AFFIRMATION AFFECTS TOTAL OF $650 MILLION OF RATED DEBT OUTSTANDING
Massachusetts Development Finance Agency
NEW YORK, Sep 16, 2011 -- Moody's Investors Service has affirmed the A3 rating assigned to
CareGroup's bonds (see debt list at end of report). This review was conducted in
conjunction with the planned refinancing of a portion of the Series A bonds with
a direct loan from JP Morgan. The outlook remains positive.
CareGroup, formed over fourteen years ago, is the parent corporation and sole
corporate member of Beth Israel Deaconess Medical Center (formerly Beth Israel
Hospital and New England Deaconess Hospital) (BIDMC), Mount Auburn Hospital, and
New England Baptist Hospital (NEBH). BIDMC is now the parent corporation and
sole corporate member of Beth Israel Deaconess Hospital-Needham (formerly
Deaconess-Glover Hospital). The academic faculty practice group, associated with
BIDMC, Harvard Medical Faculty Physicians (HMFP) was removed as an obligated
group member in 2006, but continues to be incorporated into Moody's analysis of
the consolidated system in our rating assessment of CareGroup.
The affirmation of the A3 rating and positive outlook reflect CareGroup's stable
operating performance and market share among each of its hospitals, and direct
bank loan covenants that are consistent with existing covenants in fixed rate
LEGAL SECURITY: The bonds are a joint and several obligation of the CareGroup
Obligated Group with revenue pledges provided by BIDMC and Mount Auburn, and
broadened to include revenue pledges by New England Baptist Hospital and Beth
Israel Deaconess Hospital - Needham. A first mortgage is provided on certain
core properties of these four campuses and is excluded from the definition of
INTEREST RATE DERIVATIVES: none
*Operating performance through nine months FY 2011 is on budget with operating
margin of 1.6% and operating cash flow margin of 7.6%. Although these results
are weaker than the prior year, FY 2010 was a stronger year due to large growth
in admissions at Beth Israel Deaconess Medical in that year. Balance sheet
measures have improved since our last review with approximately 150 days cash
on hand and 140% cash-to-debt through nine months FY 2011.
*Good market share in Boston with second place market share behind Partners
(rated Aa2 with a stable outlook) anchored by the system's academic medical
center, Beth Israel Deaconess Medical Center
*Construction projects at Mount Auburn Hospital and New England Baptist Hospital
funded with Series 2008 bonds have opened; no additional debt planned, although
management previously has stated the need for a master facility plan review at
BIDMC, which could lead to significant spending or additional debt
*Fixed rate debt structure with no derivatives
*New CEO recently named and is expected to start in October 2011 following the
prior CEO's unexpected resignation in January 2011
*The system's two defined benefit pension plans were underfunded by $127 million
at FYE 2010 and will require increased contributions over the next several
years; we note that CareGroup had maintained a funding ratio of over 100% for
several years until changes in the discount rate and losses on plan assets
reduced the funded status to 74% at FYE 2010 (funded status based on PBO)
*Sizeable operating lease expense of over $50 million annually; when converted
to a debt equivalent, FY 2010 maximum annual debt service (MADS) coverage falls
to 2.7 times from 4.2 times; we note that a significant portion of lease expense
is for core research space
*Reliance on BIDMC, the clinical and financial flagship of the system, which
represents over 70% of system revenues; any changes to performance at BIDMC
disproportionately affects system results
CareGroup is refinancing approximately $119 million of Series A bonds with a
direct loan from JP Morgan. The JP Morgan loan does not introduce any new
covenants and does not materially change the debt service schedule. The JP
Morgan loan will have three tranches: Series F-1, $40.3 million due July
2016; Series F-2, $13.6 million due July 2017, and Series F-3, $66.4 million
maturing July 2022. All of the Series F bonds will be fixed rate.
The refinancing lowers the interest rate on the fixed rate bonds and is
being done for cash flow savings. Maximum annual debt service is projected to
decline by approximately $2 million to $55 million resulting in modest
improvement in MADS coverage ratios.
See our report dated February 9, 2011 for more information.
The positive outlook is attributable to CareGroup's good operating
performance in FY 2010 and our expectation that the system will continue to
maintain adequate margins and strengthen the balance sheet over the near term.
What could change the rating--UP
Further growth in balance sheet metrics; maintenance of good
operating performance; maintenance of market share
What could change the rating--DOWN
Decline in operating performance or balance sheet strength, in
particular weakened performance at the flagship, BIDMC; loss of market share;
additional debt without commensurate growth in revenue
Assumptions & Adjustments:
-Based on financial statements for CareGroup, Inc. and Subsidiaries
-First number reflects audit year ended September 30, 2009
-Second number reflects audit year ended September 30, 2010
-Investment returns normalized at 6% unless otherwise noted
-Interest expense "grossed up" to account for capitalized interest by
$3.6 million in FY 2009 and $519,000 in 2010
-FY 2010 MADS reduced to $55.0 million to reflect pro-forma MADS
*Inpatient admissions: 57,918; 59,394
*Total operating revenues: $2.170 billion; $2.301 billion
*Moody's-adjusted net revenue available for debt service: $195.2 million; $244.3
*Total debt outstanding: $674.3 million; $651.6 million
*Maximum annual debt service (MADS): $58.4 million; $57.7 million
*MADS Coverage with reported investment income: 2.9 times; 3.9 times
*Moody's-adjusted MADS Coverage with normalized investment income: 3.3 times;
*Debt-to-cash flow: 4.2 times; 3.1 times
*Days cash on hand: 128 days; 143 days
*Cash-to-debt: 107%; 129%
*Operating margin: 0.8%; 2.4%
*Operating cash flow margin: 7.0%; 8.4%
RATED DEBT (debt outstanding as of September 30, 2010)
-Series H (Beth Israel Hospital Issue); fixed rate ($5.8 million outstanding);
-Series A (CareGroup Issue); fixed rate ($177.4 million outstanding); rated A3.
Approximately $119 million to be refinanced with direct loan from JP Morgan
-Series B (CareGroup Issue); fixed rate ($74.1 million outstanding); rated A3
-Series D (CareGroup Issue); fixed rate ($42.8 million outstanding); rated A3
-Series E (CareGroup Issue); fixed rate ($350.0 million outstanding); rated A3
Obligor: John T. Szum, EVP and Chief Financial Officer, CareGroup, 617-667-1881
The last rating action with respect to CareGroup was on February 9, 2011, when
the A3 rating was affirmed and the outlook changed to positive from negative.
The principal methodology used in this rating was Not-for-Profit Hospitals and
Health Systems published in January 2008. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
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Public Finance Group
Moody's Investors Service
Kimberly S. Tuby
Public Finance Group
Moody's Investors Service
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MOODY'S AFFIRMS CAREGROUP'S (MA) A3 DEBT RATING IN CONJUNCTION WITH DIRECT BANK LOAN REFINANCING $119 MILLION OF SERIES A BONDS; OUTLOOK REMAINS POSITIVE
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