AFFIRMATION AFFECTS TOTAL OF $408 MILLION OF RATED DEBT OUTSTANDING
Vermont Educational & Hlth. Bldgs. Fin. Agy.
NEW YORK, Mar 15, 2011 -- Moody's Investors Service has affirmed the Baa1 rating assigned to
Fletcher Allen Health Care's (FAHC) bonds (see debt list at end of report). The
outlook remains stable.
RATINGS RATIONALE: The affirmation of the Baa1 rating is attributable to FAHC's
dominant market share in Vermont and adequate operating results, despite a drop
in patient volume in FY 2010.
LEGAL SECURITY: Pledge of gross receipts of the obligated group, of which
Fletcher Allen Health Care, Inc. is the sole member. Mortgage pledge is provided
on Medical Center campus property. Rate covenant: 1.1 times; Additional bonds
require compliance with certain tests; Debt service reserve fund.
INTEREST RATE DERIVATIVES: FAHC has three swaps outstanding. The first, which
relates to the Series 1994 bonds, has a notional amount of $13.7 million. The
counterparty is Lehman Brothers and as of the date of Lehman's bankruptcy, the
swap had a negative mark-to-market value of $815,000 to FAHC. It is possible
that as a result of the bankruptcy, FAHC would have to pay this amount to settle
the swap. We do not believe this would be material to FAHC's credit.
The other two swaps each have a notional amount of $27.6 million and expire in
2030. FAHC pays a fixed rate of 3.76% and receives a LIBOR based floating rate.
The counterparty to each swap is Citibank. The swaps are insured by FSA.
Collateral posting required, with no threshold level, if FSA is rated below A3.
*Important role as only tertiary hospital and academic medical center and
provision of unique services within its primary and secondary service areas
translates into a dominant market share of 99% in the primary service area and
over 60% throughout Vermont and adjacent areas of New York
*Multi-year trend of favorable operating performance, particularly operating
cash flow (operating cash flow margin in excess of 9.0% since FY2005)
*FAHC recently finished installing a new IT system. The hospital and all
physician offices are now on the same IT system (Epic)
*Affiliation agreement with University of Vermont was renewed for five years
through August 2015
*Several capital projects are under consideration including the conversion of
the existing campus to 80% single beds and upgrades to various patient care
facilities. Total costs currently estimated at $160 million with the expectation
that the projects will be partly debt financed.
*Inpatient volumes have been flat or declining the last two years. FY 2010
admissions and observation stays were down 1.1% and surgical volumes have been
flat the last several years
*Defined benefit pension currently funded at 76% ($32 million underfunded)
*Flat population trends in Vermont require FAHC to seek volume growth by
increasing patient referrals from smaller regional hospitals in Vermont and
parts of New York
Patient volumes were soft in FY 2010, and below budget contributing to lower
revenue growth than in previous years (4.4% in FY 2010; average 7.1% preceding
three years). Admissions were down 1.8%, which was partly offset by growth in
observation stays for combined admission and observation stay decline of 1.1%.
Patient volumes were negatively impacted by an implementation of a new IT system
in physician clinics which reduced physician productivity and a dispute with New
York State Medicaid over reimbursement levels. Both issues have been
resolved, and management is budgeting for patient growth in FY 2011.
Overall, operating profitability was similar to recent years with operating
margin of 2.1% and operating cash flow of $83.4 million (9.1% margin), which was
slightly above the $78.7 million (9.0%) recorded in FY 2009. The balance sheet,
which has long been the organization's weakest point, continued to improve with
cash to debt growing to 66% from 58% at FYE 2009 and days cash on hand improving
to 116 days from 108 days.
FAHC is currently considering several capital projects to redesign and relocate
patient care areas and convert the majority of semi-private rooms to private.
Projects currently under consideration are estimated to cost $160 million and
although a portion is expected to be debt financed, the entire capital plan and
plan of finance is still being determined and financing is not anticipated to
occur prior to 2014 at the earliest.
