Fitch Affirms Partners HealthCare System, MA's Revs at 'AA'; Self-Liquidity Bonds at 'F1+'
Mar 21, 2013 (Close-Up Media via COMTEX) --
Fitch Ratings has affirmed the 'AA' long-term rating on approximately $3.1 billion of bonds issued by Massachusetts Health & Educational Facilities Authority, Massachusetts Development Finance Agency and Partners HealthCare System (Partners) on behalf of Partners.
The Rating Outlook is Stable.
Additionally, Fitch has affirmed its 'F1+' short-term rating on following bonds issued by the Massachusetts Health and Educational Facilities Authority on behalf of Partners and supported by Partners internal liquidity.
--$15.7 million series 2003D5 revenue bonds;
--$15.7 million series 2003D6 revenue bonds;
--$171.3 million series 2008H revenue bonds;
--$50 million series 2009I1 revenue bonds.
Bond payments are an unsecured obligation of the Partners HealthCare System parent company, supplemented with guarantees for debt service payments provided by Partners' two large tertiary facilities, The General Hospital (commonly known as Massachusetts General Hospital) and Brigham and Women's Hospital, and their respective parents.
KEY RATING DRIVERS
Leading Market Share: Partners' leading market share is nearly twice that of its nearest competitor in a competitive environment.
Excellent Clinical Reputation: Partners maintains a national reputation for clinical excellence which is enhanced by its role as the primary teaching affiliate of Harvard University's schools of medicine and dentistry.
Solid Liquidity: With 25.2 times (x) cushion ratio and 168.3 percent cash to debt, liquidity metrics are consistent with the category and provide cushion for debt service.
Stable Operating Profitability: While light for the rating category, operating profitability has been consistent, averaging 2.2 percent since fiscal 2006 and achieving 2.1 percent in fiscal 2012 despite the occurrence of significant nonrecurring expenses.
Short-Term Rating: At Dec. 31, 2012, Partners' eligible cash and investment position under Fitch's criteria would cover the maximum mandatory put on self-liquidity bonds on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating.
Partners is expected to continue to record consistent profitability from operations to maintain coverage metrics while liquidity metrics remain consistent with the rating category.
The affirmation of the 'AA' long-term rating is supported by Partners' leading market position, excellent clinical reputation, solid liquidity and stable operating profitability. Credit concerns include a competitive service area and successful integration of the Neighborhood Health Plan (NHP) acquisition.
The affirmation of the 'F1+' rating reflects the strength of Partners' cash and investment position to pay the mandatory tender on the series 2003D5, 2003D6, 2008H and 2009I1 puttable bonds. At Dec. 31, 2012, Partners' eligible cash and investment position under Fitch's criteria would cover the maximum mandatory put on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating.
Fitch views Partners' national reputation, clinical excellence and leading market position favorably and believes these factors enhance the organization's operating stability. Partners' 21 percent market share in eastern Massachusetts has been extremely stable and is nearly twice that of its nearest competitor.
Partners includes two of the nation's leading academic medical centers, Massachusetts General Hospital (MGH) and Brigham and Women's Hospital (BWH). Both hospitals consistently rank among the top 10 hospitals in U.S. News' Best Hospital Honor Roll, with MGH ranked #1 and BWH ranked #9 in 2012.
Partners' national reputation is enhanced by its large research operations and status as the primary teaching affiliate of Harvard University's schools of medicine and dentistry. Partners has the largest non-university-based non-profit private medical research enterprise in the nation with approximately $1.5 billion in research expenditures in 2012. Additionally, MGH and BWH are the top two independent hospitals receiving National Institutes of Health research funds.
Unrestricted cash and investments increased 24.8 percent to $5.9 billion at Dec. 31, 2012, from $4.8 billion at Sept. 30, 2011. The increase was primarily due to operating cash flow, proceeds from debt issuances and investment income. Days cash on hand (DCOH) of 228.5, cushion ratio of 25.2x and cash to debt of 168.3 percent remain solid relative to Fitch's 'AA' medians of 241.1 days, 24.1x and 169.4 percent.
Excluding non-recurring items, operating margin increased to 3.9 percent in fiscal 2012 from 2.7 percent in the prior year. The non-recurring items included a $114.4 million asset impairment charge (non-cash) related to the replacement of Partners' information technology (IT) system with an Epic system and $42 million for the Massachusetts Distressed Hospital Fund. Including the nonrecurring expenses, Partners margin was 2.1 percent in fiscal 2012. Fitch notes that profitability is diluted by large research operations which account for over $1.5 billion of operating revenue. Management typically targets operating margins of between 2 percent and 3 percent each year.
An additional $400 million of new debt was issued in the fall of 2012 through a direct placement, $200 million of which was used to fund the pension plan while the remaining $200 million will be used to fund capital expenditures. Maximum annual debt service (MADS) increased to $236.2 million from $215.7 million and was provided by Partners. Fitch does not rate the private placement. Long-term debt increased markedly to $3.5 billion at Dec. 31, 2012 from $2.6 billion at Sept. 30, 2011, reflecting the 2012 private placement and $500 million new money issued during fiscal 2012.
Despite the significant increase in debt, MADS coverage remains adequate for the rating category given Partners' overall credit profile. MADS coverage equaled 4.2x EBITDA (excluding non-recurring expenses) in fiscal 2012 relative to Fitch's 'AA' category median of 4.8x. MADS as a percent of revenue remains moderate at 2.6 percent.
Partners finalized its acquisition of NHP on Oct. 1, 2012. NHP is a 252,000 member not-for-profit managed care organization, increasing Partners' number of covered lives to over 750,000. Approximately 83 percent of NHP's revenues come from Medicaid and Massachusetts Commonwealth Care (a health insurance program for uninsured adults who meet income and other eligibility requirements). The acquisition is expected to be mildly dilutive to Partners' consolidated financial results in the near term. However, Fitch believes that the strategic benefits, including experience in both population management and risk based contracting, outweigh the dilution.
Capital plans are expected to focus on network development and information technology over the next five years. Partners is replacing its existing IT systems with Epic. The project is budgeted for $1.2 billion and implementation is expected to take five years. Partners actively manages capital spending with actual spending in any year subject to financial performance targets.
The Stable Rating Outlook is based on Fitch's expectation that Partners will continue to record consistent profitability from operations while maintaining liquidity and leverage metrics that are consistent with the rating category.
Based in Boston, Partners comprises two tertiary hospitals, six community acute care hospitals, and five specialty hospitals. Total operating revenues equaled $9 billion in fiscal 2012. Partners covenants to provide annual disclosure no later than 150 days following the fiscal year end and voluntarily discloses quarterly financials within 60 days of the first three quarters and within 90 days of the fourth quarter.
Additional information is available at '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', June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012;
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity, July 15, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
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