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Rating Action:

Moody's affirms Memorial Hospital at North Conway's (NH) Baa3; outlook stable

10 Dec 2013

$18.7 million of rated debt outstanding

New York, December 10, 2013 -- Moody's Investors Service has affirmed the Baa3 rating assigned to Memorial Hospital at North Conway's (Memorial) $19.1 million of rated debt outstanding issued by New Hampshire Health & Education Facilities Authority, NH. The rating outlook remains stable. The affirmation is based on Memorial's continued good financial performance, its position as a critical access hospital with distinctly leading market share and its anticipated membership in MaineHealth.

SUMMARY RATING RATIONALE

The affirmation of the Baa3 bond rating reflects Memorial's continued good financial performance and balance sheet growth and maintenance of good debt service coverage. The affirmation is also supported by its strong market position, critical access designation and benefit from the state's provider tax and Medicaid disproportionate share program. The stable outlook reflects Memorial's anticipated January 1, 2014 membership in MaineHealth and the benefits this small sized hospital will likely realize as being part of a larger, albeit decentralized, organization. We anticipate that the benefits of this new relationship will help address the seasonality of the hospital's volumes, its small size making it vulnerable to financial variability and physician departures, and any future change to the critical access enhanced reimbursement.

STRENGTHS

*Memorial is designated a critical access hospital which provides for enhanced reimbursement under Medicare and therefore greater financial stability than other hospitals of similar size.

*Memorial has distinctly leading market share of approximately 80% (according to management) in its geographically protected primary service area with limited competition. Its market share has remained consistent over the last several years.

*In fiscal years 2011 to 2013 Memorial benefitted from the state Medicaid disproportionate share (DSH) funding equating to a net benefit of $3.2 million in fiscal year 2013 and 2012 and $2.4 million in FY 2011. In FY 2014, the net benefit is expected to improve to $3.4 million. Management is budgeting to be DSH independent as this funding source is expected to gradually decline with healthcare reform.

*Memorial has a pending agreement to become a member of MaineHealth by the end of calendar year 2013 which is expected to create benefits through economies of scale, enhanced services and a standard electronic medical record.

*In FY 2013 Memorial reported good operating performance, though down from the prior year, with an operating margin of 1.6% and an operating cash flow margin of 9.0%. The Baa3 median operating margin is 1.2% and median operating cash flow margin is 7.9%.

*Memorial's balance sheet position continued to improve at fiscal year end (FYE) 2013 to 180 days cash on hand from 169 days at FYE 2012. The position is favorable to the Baa3 median of 133 days cash.

*Memorial employs the majority of the physicians in the service area (approximately 30 physicians) which provides some stability given the vulnerabilities the hospital faces with its small size and revenue base and seasonal volumes.

*Memorial has all fixed rate debt and defined contribution pension plan which limits pressure on balance sheet resources.

CHALLENGES

*Memorial is a small community hospital with just under 1,500 admissions and $63 million in operating revenue in FY 2013 compared to Baa3 median admissions of 10,918 and operating revenue of $247 million, making it vulnerable to physician departures and financial variability. The hospital also is heavily reliant on summer and winter tourism months for annual profitability.

*Memorial depends on its top ten admitting physicians for a high concentration of admissions (approximately 90%), although as mentioned above most of these physicians are employed which limits changes in referral patterns and minimizes physician departures.

*In fiscal years 2012 and 2013 Memorial was reliant on DSH funding for profitability as the net benefit was 229% and 320% of operating income, respectively. Management is budgeting to be DSH independent in FY 2014.

*Memorial is susceptible to legislative changes to the critical access reimbursement model and with sequestration saw reimbursement reduced from 101% of cost to 100% of cost. Elimination of this program could also be a part of future deficit reduction strategies; although there is strong support for rural healthcare which makes elimination politically unpopular.

OUTLOOK

The stable rating outlook is supported by our expectation of continued good operating performance given the benefits expected from membership with MaineHealth and other initiatives put in place in FY 2013 and the continuation of addition DSH revenue in FY 2014. Furthermore, with good cash flow, no new debt plans and manageable capital spending, debt service coverage metrics and balance sheet measures should continue to improve.

WHAT COULD MAKE THE RATING GO UP

A rating upgrade would be considered if Memorial's volumes grow materially leading to an increase in the size of the enterprise while maintaining strong operating performance and grow balance sheet measures.

WHAT COULD MAKE THE RATING GO DOWN

A rating downgrade will be considered if the downturn in operating performance continues throughout FY 2014 and leads to softer debt coverage ratios and weaker balance sheet metrics. Detrimental change to the critical access program would also be a consideration.

The principal methodology used in this rating was Not-for-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jennifer Ewing
Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lisa Goldstein
Associate Managing Director
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Memorial Hospital at North Conway's (NH) Baa3; outlook stable
No Related Data.
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