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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Fitch RatingsPrimary AnalystOlga
BeckDirector+1-212-908-0772Fitch Ratings, Inc.33 Whitehall
StreetNew York, NY 10004orSecondary AnalystGary
SokolowDirector+1-212-908-9186orCommittee ChairpersonJim
LeBuhnSenior Director+1-312-368-2059orMedia Relations:Elizabeth
Fogerty, New York, +1 212-908-0526Email:
elizabeth.fogerty@fitchratings.com