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Rating Update:

MOODY'S AFFIRMS SOUTHCOAST HOSPITAL'S (MA) A2 DEBT RATING; OUTLOOK REMAINS STABLE

10 May 2011

AFFIRMATION AFFECTS TOTAL OF $163 MILLION OF RATED DEBT OUTSTANDING

Massachusetts Health & Educ. Fac. Auth
Health Care-Hospital
MA

Opinion

NEW YORK, May 10, 2011 -- Moody's Investors Service has affirmed the A2 rating assigned to Southcoast Hospital's bonds issued by the Massachusetts Health and Educational Facilities Authority (see debt list at end of report). The outlook remains stable.

RATINGS RATIONALE

The A2 rating is attributable to Southcoast's stable operating performance and sizeable balance sheet. Although operating margins are below the median for A2 rated organizations, leverage metrics and balance sheet measures are strong.

STRENGTHS

*Leading market share of 65% in the primary service area and 44% in the broader two county service area; patient volume growth was very strong in FY 2010 with inpatient admissions growing 6.9% to 37,607 and further growth of 15.0% through the first quarter of FY 2011

*Strong balance sheet with pro-forma 246 days cash on hand and 255% cash-to-debt

*Construction of Fairhaven Cancer Center proceeding on time/budget and expected to open Summer 2011

*Defined contribution pension removes risk that additional contributions will need to be made due to recent market declines

*Strong market position with 44% market share across the system's three markets

CHALLENGES

*Challenging payer mix that includes nearly 20% Medicaid exposure, approximately half of which are insurance products obtained through the Commonwealth Connector

*Unlikely that patient volume gains will continue given that population growth in the area is minimal and competition exists in the Fall River market from St. Anne's (a for-profit provider owned by Steward Healthcare)

*Historically weak operations with operating cash flow margin between 5% and 7%

DETAILED CREDIT DISCUSSION

LEGAL SECURITY: The bonds are secured by a joint and several gross receipts pledge of the obligated group which consists of the Hospitals Group, the Parent, Southcoast Physician Services, Inc., Southcoast Primary Care, Inc. and the Visiting Nurse Association of Southeastern Massachusetts, Inc. These entities represent over 90% of system revenues and assets. A mortgage pledge is in place except for the main campus of Tobey Hospital. Unless otherwise indicated, all financial indicators reflect system results.

INTEREST RATE DERIVATIVES: Southcoast entered into an interest rate swap agreement on $15 million of the Series 2004B bonds under which it pays a fixed rate in exchange for a variable rate based on a percent of LIBOR. The counterparty is Goldman Sachs. The collateral posting threshold for Southcoast is $3 million; there is no collateral currently posted.

RECENT DEVELOPMENTS/RESULTS

Operating performance in FY 2010 continued Southcoast's trend of stable margins. Operating cash flow of $43.6 million (6.3%) was in line with previous years and leverage metrics remained strong with Moody's adjusted MADS coverage of 5.8 times improving slightly from 5.4 times in FY 2009. Patient utilization growth has been strong the last two years with adult acute admissions growing 5.7% in FY 2010 and 9.5% in FY 2009 with growth across all DRG's. Long term, we do not believe substantial growth will continue as population growth in Southcoast's market is low and the health system already offers a wide range of services limiting overall outmigration.

Management reports that construction of the Fairhaven cancer center is proceeding on time and budget and will open in summer 2011. The cancer center will be the primary site of the system's expanded oncology program which is being developed in collaboration with MD Anderson Physicians. The center was financed with proceeds of the 2009D bonds.

Southcoast's balance sheet remains strong with 246 days cash on hand and 255% cash-to-debt at FYE 2010. Liquidity is strong with only $50 million exposure to illiquid investments across a portfolio of restricted and unrestricted investments totaling nearly $500 million. Southcoast does not have a defined benefit pension plan.

Outlook

The stable outlook is attributable to Southcoast's stable operating performance and sizeable balance sheet.

WHAT COULD MAKE THE RATING GO UP

Sustained improvement in operating cash flow margin; material growth in patient volumes and revenue

WHAT COULD MAKE THE RATING GO DOWN

Depressed operating cash flow margins, volume pressures, investment losses, additional debt

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for Southcoast Health System, Inc. and Affiliates

-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: 35,302; 37,607

*Total operating revenues: $668.7 million; $697.1 million

*Moody's-adjusted net revenue available for debt service: $65.4 million; $70.2 million

*Total debt outstanding: $123.3 million; $174.3 million

*Maximum annual debt service (MADS): $12.1 million; $12.1 million

*MADS Coverage with reported investment income: 3.1 times; 5.2 times

*Moody's-adjusted MADS Coverage with normalized investment income: 5.4 times; 5.8 times

*Debt-to-cash flow: 2.0 times; 2.7 times

*Days cash on hand: 218 days; 246 days

*Cash-to-debt: 305%; 256%

*Operating margin: 1.1%; 0.6%

*Operating cash flow margin: 6.4%; 6.3%

RATED DEBT (debt outstanding as of September 30, 2010)

-Series 1998A; fixed rate ($59.4 million outstanding) rated A2, also insured by MBIA

-Series 2008C; VRDB ($47.4 million outstanding) rated A2, LOC provided by Bank of America, expires June 8, 2013

-Series 2009D; fixed rate ($56.1 million outstanding) rated A2

CONTACT

Obligor: Bill Grigg, Chief Financial Officer, (508) 961-5016

The last rating action with respect to Southcoast was on September 16, 2009, when a municipal finance scale rating of A2 with a stable outlook was assigned to the Series 2009D bonds. That rating was subsequently recalibrated to A2 with a stable outlook on May 7, 2010.

The principal methodology used in this rating was Not-for-Profit Hospitals and Health Systems published in January 2008.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Daniel Steingart
Analyst
Public Finance Group
Moody's Investors Service

Lisa Goldstein
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S AFFIRMS SOUTHCOAST HOSPITAL'S (MA) A2 DEBT RATING; OUTLOOK REMAINS STABLE
No Related Data.
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