NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the A+ rating on Lahey Clinic's (Lahey) outstanding debt listed below:
--$138 million Massachusetts Health and Educational Facilities Authority, series C
--$49 million Massachusetts Health and Educational Facilities Authority, series D
The Rating Outlook is Stable.
KEY RATING DRIVERS
--Integrated Delivery System: Lahey's delivery model, which places the physician clinic and hospital operations under a single unified board and management structure secures physician alignment and facilitates the coordination of care.
--Very Competitive Market: Several reputable tertiary academic medical centers in Boston present formidable competition, however, Lahey's market share has increased over the last several years. Lahey continues to grow its network and referral relationships through the addition to the clinic and affiliations with other hospitals in the area.
--Low Debt Burden: Maximum annual debt service (MADS) comprised 2% of total revenue and debt service coverage by operating EBTIDA was solid at 3.8 times (x) for fiscal 2010 and 5.1x for the nine months ended June 30, 2011 (unaudited; interim period) compared to the 'A' category median of 3.3x.
--Planned Reduction in Profitability: Operating margins have been solid at 3.7% for fiscal 2009, 2.3% for fiscal 2010 and 4.4% for the interim period. A new CEO joined in November 2010 and has implemented an incentive based compensation pool. This is expected to reduce profitability and management anticipates fiscal 2011 to end with a 2.5% operating margin.
--Manageable Capital Needs: Lahey does not have any additional debt plans and future capital needs are manageable. The fiscal 2011 capital budget totals $49 million and is a little more than depreciation expense. Lahey recently completed an expansion project at its North Shore facility.
SECURITY:
Gross revenue pledge.
CREDIT PROFILE:
Lahey has a long history of operating as an integrated unit with its 520 member physician clinic (full time equivalents). This physician alignment fosters cost effective care and management indicated that it is one of the lowest cost providers in the area. Lahey has continued to secure its market position in a competitive market through physician growth and affiliations with community hospitals.
Lahey recently announced an affiliation with Northeast Health System. Initially, a parent organization will be created over the two entities. The benefits of the affiliation include cost savings, enhanced tertiary referrals, and better utilization of resources. The debt of each organization will remain separate at this time but may be combined at a later time if management determines it would be financially advantageous. Fitch will review the impact to the rating if this occurred. The affiliation is in a due diligence phase and would require regulatory approval.
Lahey's market share has increased to 10.4% in 2009 from 9.1% in 2005 in its total service area (81% of discharges). The competitors with the next closest market share include North Shore Medical Center (community hospital; part of Partners Healthcare rated 'AA' by Fitch) with 8.7% market share and Massachusetts General Hospital (tertiary facility; part of Partners) with 9.6% market share.
Lahey's operating performance is solid and profitability has been driven by volume growth and rate increases. In fiscal 2010, profitability declined due to a $23 million increase in pension expense. Pension expense totaled $37 million in fiscal 2010. Lahey's defined benefit plan is currently 80% funded and future contributions are projected to be approximately $50 million a year (including expense). Lahey closed the defined benefit pension plan to new employees hired after Aug. 1, 2010 and they are eligible to participate in an enhanced 403(b) defined contribution plan.
Fiscal 2011 year to date performance is very strong with a 4.4% operating margin, which is well exceeding the budget. Management recently implemented an incentive compensation program and the distribution will be based on financial as well as quality, service, and patient satisfaction metrics. For fiscal 2011, management expects the total pool to be approximately $12.5 million (not accrued in the interim period), which would result in a 2.5% operating margin for the year. Going forward, management expects to target an operating margin of approximately 3%.
The balance sheet is solid with $421.4 million of unrestricted cash and investments at June 30, 2011, which translates to 175.3 days cash on hand and 209% cash to debt. Fitch believes Lahey has debt capacity at its current rating level. Total outstanding debt is $210.4 million as of June 30, 2011 and is 100% fixed rate. There are no swaps outstanding.
The Stable Rating Outlook reflects Fitch's expectation that Lahey will maintain its solid financial profile due to its business model and investment in its network.
Located in and around Burlington, Massachusetts, Lahey is an integrated delivery system operating a 520 physician full time equivalents group practice, 317-bed acute and tertiary care hospital and a 10-bed community hospital. In FY 2010, Lahey had total revenue of $927.8 million. Lahey provides annual and quarterly disclosure (for the first three quarters) to EMMA.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (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 Massachusetts
INDUSTRY KEYWORDS: Health Hospitals Other Health
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