUING DISCLOSURE

MGH covenants to provide audited annual disclosure within five months and quarterly disclosure within 45 days of each period end to the Municipal Securities Rulemaking Board's EMMA System. Disclosure to Fitch has been timely and thorough.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 3, 2013;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794253

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contact:
Fitch Ratings, Inc.
Primary Analyst
Emily E. Wadhwani, +1-312-368-3347
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eva Thein, +1-212-908-0674
Senior Director
or
Committee Chairperson
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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