NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A+' rating to the following State of Connecticut Health and Educational Facilities Authority revenue bonds on behalf of Lawrence & Memorial Hospital (LMH):
--$60,000,000 series F;
--$42,620,000 series D*;
--$22,990,000 series E**.
The Rating Outlook is Stable.
*Series D bonds will be refunded with the series F issuance.
**Underlying rating. Series E bonds are supported by a direct-pay letter of credit (LOC) from JPMorgan Chase Bank (rated 'AA-/F1+'; Stable Outlook by Fitch).
Series F bonds will be secured by a pledge of gross revenues and mortgage. Series E bonds are secured by the LOC from JPMorgan Chase Bank.
KEY RATING DRIVERS
Strong Market Position: LMH has a dominant market share of nearly 70% in its primary service area (PSA). The organization's closest competitor is William W. Backus Hospital (Backus; revenue bonds rated 'A+'), which has a 10.7% position.
Robust Liquidity Position: As of June 30, 2011 (unaudited) LMH had $196.6 million in unrestricted cash and investments which equates to a robust 219.4 days cash on hand, 31.8 times (x) pro forma cushion ratio, and 311.3% cash to debt.
Strong Debt Service Coverage: LMH's light debt burden results in strong historical pro forma debt service coverage averaging 4.5x over the past four fiscal years.
Light Profitability for Rating Level: Operating and operating EBITDA margins have averaged 2.1% and 8.1%, respectively, over the past four years. Although consistent, these metrics are below the Fitch medians of 3% and 10%.
Good Service Area Characteristics: Located in New London, CT (rated 'AA'; Stable Outlook) and serving much of southeastern Connecticut, LMH's service area has solid wealth and socioeconomic indicators compared against state and national averages.
Lawrence and Memorial Hospital operates a 308 licensed bed hospital in New London, CT, as well as seven ambulatory facilities located off the hospital's main campus. For fiscal year 2010, LMH had total revenues of $345 million. LMH covenants to provide annual financial disclosure to the Municipal Securities Rulemaking Board's EMMA system.
Assigned Rating of 'A+'
The 'A+' rating reflects LMH's dominant market position in its PSA, solid balance sheet, robust pro forma debt service coverage, light profitability for the rating level, and good service area characteristics. Credit concerns include LMH's future capital needs and high exposure to Medicaid payors.
New Debt Issuance
Series F bond proceeds will be used to refund LMH's outstanding series D issuance, reimburse the organization for prior capital expenditures, fund new construction and renovation, and pay costs of issuance. After reimbursement, LMH will add approximately $10 million of new debt onto its financial profile. The series F bonds will be issued in a traditional fixed-rate mode.
LMH's operating performance over the past four fiscal years has been consistent, while trending positively. In 2010, LMH recorded its highest operating income ever of $10.1 million (2.9% operating and 8.6% operating EBITDA margins), which was up from 2009's $6 million (1.9% operating margin). Despite comparing unfavorably against Fitch's 'A' category medians, Fitch views favorably management's ability to continually generate profit on an annual basis. Management has done an effective job in growing its top-line revenue through various enhancements, while controlling the organization's expense base. Overall, Fitch expects recent profitability growth to be sustained and/or improved upon over the medium term.
Supported by consistent profitability, LMH has a very strong balance sheet highlighted by 219.4 days cash on hand, 31.8x pro forma cushion ratio, and 311.3% cash to debt through June 2011. After the series F debt issuance, Fitch estimates LMH's pro forma cash to debt position to be approximately 254.8%, which is well above the 'A' category median of 105.5%. An additional credit strength is the organization's dominant market position in a service area (southeastern CT) with positive demographic characteristics. Maintaining a market share of nearly 70%, Fitch views LMH's competitive risk with minimal concern.
LMH has robust debt service coverage demonstrated by pro forma coverage by EBITDA and operating EBITDA of 5.4x and 4.8x, respectively, for fiscal 2010. These metrics compare favorably against Fitch's medians of 3.3x. Fitch believes LMH has some, but limited, additional debt capacity at the current rating level.
Central Credit Concerns
Fitch views LMH's potential capital plans as well as high exposure to Medicaid payors as the most significant credit concerns. Although management does not have any firm plans to issue additional debt, potential construction of a new patient tower is currently under review. Management stated if there is a need for future debt, a new bond offering would not occur until at least 2014.
Medicaid as a percentage of gross revenues totaled a high 15.6% in 2010. Consistently increasing since fiscal 2007's 12.2%, Fitch believes having a high Medicaid load poses risk for LMH, which can leave the organization susceptible to negative cuts in reimbursement.
Outstanding Debt Profile
Following the series F debt issuance, approximately 75% of LMH's outstanding debt will be fixed-rate. The remaining 25% is variable-rate supported by an LOC from JPMorgan Chase Bank, which expires in 2013. LMH has no outstanding swaps. Overall, Fitch views LMH's outstanding debt structure as relatively conservative.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Public Finance Rating Criteria, this action was informed by information from the obligor and investment banking team.
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated June 20, 2011;
'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
Michael Burger, +1-212-908-0555
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Jim LeBuhn, +1-312-368-2059
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Cindy Stoller, +1-212-908-0526 (New York)
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