Fitch Rates Fletcher Allen's (Vermont) $50MM 2008 Bonds 'BBB+'; Outlook Stable

2008-04-25 23:58:17 -

- Fitch Ratings has assigned an underlying 'BBB+' rating to the Vermont Educational and Health Buildings Financing Agency's approximately $50 million variable-rate hospital revenue refunding bonds (Fletcher Allen Health Care Project) series 2008A. The series 2008 bonds will be issued as variable-rate demand bonds (VRDBs), backed by bank support. Fitch expects to assign both a short- and long-term rating closer to the bond sale. The series 2008 bonds will be priced through negotiation by Citigroup during the week of April 28, 2008.

Simultaneous to this refunding debt issuance, Fletcher Allen plans to convert approximately $170 million of Vermont Educational and Health Building Financing Agency variable-rate hospital revenue bonds (Fletcher Allen Health Care Project) series 2004B from auction-rate mode to long-term fixed-rate mode. Fitch has also affirmed the 'BBB+' underlying rating for the following issues for Fletcher Allen:

--Series 2004B bonds;

--$226.8 million outstanding bonds.

The series 2004B bonds are insured by Financial Security Assurance (IFS rated 'AAA by Fitch). The Rating Outlook is Stable.

The rationale for the 'BBB+' rating is supported by Fletcher Allen's dominant market position as the region's leading tertiary care provider, consistently positive operating margins, and growing outpatient volumes. Fletcher Allen has a commanding 66% share of the tertiary market in a large 150 mile service area that encompasses six counties in northeastern New York State and all counties in Vermont. In its local service area, Chittenden County, the health system captures approximately 95% of all inpatient admissions and 99% of the tertiary market. Fletcher Allen's operating margins over the past five years have been stable, averaging approximately 2.53%, which is above Fitch's 'BBB' category median of 2.2%. For fiscal 2007 (Sept. 30 year-end), Fletcher Allen recorded an operating margin of 2.6% (resulting in operating income of $20.4 million), an operating EBITDA margin of 9.4%, and an excess margin of 4.2%. All of these are above Fitch's 'BBB' category medians of 2.2%, 8.5% and 3.8%, respectively.

Unaudited results from the first four months of fiscal 2008 show Fletcher Allen's operating margin dropping significantly to 0.9% from 5% for the same period in fiscal 2007. Some of the pressure on the operating margin is due to flattening inpatient admission volumes, which declined 2.9% in fiscal 2007 and has continued to remain flat in fiscal 2008. However, the loss in inpatient admissions has been offset by increasing outpatient volumes: in fiscal 2007, radiation therapy visits increased 37.8%; CT scans, 12%; nuclear medicine, 12%; outpatient renal dialysis, 14.5%; and outpatient surgical procedures, 0.6%. Outpatient volume continued to grow for the first four months of fiscal 2008, with outpatient surgery up 5% year over year. Overall, patient revenue from fiscal 2006 to fiscal 2007 increased approximately 9% from $634.7 million to $692.6 million.

Other pressures on the operating margin in fiscal 2008 include an increase in expenses led by bad debt. Provisions for bad debt jumped 70% for the first four months of fiscal 2008. This increase has been mostly due to concerns over the growing numbers of patients insured by health savings accounts, which require a much higher deductible before the health insurance coverage begins payment. Fletcher Allen recently hired a new CFO--the position was vacant for several months--which should help manage the increase in expenses.

Credit concerns include Fletcher Allen's light liquidity for the rating category and limited debt capacity. Most liquidity indicators and capital ratios are below Fitch's 'BBB' category medians. At year end fiscal 2007, Fletcher Allen had a cushion ratio of 8.1 times (x), cash to debt of 55.7%, and debt to EBITDA of 5x, all below Fitch's 'BBB' category medians of 9.2x, 74.1%, and 3.9x, respectively. While most of these debt ratios are below Fitch's rating category medians, maximum annual debt service coverage on a pro forma basis did improve to the category median in the past two fiscal years and other debt ratios, such as debt to capitalization and debt as a percentage of revenues, indicate moderate improvement. Management expressed plans to build an inpatient tower; however, given the system's limited debt capacity and high debt ratios, additional debt issuance may result in negative rating pressure.

The Stable Outlook reflects Fletcher Allen's dominant market share, consistently positive operating performance, and growing outpatient volumes which over time should help grow liquidity and gradually ease the health system's high leverage position.

As part of the series 2004B conversion, Fletcher Allen will also be adjusting two floating- to fixed-rate swaps, which are each $67.5 million and have Citibank N.A. as the counterparty. Fletch Allen plans to apply as much of these swaps as it can to the 2008A variable-rate issuance and is exploring various options to address the balance of the swaps not applied to the 2008 issuance. Fletcher Allen will make a final decision on this remaining balance on the swaps closer to the bond sale date and Fitch is not concerned about the credit impact of the various options. As of December 2007, the year to date mark to market value of the swaps was negative $5.3 million.

Fletcher Allen is an integrated health care network, providing hospital and physician services from its three main campuses, more than 40 patient care sites in Vermont and New York, and more than 100 outreach clinics, programs, and services in Vermont and New York. Fletcher Allen's flagship hospital located in Burlington, VT, is a full-service tertiary and quaternary academic medical center with 562 licensed beds, and it is the largest hospital in Vermont. Total revenues for the consolidated system in fiscal 2007 were approximately $772 million.

Fletcher Allen covenants to provide bondholders with annual and quarterly disclosure, and currently posts its annual and quarterly financial statements to the Nationally Recognized Municipal Securities Information Repositories as well as on its web site at www.fahc.org and at www.dacbond.com. Quarterly disclosure includes a balance sheet, income statement, cash flow statement, and utilization statistics but does not include management discussion and analysis. Fitch views Fletcher Allen's recent disclosure practices favorably.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, New York
Carolyn Tain, +1-212-908-0259
Gary Sokolow, +1-212-908-9186
Michael Burger, +1-212-908-0555
Cindy Stoller, +1-212-908-0526 (Media Relations)