July 2, 2012 / 8:36 PM / in 5 years

TEXT-Fitch affirms Winchester Hospital, Mass. revs

July 2 - Fitch Ratings has affirmed the rating on the following revenue bonds issued by the Massachusetts Health and Educational Facilities Authority, on behalf of Winchester Hospital (Winchester) at ‘BBB+': --$77.7 million series 2010H. The Rating Outlook is Stable. KEY RATING DRIVERS: --LEADING MARKET SHARE IN A FAVORABLE SERVICE AREA: Winchester maintains a stable and leading 22.5% market share in a very competitive service area with favorable demographics and a good payor mix. --CONSISTENT OPERATING PROFITABILITY: Operating profitability has been consistent with an average 2.3% operating margin since fiscal 2006 and equal to 1.9% in fiscal 2011 and 2% in the six-month interim period ending March 31, 2012 (the interim period). --SOLID LIQUIDITY METRICS: Winchester’s balance sheet is solid for the rating category with 154.8 days cash on hand, 15.2x cushion ratio, and 112% cash to debt at March 31, 2012 relative to Fitch’s ‘BBB’ category medians of 128.6 days, 8.8x and 79.8%. --MANAGEABLE DEBT BURDEN: The debt burden is manageable with maximum annual debt service (MADS) equal to 2.7% of revenue and MADS coverage equal to 2.8x EBITDA relative to Fitch’s ‘BBB’ category median of 2.6x. SECURITY: The bonds are secured by a gross revenue pledge and mortgage pledge. CREDIT SUMMARY: The ‘BBB+’ rating affirmation is supported by Winchester’s leading market position in a favorable service area, consistent operating profitability, solid liquidity metrics and a moderate debt burden. Winchester maintains a leading 22.5% market share in an affluent suburb of Boston with above average wealth indicators, and relatively low unemployment. Fitch views the service area characteristic as a credit positive. The favorable service characteristics are reflected in Winchester’s minimal exposure to Medicaid which accounts for a low 5.9% of gross revenues. However, the service area remains highly competitive which Fitch views as a continued credit concern. Winchester faces competition from local hospitals in addition to major academic medical centers located in Boston and further consolidation activity within its market may pose heightened competitive pressure. Operating profitability has been stable with operating margin averaging 2.3% since fiscal 2006 and equal to 1.9% in fiscal 2011 and 2% in the interim period. Management’s 2012 budget calls for system-wide operating margin to equal 1.9%. While stable, operating profitability remains light relative to Winchester’s ‘BBB+’ category peers. Fitch expects operating profitability to improve over the medium term due to its strategic capital investments, which should drive revenue growth. Unrestricted cash and investments increased 15% since fiscal 2011 to $123.1 million at March 31, 2012. This equates to a solid 154.8 days cash on hand, 15.2x cushion ratio, and 112% cash to debt relative to Fitch’s ‘BBB’ category medians of 128.6 days, 8.8x and 79.8%. The solid balance sheet provides solid cushion for timely payment of principle and interest. Additionally, Winchester’s debt burden remains manageable with $109.9 million of long-term debt outstanding as of March 31, 2012. The debt is 72% fixed rate and 28% variable rate. The $30.3 million of variable rate demand bonds are supported by a letter of credit that expires in 2015. MADS accounted for a light 2.7% of revenues in fiscal 2011, while debt to capitalization equaled a moderate 41.3%. The low debt burden and consistent profitability have generated consistent coverage metrics with MADS coverage averaging 2.9x since fiscal 2006 and equal to 2.8x in fiscal 2011. After a period of heavy capital spending, Winchester expects its capital spending to moderate to $18 million per year in the near to medium term. Capital spending equaled $33.8 million in fiscal 2011. Major capital projects that have been recently completed include a new cancer center and a new ambulatory surgical center. Future capital spending is expected to focus upon information technology, replacement capital and renovations. No new major capital projects are planned. The Stable Outlook reflects Fitch’s expectation that Winchester will maintain its consistent financial performance and solid liquidity metrics. Winchester Hospital is a 229 licensed bed community hospital located in Winchester, MA, approximately eight miles northwest of Boston. Total operating revenues equaled $299.7 million in fiscal 2011. Winchester covenants to provide annual disclosure no later than 120 days following the end of its fiscal year and quarterly disclosure no later than 45 days following the end of each fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board’s EMMA system.

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