|[April 23, 2012]
Fitch Rates Berkshire Health System's (MA) Revs 'BBB+'; Affs Outstanding; Outlook Revised to Stable
NEW YORK --(Business Wire)--
Fitch Ratings has assigned a 'BBB+' rating on the expected issuance of
approximately $92.5 million of Massachusetts Development Finance Agency
(Berkshire Health System), series G (2012) revenue bonds.
In addition, Fitch affirms the following parity debt issued on behalf of
Berkshire Health System (BHS) at 'BBB+':
--$33,730,000 Massachusetts Health and Educational Facilities Authority
revenue bonds (Berkshire Health System), series F (2005);
--$60,835,828 Massachusetts Health and Educational Facilities Authority
revenue bonds (Berkshire Health System), series E (2001).
The Rating Outlook is revised to Stable from Negative.
The series 2012G bonds are expected to be issued as fixed-rate bonds
with a final maturity in 2031. BHS is considering using bond insurance
for the series 2012G from Assured Guaranty Municipal Corp., which Fitch
does not rate. Proceeds of the series 2012G bonds will refund BHS's
series 2001E, restructure the variable series 2009A and B (not rated by
Fitch), reimburse BHS for $6.8 million of new money projects and pay for
cost of issuance. As currently planned, the 2012G series will not have a
debt service reserve fund. The restructuring of the series 2009A and B
debt will enable the system to avoid a balloon payment in 2019. The
refinancing of the series 2001A bonds is expected to generate present
value savings. The series 2012G bonds are expected to sell via
negotiation the week of May 7.
Pro forma maximum annual debt service (MADS) of $12 million occurs in
2013 and is slightly less than current MADS of $12.4 million.
Debt payments are secured by a pledge of the gross revenues of the
obligated group and a mortgage pledge on the core Berkshire Medical
Center (BMC) campus The legal requirements will include a liquidity
covenant of 65 days cash on hand (DCOH). The BHS obligated group
represents 97% of the BHS 2011 assets and 93% of revenues.
KEY RATING DRIVERS
IMPROVED OPERATING PERFORMANCE: The revision of the Outlook to Stable is
based on BHS's return to solid operating performance in fiscal 2011,
which is in line with Fitch's 'BBB' category medians. Performance
through the five-month interim period ended Feb. 29, 2012 showed further
significant improvement in core operating profitability with a 2.6%
operating margin and 9.6% operating EBITDA margins. However, actual
results are much better at 6.2% and 13%, respectively, due to a wage
index adjustment that favorably affected some Massachusetts hospitals.
DOMINANT MARKET SHARE: BHS maintains a dominant presence as the only
provider in its primary service area (source of approximately 90% of
admissions), which includes most of Berkshire County and portions of
eastern New York State, commanding market share of 84%. Its only
competitor in Berkshire County, North Adams Regional Hospital (NARH) in
North Adams, holds 1% market share of BHS's primary service area and is
in bankruptcy reorganization.
SOLID LIQUIDITY: Liquidity has consistently continued to improve, with
DCOH of 175.5, 14.6 times (x) cushion ratio and cash equal to 136% of
debt at Feb. 29, 2012, all comparing favorably to the respective 'BBB'
category medians of 128.6 DCOH, 8.8x cushion ratio and 79.8% cash to
CONSERVATIVE DEBT STRUCTURE: The 2012 issuance will result in BHS having
all fixed-rate debt, with a slight decrease in MADS. Additionally, the
restructuring of the variable series 2009 A and B will eliminate a
balloon payment of close to $30 million due in 2019. BHS has a moderate
debt burden, and MADS coverage by EBITDA improved from 3.8x in fiscal
2011 to 5.1x through the interim period.
WHAT COULD TRIGGER A RATING ACTION
The Stable Outlook is based on Fitch's expectation that BHS will
continue to maintain a solid financial profile. Upward rating movement
would be dependent on sustaining current improved operating performance,
which would further build its liquidity position.
The decision to affirm the rating and to revise the Outlook to Stable is
based on BHS's return to solid operating performance in fiscal 2011 and
a further improvement in operations for the interim period ended Feb.
