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13 Dec 2013
$299 million of rated debt
New York, December 13, 2013 -- Moody's Investors Service has downgraded UMass Memorial Health Care's
rating to Baa3 from Baa1. The rating remains under review for downgrade.
The downgrade reflects multi-year deterioration of operating performance
and debt service coverage that accelerated in FY 2013, timing variability
in receipt of supplemental Medicaid funding resulting in a period of thinner
liquidity, and forecasted breach of bank debt financial covenants
during FY 2014 which could result in acceleration of debt. During
the review period we will focus on revisions to debt financial covenants
as well as the system's ability to improve quarterly operating performance
through expense containment measures as well as growth of revenue.
SUMMARY RATING RATIONALE:
The Baa3 rating reflects the sharp decline in operating performance in
FY 2013 that follows a recent history of eroding margins, exacerbated
by pronounced and immediate debt structure and covenant issues (projected
breach of debt service coverage covenant for bank debt at March 31,
2014 which could result in acceleration). The decline in performance
reflects a largely unionized work force, decline in patient volumes,
high Medicaid exposure, and growth of expenses. The system
has also recently transitioned to a new senior management team with an
interim CFO; the new management team is tasked with a multitude of
strategies to improve financial performance. The Baa3 rating benefits
from the system's role as a large and diversified health system
serving central Massachusetts and the Medical Center's important
role as an academic medical center affiliated with University of Massachusetts
Medical School (University of Massachusetts system rated Aa2).
We are maintaining the rating under review at the Baa3 rating given immediate
negotiations and strategies management is embarking upon to resolve the
debt structure issues and avoid future breach of debt financial covenants.
*The system's operating performance and debt service coverage
have steadily weakened over a multi-year period, with very
thin operating cash flow in FY 2013 (2.5%, based on
draft FY 2013 financial statements). Although the new senior leadership
team has laid out steps for improving performance, we expect this
will take time and an operating deficit and thin cash flow margin are
budgeted for FY 2014.
*The system's debt documents (bonds as well as bank debt) contain
a debt service coverage covenant, which could be breached as a result
of weak operating performance and variable timing of the Medicaid funding.
Breach of the debt service coverage covenant could result in acceleration
of debt, and given current ratio calculation management forecasts
a breach of the bank debt service coverage covenant as of the March 31,
2014 reporting date. Management is working with the banks to revise
the covenant calculation methodology.
*The Medical Center has very high exposure to Medicaid (19.4%
gross payer mix in FY 2013) and relies on the receipt of Supplemental
Medicaid Funding which is appropriated by the Commonwealth annually ($45-48
million net revenue received annually after adjusting for contractual
obligations to the University of Massachusetts Medical School).
Absent this funding, operating performance would be much weaker
and in recent years the timing of receipt of the funding has been variable
and resulted in depressed end-of-year liquidity for the
*The system's comprehensive debt (which includes unfunded pension
liability and operating leases) was $773 million in FY 2013,
much higher than direct debt. Although the defined benefit pension
plan is large and underfunded, the obligation was reduced significantly
during FY 2013 as a result of union negotiations as well as an increased
discount rate ($153 million liability in FY 2013, down from
$337 million in FY 2012).
*A large unionized employee base places some limitations on expense
flexibility. In spring 2013 the Medical Center came close to but
averted a nursing strike, resulting in approximately $10
million of additional costs and lost revenue due to hiring of nurse replacements
and reduced occupancy in the hospital. The new contract with the
nursing union extends through May 2015.
*The system is large and diversified, including the academic
medical center which serves as a safety net healthcare provider for central
Massachusetts as well as several other community hospitals. The
entire system had approximately $2.2 billion of operating
revenue in FY 2013 (unaudited). Market share in the Worcester area
remains dominant (61% combined volume market share for the Medical
Center and member hospitals).
*The Medical Center maintains a close working relationship with the
affiliated University of Massachusetts Medical School (University of Massachusetts
System rated Aa2). The medical school and the University campus
of UMass Memorial (one of two main hospital sites of the Medical Center)
are housed on the same campus in Worcester and share some physical space.
*The system has a relatively low amount of direct debt outstanding
given its large size (direct debt-to-revenue of 19%
and cash-to-debt of 130% estimated in FY 2013).
The rating remains under review reflecting the multitude of challenges
which could impede the turnaround in performance of this large and complex
health system, coupled with forecasted breach of debt financial
covenants during the current fiscal year based on current covenant definitions.
WHAT COULD MAKE THE RATING GO UP
Although a rating upgrade is unlikely near term, the outlook could
return to stable over the medium term if the system builds headroom under
financial covenants and is able to achieve steady improvement in operating
cash flow and liquidity. The rating could be upgraded longer term
as a result of stabilization of patient volumes and sustained improvement
in operating cash flow coupled with balance sheet strengthening.
WHAT COULD MAKE THE RATING GO DOWN
The rating could be downgraded if bank debt financial covenants are not
revised to improve headroom or strategic initiatives are insufficient
to return the system to positive operating performance and much stronger
operating cash flow. Other factors which could contribute to a
downgrade include declining liquidity or discontinuation of Supplemental
Medicaid Funding from the Commonwealth.
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
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
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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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Kimberly S Tuby
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
60 State Street
Boston, MA 02109
Associate Managing Director
Public Finance Group
Moody's downgrades UMass Memorial Health Care (MA) to Baa3; rating under review for downgrade
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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