In December 2010, FAHC announced its intention to affiliate with Central Vermont
Medical Center (CVMC). The two hospitals would create a parent organization that
over time would undertake strategic planning, and issue debt, in addition to
various other activities. CVMC has a revenue base of $138 million, is
profitable, and has cash to debt and days cash on hand ratios similar to that of
FAHC. We do not believe an affiliation of the two organizations would be
materially dilutive to FAHC's financial metrics. Over time, the
affiliation could be beneficial to FAHC's credit if it is able to increase
referrals and patient volumes, or generate cost saving efficiencies.
FAHC has a relatively conservative debt structure and balance sheet. Only 15% of
debt is variable rate, the majority of which is the Series 2008A VRDB's backed
by a Letter of Credit from TD Bank, expiring in April 2014. The balance of debt
is fixed rate. Investments have a fairly typical allocation with approximately
31% equities, and nearly all the balance in cash and fixed income. The pension
is 76% funded on a PBO basis with a manageable $32 million liability. Use of
operating leases is moderate and does not materially impact leverage ratios when
converted to a debt equivalent; annual lease expense is $11.5 million.
The stable outlook reflects FAHC's stable operating results, strong market
share, and our expectation that the organization will continue to strengthen the
balance sheet over the near term.
What could change the rating--UP
Maintenance of current levels of operating performance; growth in patient
volumes; strengthening of balance sheet metrics
What could change the rating--DOWN
Further decline of patient volumes; weakening of operating performance leading
to weaker debt coverage or balance sheet metrics; additional debt without
commensurate cash flow growth
Assumptions & Adjustments:
-Based on financial statements for Fletcher Allen Health Care, Inc. and
-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
*Inpatient admissions: 23,155; 22,744
*Total operating revenues: $874.7 million; $912.2 million
*Moody's-adjusted net revenue available for debt service: $93.1 million; $100.0
*Total debt outstanding: $418.5 million; $409.6 million
*Maximum annual debt service (MADS): $28.2 million; $28.2 million
*MADS Coverage with reported investment income: 2.5 times; 3.9 times
*Moody's-adjusted MADS Coverage with normalized investment income: 3.3 times;
*Debt-to-cash flow: 5.8 times; 5.1 times
*Days cash on hand: 108 days; 116 days
*Cash-to-debt: 58%; 66%
*Operating margin: 2.3%; 2.1%
*Operating cash flow margin: 9.0%; 9.1%
RATED DEBT (debt outstanding as of September 30, 2010)
-Series 1994; Auction Rate ($8.3 million outstanding) underlying rating of Baa1;
insured by FGIC
-Series 2000A; fixed rate ($94.4 million outstanding) underlying rating of Baa1;
insured by Ambac
-Series 2004A; fixed rate ($39.4 million outstanding) underlying rating of Baa1;
insured by FGIC
-Series 2004B; fixed rate ($155.0 million outstanding) underlying rating of
Baa1; insured by FSA
-Series 2007A; fixed rate ($56.3 million outstanding) underlying rating of Baa1
-Series 2008A; VRDO ($54.7 million outstanding) underlying rating of Baa1;
two-party pay rating of Aaa/VMIG 1; LOC provided by TD Banknorth, expires
Obligor: Roger Deshaies, Chief Financial Officer, FAHC, (802) 847-9975
Underwriter: Michael Irwin, Citi, (212) 273-5624
The last rating action with respect to FAHC was on June 8, 2009, when the
municipal finance scale rating of Baa1/stable was affirmed. That rating was
subsequently recalibrated to Baa1/stable on May 7, 2010.
The principal methodology used in this rating was Not-for-Profit Hospitals and
Health Systems published in January 2008.
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Moody's Investors Service
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MOODY'S AFFIRMS FLETCHER ALLEN HEALTH CARE'S (VT) Baa1 DEBT RATING; OUTLOOK REMAINS STABLE
Moody's Investors Service
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