Fitch Affirms Holyoke Medical Center's (Massachusetts) Rev Bonds at 'BB'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BB' rating on approximately $5.9 million of series B (1994) bonds issued by the Massachusetts Health and Educational Facilities Authority, on behalf of Holyoke Medical Center (formerly known as Holyoke Hospital [Holyoke]), an affiliate of Valley Health System (VHS).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a lien on the gross receipts of the obligated group and a debt service reserve fund.

KEY RATING DRIVERS

IMPROVED OPERATING PROFITABILITY: Operating margin improved to 1% in fiscal 2011 from negative 0.9% in fiscal 2010 due to receipt of $7 million in Medicaid Section 1115 Waiver funds which were received due to Holyoke's high Medicaid case load.

LIGHT DEBT BURDEN: Maximum annual debt service (MADS) remained low at 2.3% of operating revenue while MADS coverage strengthened to 2.0 times (x) EBITDA.

MIXED LIQUIDITY METRICS: Unrestricted liquidity remains solid relative to debt with 104.8% cash to debt at Jan. 31, 2012, but weak relative to operating expenses with a low 31 days cash on hand (DCOH) in fiscal 2011.

DEFERRED CAPITAL SPENDING: A high average age of plant of 23.2 years and light historic capital spending remain credit concerns as they are indicative of deferred capital projects.

CREDIT PROFILE

The 'BB' rating reflects improved operating profitability, a light debt burden with strengthened debt service coverage, solid liquidity relative to debt, weak liquidity relative to expenses, and the need for future capital investments.

Fitch's analysis is based upon the consolidated financial statements of Valley Health System, Inc. and Affiliates (VHS), the parent and sole corporate member of Holyoke Medical Center (formerly known as Holyoke Hospital). Holyoke is the sole member of the obligated group for the series B bonds and accounted for approximately 89.4% of VHS's fiscal 2011 operating revenue.

Despite decreasing volumes in fiscal 2011, profitability improved due to receipt of $7 million in Medicaid Section 1115 Waiver funds. As a result, operating margin improved to 1% in fiscal 2011 from negative 0.9% in fiscal 2010. Holyoke was one of six hospitals in Massachusetts to receive such funding in fiscal 2011 primarily due to its high Medicaid case load. Medicaid accounted for 26% of net revenues in fiscal 2011. Holyoke anticipates receiving approximately $8 million per year in waiver funds in fiscal years 2012 through 2014.

Operating profitability should be further aided by an increase in the service area's Medicare wage index which was effective Oct. 1, 2011. The change is expected to increase operating revenue by approximately $1.8 million per year.

Operating performance continues to be hampered by losses at the system's medical group due to physician subsidies. The medical group posted an operating loss of $2.3 million on $7.2 million of operating revenue in fiscal 2011. Fitch remains concerned about the continued losses, but expects the losses to remain stable in the near term.

VHS's manageable debt burden remains a primary credit factor maintaining the current rating level. MADS equaled a light 2.3% of revenue in fiscal 2011. The improved profitability increased MADS coverage to 2.0x EBITDA in fiscal 2011 from 1.3x in fiscal 2010. As the 2015 maturity date of the series B bonds approaches, MADS will continue to decline which should further improve coverage.

Unrestricted cash and investments equaled $12 million as of Jan. 31, 2011, equating to an adequate cushion ratio of 3.6x and a strong 104.8% cash to debt. While liquidity provides solid cushion for debt service, it remains weak relative to expenses with 31 DCOH.

In addition to the continued losses at the medical group, credit concerns include a very high average age of plant of 23.2 years. The combination of the average age of plant with capital spending that has averaged a low 73% of depreciation expense since fiscal 2007 is indicative of deferred capital projects. Holyoke has indefinitely postponed plans to construct a new emergency department. Management is not planning to undertake any major capital projects in the near term. However, ongoing capital needs combined with VHS's limited financial flexibility remain a credit concern.

The Stable Outlook is based upon Fitch's expectation that Holyoke will continue to receive Section 1115 waiver funding in fiscal years 2012 through 2014, medical group operating losses will remain stable at approximately $2 million per year and that VHS's debt burden remains light.

Valley Health System operates Holyoke Medical Center, a community hospital located in Holyoke, MA, approximately 10 miles north of Springfield, MA. Total operating revenue equaled $142.9 million in fiscal 2011. Holyoke covenants to provide quarterly and annual financial disclosure to the trustee and to bondholders upon request. However, the documents governing the rated issue predate Rule 15c2-12 and Holyoke does not provide disclosure through the Municipal Securities Rulemaking Board's EMMA system, which Fitch views negatively.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 20, 2011;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

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KEYWORDS:   United States  North America  Illinois  Massachusetts  New York

INDUSTRY KEYWORDS:   Health  Hospitals  Professional Services  Finance

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