NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to approximately $159 million in Series 2016B&C to be issued by or on behalf of Care New England (CNE).
In addition, Fitch has downgraded the rating on the following bonds issued by the Rhode Island Health and Educational Building Corporation on behalf of CNE to 'BBB-' from 'BBB':
--$82.2 million series 2013A.
The Rating Outlook is Negative.
SECURITY
Pledge of gross revenues, a mortgage interest in certain hospital facilities and debt service reserve fund.
The series 2016B&C bonds are expected to be issued as fixed rate debt. The bonds will be used to refund all of CNE's debt secured under its current Master Trust Indenture, which includes the series 2016A, series 2014A, series 2013A (rated by Fitch), Series 2010, and The Providence Center's series 2013 bonds, fund a debt service reserve, and pay cost of issuance. The bonds are scheduled to sell via negotiated sale on the week of Sept. 26, 2016.
KEY RATING DRIVERS
WEAKENED FINANCIAL PROFILE: The downgrade to 'BBB-' and maintenance of the Negative Outlook is driven by CNE's overall increasingly stressed financial profile and diminished operating flexibility. While most of the losses in 2016 are non-recurring, concerns remain about CNE's low cash position, tight reimbursement, competitive landscape, and long-term strategies to stem the losses at its Memorial Hospital.
MEETING EXPECTATIONS ON TURNAROUND PLAN: CNE engaged a consultant and started to implement a performance improvement plan in the latter part of 2015 focused on human resources, clinical operations, labor productivity, revenue cycle, clinical documentation, physician solutions, purchased services and lab consolidation. Initiatives implemented to date are yielding a $43 million annual impact.
LEAN LIQUIDITY: As expected, unrestricted cash decreased at fiscal year-end 2015. After the reclassification of approximately $13 million that was previously categorized as unrestricted, unrestricted cash and investment of $153.2 million translated to 50.7 days cash on hand (DCOH) for fiscal 2015. Although the level of cash remained relatively steady as of June 30, 2016, DCOH dropped to 48 days because of the higher expense base. Cash-to-debt of 93.2% remains appropriate for the category, reflecting CNE's manageable debt burden.
LIGHT DEBT BURDEN: CNE's lower debt burden provides a considerable financial cushion. Preliminary pro forma maximum annual debt service (MADS) of $14.8 million represents a modest 1.3% of 2015 revenues, relative to Fitch's 'BBB' category median of 3.6%. Adjusting for the one-time restructuring costs in the nine-months of fiscal 2016 (June 30), annualized coverage would be 2.3x and on par with MADS coverage in fiscal 2015.
REDUCED COVENANT RISK: With the legal provisions in the Series 2016 financing, CNE will avoid covenant violation triggers in 2016 and 2017, giving the organization flexibility in these transition years with non-recurring restructuring expenses.
RATING SENSITIVITIES
SUSTAINABILITY OF IMPROVEMENT PLAN: Fitch expects that Care New England (CNE) will continue to show quarter over quarter improvement with the continued implementation of the turnaround plan. As CNE approaches the final phases of implementation, Fitch expects a return to break-even operations and coverage levels above 3.0x. Failure to maintain operating levels that are consistent with investment grade expectations and/or deterioration in balance sheet metrics will result in a downgrade.
CREDIT PROFILE
Headquartered in Providence, RI, CNE consists of the 247-licensed bed Women's & Infants Hospital (W&I), Butler Hospital (psychiatric hospital, 143 beds), Memorial Hospital (294 beds), and Kent Hospital (359 beds), The Providence Center (outpatient behavioral health) and VNA. In fiscal 2015, CNE reported total operating revenues of $1.1 billion. Fitch's analysis and financial ratios are based on consolidated financial statements.
FINANCIAL TURNAROUND
In the past, CNE relied on one-time revenue items, investment returns and dividends to offset historically thin operating results. To address the declining financial profile, a national consulting firm was engaged in 2015 to identify several areas for improvement. The implementation and accountability for the approximate $85 million in recurring improvement initiatives has been assigned to working groups consisting of key system leaders, senior management and consultants. Fitch views the increased level of accountability favorably and believes that it is an important factor in the long-term success of the turnaround plan.
As expected, 2016 has been a transition year for the organization with substantial non-recurring losses but that Fitch ultimately anticipates will yield long-term operational profitability. Through the nine months of fiscal 2016 (June 30), CNE posted a dismal -3.4% operating margin and operating EBITDA of 0.6%. Approximately $20.7 million of the $29.4 million loss year-to-date (Fitch excludes loss on refinancing from operating expense) are restructuring costs. CNE is projecting a $55 million loss by year-end that will include around $31 million of restructuring expense and a $15 million loss on the current refinancing.
The financial improvement plan is mostly on target, with confirmed quarter-over-quarter improvement. Driven by strong NICU volume, CNE's main hospital, W&I, posted a healthy $11.9 million operating gain through the nine-months of 2016. Similarly, operations have stabilized at the different entities, with the exception of Memorial Hospital which reported a $20.3 million loss, including $1.1 million of restructuring costs. With ongoing losses, a weak payor mix, low utilization and capital needs, Fitch has concerns about the long-term strategy for Memorial (acquired in 2013) and its role within the larger CNE system. The obstetrics unit at Memorial was closed and relocated as of August 1st and management continues to consider long-term strategies for the hospital.
PROJECTIONS FOR THE POST-TURNAROUND PERIOD
Even after the improvement initiatives, CNE's operations will still be stressed by capped managed care reimbursement rates, unfavorable shifts to lower-paying plans, high exposure to government payors, a competitive market, growing pension liability, thin funding or financing flexibility for strategic and capital investments and modest to below-budget utilization trends. Given the challenging headwinds, CNE's projections show a modest operating EBITDA margin of 4.3% and 4.8% in 2018 and 2019, respectively, and DCOH of 52.4 days and 53 days in the respective years. Therefore, these metrics are expected to continue to be significantly below investment grade category medians even in the years beyond the 2016 restructuring.
The amended liquidity covenant in the 2016 financing will lower the DCOH threshold to 25 days in fiscal 2016 and 2017 and 35 days in subsequent fiscal years.
LIGHT AND CONSERVATIVE DEBT PROFILE
CNE's light debt burden continues to be a key credit strength. MADS coverage through the nine months of 2016 is a very low 0.4x because of the restructuring costs, but measures 2.3x when adjusted for these one-time expenses. The amended bond documents for the financing grant a covenant holiday in 2016 so there will be no covenant breach as a result of the transition year costs. Looking forward, management expects to deliver strong coverage of 4.5x and cash-to-debt of 1.18x by 2019. CNE has no debt plans in the near future.
OTHER STRATEGIC INITIATIVES
CNE has also been working on several other initiatives such as population health through its Integra ACO, the merger of all its employed physicians into one group, the CNE Medical Group, for improved efficiency and coordination, and the planned merger with Southcoast. CNE believes that it will benefit from Southcoast's broader medical/surgical presence and that the larger size of a combined organization will create synergies. Fitch is not incorporating the effects of a possible merger into the current rating.
DISCLOSURE
CNE covenants to provide annual audited financial statements within 120 days of each fiscal year-end and quarterly unaudited financial statements within 45 days of each fiscal quarter-end.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010892
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010892
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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