29, 2012. Issues affecting the 2009 through 2010 fiscal years, i.e.
difficulty replacing a specialist and a threatened nursing strike, have
been successfully resolved. BHS signed a new three-year nursing union
contract in May 2011 and management reports no major physician
recruitment needs at the present. BMC suffered from a decline in
admissions in 2010 due to the loss of a key neurologist; the hospital
now has a full complement of neurologists (7).
IMPROVED OPERATING PERFORMANCE
Results for fiscal 2011 (year end Sept. 30) were a solid reversal of the
challenging prior fiscal year, which saw a 5% drop in revenues and a
$9.1 million operating loss. BHS recorded operating income of $6.4
million equating to an operating margin of 1.6% and operating EBITDA
margin of 9.4%, and exceeding the 2011 budget of $2.1 million. The
improved performance was a result of a return in volume and ongoing cost
Through the interim period ended Feb. 29, 2012, core operating
profitability continued to improve as a result of the implementation of
lean and six-sigma processes. Additionally, BHS benefited from a wage
index adjustment that affected Massachusetts hospitals, which increased
revenues by $6.7 million. While it is unclear as to whether the wage
adjustment will be in effect permanently, it is management's opinion
that it is likely to remain at the current level through fiscal 2013. A
full-year impact of the wage adjustment for the 2012 fiscal year is
estimated at $14 million. However, management has not included this
funding in its 2012 budget and does not plan to include it in the 2013
DOMINANT MARKET SHARE
BHS continues to maintain its dominant market position in its primary
service area (PSA). The PSA market share may have increased slightly
from the 84% reported for 2010, which is the most recently available
state data, as a result of growth in admissions of 2.5% in fiscal 2011
and a robust 13% through the interim period. Market share of the primary
and secondary service areas combined, which also includes north
Berkshire County and portions of Vermont, northern Connecticut and New
York, was 81.6% in 2010. Its only competitor in the combined service
area is NARH, 23 miles north of Pittsfield, with an 18.6% market share,
which is currently in the process of a bankruptcy reorganization.
BHS's service area, which includes Berkshire County and parts of
Rensselaer and Columbia Counties in New York, is viewed by Fitch as a
credit weakness. Berkshire County is characterized as having stable, but
older demographics, but unemployment has shown some improvement and was
most recently reported at 7.3%, down from 8.7% a year ago. However, the
area attracts a significant number of tourists and second-home owners.
SOLID LIQUIDITY AND MODEST DEBT BURDEN
Liquidity has shown consistent growth over the last three years and
unrestricted cash and investments have increased to $173.9 million at
the end of the interim period from $126 million at 2009 year-end and are
equal to 175.5 DCOH, 14.6x cushion ratio and 136% cash to debt, all
exceeding Fitch's 'BBB' category medians of 128.6 days, 8.8x cushion and
79.8% cash to debt.
BHS's debt burden is relatively light with MADS equal to 2.8% of
revenues and coverage of MADS by EBITDA was a solid 3.8x in fiscal 2011
and 5.1% through the interim period (3.8x excluding the wage index
adjustment), favorable to the 'BBB' median of 2.6x.
BHS does not have significant capital needs for the next couple of
years, which should enable it to further build its balance sheet.
Relocation of oncology to a dedicated cancer center at the BMC
Pittsfield Hillcrest campus is currently being planned and will be
funded with BHS internal funds and philanthropy. BHS is investing in the
conversion of additional patient rooms to private rooms at the main BMC
campus, which is being funded from operating cash flow. A potential
replacement facility for the Fairview campus in Great Barrington is
being explored. No firm plans for the timing or the sources of funding
for the $22 million-$24 million potential cost of this project have been
made as of this time.
Berkshire Health System operates two acute care hospitals: Berkshire
Medical Center in Pittsfield, MA (40 miles east of Albany) with 284
available acute care beds, and Fairview Hospital in Great Barrington
(MA), 20 miles south of Pittsfield, a critical access hospital with 24
available acute care beds. Berkshire had $397 million in total operating
revenue in fiscal 2011. BHS covenants to provide annual and quarterly
financial disclosure through the MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 20, 2011;
--'Nonprofit Hospitals and Health Systems Rating Criteria', Aug. 12,
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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