AFFIRMATION AFFECTS TOTAL OF $163 MILLION OF RATED DEBT OUTSTANDING
Massachusetts Health & Educ. Fac. Auth
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
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.
*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
*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.
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.
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,
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
*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;
*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
-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
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.
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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
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Moody's Investors Service
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MOODY'S AFFIRMS SOUTHCOAST HOSPITAL'S (MA) A2 DEBT RATING; OUTLOOK REMAINS STABLE
Moody's Investors Service
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