June 17, 2008
Fitch Affirms The William W. Backus Hospital (Connecticut) Revenue Bonds ‘A+'; Stable Outlook
Fitch Ratings, New York
Carolyn Tain, 212-908-0259Gary Sokolow, 212-908-9186
Christopher Kimble, 212-908-0226
Fitch Ratings has affirmed the underlying rating of 'A+' to Connecticut Health and Educational Facilities Authority's series F refunding revenue bonds issued on behalf of The William W. Backus Hospital (WBH). In addition, Fitch has affirmed WBH's outstanding debt at 'A+'. The Rating Outlook is Stable.
The series F bonds, initially issued in 2005 as auction rate securities, will be converted to fixed rate mode, effective July 2008. The swap associated with the auction rate bond issue will also be terminated. FSA, which provided insurance on the bonds in 2005 and whose insurer financial strength is rated 'AAA' by Fitch, is expected to continue to provide insurance on the bonds.
The 'A+' rating is supported by WBH's leading market position, strong physician alignment strategies, solid operating and liquidity ratios, and strong debt service coverage. The hospital is the sole provider in its service area with a 75% market share in its primary service area and a 35% market share in its secondary service area. Almost all of the 228 physicians on its medical staff admit exclusively to WBH with a strong referral network to tertiary care providers in the region. As of Sept. 30, 2007, WBH had $89.7 million in unrestricted cash and investments, which translated into 173.5 days cash on hand, a pro forma cushion ratio of 19.1 times (x), and cash to debt of 132.8%. This does not include $52.5 million of additional funds held by the Backus Foundation solely for the benefit of the hospital. Coverage on maximum annual debt service is excellent at 7.2x and debt as a percentage of revenues is light at 2.1%. For fiscal year (FY) 2007, the hospital earned $9.1 million from operations (4.1% operating margin) and $20 million in excess income (10.3% excess margin), fueled by strong investment income. Through the unaudited interim period ending March 31, 2008, WBH's unrestricted cash position increased slightly to a total of $90.1 million as the hospital earned $7.3 million from operations (6.0% operating margin). But excess margin has declined due to losses from investments. Excess margin for the six month period is $4.3 million (3.6% excess margin).
Credit concerns include a relatively high Medicaid exposure and reliance on two large managed care payors, making the hospital vulnerable to changes in third party reimbursement or potential state funding cuts, and, increased bad debt expense as a percentage of expenses. Anthem BCBS and HealthNet are the two dominant non- governmental payors for the hospital, at 53% and 13%, respectively. Since FY2005, the percentage of revenues from Medicaid has decreased from 13% to 12% of gross patient revenues, but bad debt as a percentage of expenses increased to 5.8% in FY2007 from 4% in FY2005 with a further increase to 6.2% for the six month period ending March 31 2008. WBH has increased its reserves for bad debt as a result of the increase in high deductibles and co-pays in its patient population.
The Stable Outlook reflects Fitch's belief that WBH's will maintain its historical profitability trends leading to continued strengthening of the liquidity position and other balance sheet ratios. Hospital management has no plans to issue any long-term debt in the near term.
WBH is a 213 licensed and 184 staffed-bed acute care hospital located in Norwich, CT, which is approximately 40 miles southeast of Hartford. Total revenue in fiscal 2007 was $223 million. The hospital covenants to provide to bondholders annual audited financials within 150 days of fiscal year-end and quarterly disclosure (includes a balance sheet, income and cash flow statements, and utilization data) within 45 days of quarter-end. To date, disclosure to Fitch has been favorable in terms of content and timeliness.
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