Fitch Rates Concord Hospital's (NH) $45MM Series 2013 Revs 'A'; Outlook Stable

CHICAGO --(Business Wire)--

Fitch Ratings has assigned an 'A' rating to the New Hampshire Health and Education Facilities Authority's expected issuance of approximately $45 million revenue bonds, series 2013 (Concord Hospital and Subsidiaries). In addition, Fitch has affirmed the 'A' rating to the New Hampshire Health and Education Facilities Authority's approximately $107.2 million outstanding bonds issued on behalf of Concord Hospital and Subsidiaries'.

The Rating Outlook is Stable.

Proceeds of the series 2013 fixed-rate bonds will be used to refund the series 2001 bonds, finance improvements to its power plant, renovations to two nursing units, expand parking capacity and other routine capital expenditures, fund capitalized interest and pay certain costs of issuance. Maximum annual debt service (MADS) was calculated by the underwriter and is expected to be about $14.44 million for the period ending Oct. 1, 2013. Concord Hospital has a $2.8 million final payment for the series 2008 capital notes on May 1, 2013 and MADS will drop to $12.76 million in fiscal 2014. For purposes of this analysis, Fitch will use $14.44 million for MADS. The bonds are expected to sell via negotiation the week of Jan. 21, 2013.

KEY RATING DRIVERS

STABLE OPERATIONS DESPITE NEW HAMPSHIRE DSH CUTS: Despite New Hampshire's elimination of disproportionate share funding (DSH) in the middle of 2011 while continuing to collect a statewide Medicaid enhancement tax (MET) on hospitals, Concord was able to maintain stable operating results. After essentially breaking even on the program for a number of years, Concord paid $16.2 million for the MET while receiving no DSH funding from the state for fiscal 2012. Because of expense management, adherence to LEAN management philosophy and expansion of specialty service lines, profitability in fiscal 2012 held steady with a 3.4% operating margin and 10.4% operating EBITDA margin, both comparing favorably to the respective 'A' category medians of 2.8% and 9.8%.

LIQUDITY IMPROVING: Concord had $221.97 million in cash and unrestricted investments in fiscal 2012 (September 30 year-end), up 18% from fiscal 2011. This resulted in 212.6 days cash on hand and 179.7% pro forma cash to debt. However, Concord's defined benefit pension plan is only 63% funded, which could limit future liquidity growth. Concord is expected to make a cash contribution of $16 million to the plan in 2013.

STRATEGIC INITIATIVES CONTINUE: Strategic initiatives including an expanded physician alignment strategy, the development of specialty service lines, investment in information technology and plant, and participation in the Granite Healthcare Network's five hospital collaboration, created to better leverage intellectual and clinical resources, have contributed to Concord's solid financial profile with consistent operating results and improved liquidity metrics against 'A' category medians.

MANAGEABLE DEBT BURDEN: Pro forma MADS represents a manageable 3.4% of fiscal 2012 revenues. Pro forma MADS coverage in fiscal 2012 is 3.4x, which is below the 'A' category median of 4.1x, but following the final payment of revenue anticipation notes in 2013, MADS will decline to $12.76 million the following year, which will positively affect coverage.

LEADING MARKET SHARE POSITION: Concord has a dominant market share position in afavorable service area.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group.

CREDIT PROFILE

The 'A' rating reflects Concord Hospital's solid operating performance, improving liquidity position and leading market share position in a stable service area. The primary credit concern is competition for and alignment with area physicians.

Concord's consistent operating performance is supported by management's focus on cost control, its growth in acute care services, robust IT systems and the strength of its service area. Concord has benefited from its participation in the Granite Healthcare Network, a five-hospital regional collaboration which has formed a captive insurance company, established a common reference lab, common broker of record and advisor for health and welfare benefits, and developed medical management resources to support a risk-based/shared savings approach to insurance contracting. All of these factors contributed to Concord's ability to sustain solid operating performance in spite of New Hampshire's DSH cuts. The MET for fiscal 2013 is $16.5 million, which Concord has already paid.

Liquidity has continued to improve and now indicators meet or exceed 'A' category medians. At Sept. 30, 2012 (fiscal 2012 year-end) Concord had $221.97 million in unrestricted cash and investments, equating to 212.6 days cash on hand and 179.7% pro forma cash to debt, exceeding the respective 'A' category medians of 191 days and 11.6%. Pro forma cushion ratio of 15.4x during the same time period is in line with the 'A' category median of 16.3x. However, Concord's pension plan is only 63% funded, which could pressure future liquidity growth. Pension contributions are expected to be $16 million in fiscal 2013 compared to operating EBITDA of $44 million in fiscal 2012.

Concord Hospital is just completing the last phase of a three-phase facility expansion and renovation project, most recently converting shared rooms to private; with the goal to have over 90% private rooms. Concord Hospital also just completed the renovation of its emergency department as well as adding two new operating room suites and renovated four operating room suites and their supporting space. The average age of plant is low at 8.7 years. The current financing will fund energy improvements and other routine capital projects. Fitch does not expect additional debt in the near term.

Concord's debt profile is conservative with all fixed-rate debt and no swaps, which is viewed favorably by Fitch. Total long-term pro forma debt is $123.5 million and includes approximately $2.7 million in outstanding capital notes, which Fitch does not rate. Pro forma MADS of $14.4 million is a manageable 3.4% of revenue. Coverage of pro forma MADS in fiscal 2012 was adequate at 3.4x and in line with the 'A' category median of 4.1x. Debt service is front-loaded and drops to approximately $12 million-$13 million for six years and then further declines to $8 million by 2021.

Fitch's primary credit concern is competition for and alignment with area physicians. In addition to its long-standing relationship with Dartmouth-Hitchcock Clinic-Concord, located adjacent to Concord, Concord has expanded its physician alignment, acquiring several physician groups over the last few years, including urology, cardiology and neurology for a total of 231 employed physicians and mid-level providers as of Sept. 30, 2012. Although Fitch views an expanded physician alignment system positively, physician competition is an ongoing challenge.

The Stable Outlook reflects Fitch's expectation that Concord will maintain its historical profitability and liquidity position while improving debt service coverage ratios.

Concord Hospital is a 295-bed acute care hospital located on a 111-acre campus in Concord, NH, approximately 65 miles from Boston. Total revenue for fiscal 2012 was $419.8 million. Concord covenants to disclose annual and quarterly financial information. Quarterly statements include a balance sheet, income statement, cash flow statement and utilization statistics.

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.

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from the Underwriter.

Applicable Criteria & Related Research:

--'Revenue-Supported Rating Criteria', dated June 12, 2012;

--Rating Criteria', dated July 23, 2012.

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=683418

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