[May 08, 2014]

Fitch Affirms Memorial Hospital (NH) Revs at 'BBB'; Outlook Stable

Fitch Ratings has affirmed the 'BBB' rating on the following New Hampshire Health and Education Facilities Authority bonds issued on behalf of The Memorial Hospital (TMH):

--$18,670,000 Series 2006;

The Rating Outlook is Stable.

SECURITY:

The bonds are secured by TMH's gross receipts and equipment, and a mortgage lien on the facility.

KEY RATING DRIVERS

SOLID LIQUIDITY: At March 31, 2014 (nine-month interim period - unaudited), TMH continued to exhibit solid liquidity metrics highlighted by 175.3 days cash on hand, 17.2x cushion ratio, and 150.2% cash to debt. Each of TMH's balance sheet indicators compared favorably against Fitch's 'BBB' category medians of 144.7 days, 10.2x, and 91.7%, respectively.

WEAKENING OPERATIONS: Since fiscal year (FY) 2011 TMH has experienced year-over-year profitability deterioration, which reached its lowest point through the interim period with a negative 1.7% operating margin, down from 5.1% in FY 2011. Despite management's expectations to end FY 2014 slightly above breakeven, Fitch views the declining profitability trend negatively and as a primary credit concern.

CRITICAL ACCESS DESIGNATION: The achievement of the 'BBB' rating is due primarily to TMH's critical access hospital (CAH) designation, which helps to mitigate the risks inherent to small rural facilities. Management reports that TMH's CAH designation is not currently at risk. Additionally, TMH maintains a leading market share of approximately 82% in its primary service area (PSA), which Fitch views as a primary credit strength.

MAINE HEALTH AFFILIATION: On January 1, 2014, TMH became a member of MaineHealth (MH), with MH becoming the sole corporate member of TMH. TMH did not join MH's obligated group (OG) and continues to be solely obligated on its debt. The affiliation allows for TMH to benefit from a number of financial and operating synergies, which Fitch views favorably.

MANAGEABLE DEBT BURDEN: Maximum annual debt service (MADS) of $1.6 million represented a manageable debt burden of 2.7% of total revenue through the 2014 interim period. Further, over the past five fiscal years MADS coverage by EBITDA has averaged 3.8x, which compares favorably against Fitch's median of 3.1x.

RATING SENSITIVITIES

STABILIZATION OF OPERATIONS: Fitch expects TMH's operations to return to levels consistent with the rating category in the near term. Failure to improve operations could lead to negative rating pressure.

CREDIT PROFILE

Located in North Conway, NH, approximately 80 miles northeast of Concord, NH, TMH is a critical access hospital with 25 acute care/swing beds and a 45-ed intermediate care facility. In 2013, TMH had total revenues of $62.9 million.

SOLID LIQUIDITY

TMH has exhibited robust year-over-year balance sheet strengthening, growing their unrestricted cash position from $18.4 million in FY 2009 to $28.7 million in FY 2013. TMH's $28.3 million in unrestricted cash and investments at March 31, 2014 equated to 175.3 days cash on hand, 17.2x cushion ratio, and 150.2% cash to debt, all comparing favorably against Fitch's 'BBB' category medians of 144.7 days, 10.2x, and 91.7%, respectively. Fitch views TMH's strong liquidity position as a primary credit strength, and necessary to maintaining the current rating.

WEAKENING OPERATIONS

Since fiscal 2011 TMH has experienced year-over-year profitability deterioration, which reached its lowest point through the fiscal 2014 interim period. Through March 31, 2014, TMH recorded an operating loss of $769,000 (negative 1.7% operating margin and 5.9% operating EBITDA margin), down from 2011's $3.1 million gain (5.1% operating margin and 12.3% operating EBITDA margin). Management attributes the decline in operating profitability to certain one-time expenses, as well as a dramatic increase in TMH's Medicare payor mix in early FY 2014. Management reports that the payor mix has since stabilized and expects to end FY 2014 at slightly above breakeven, with the help of certain Meaningful Use funds (approximately $1 million) due to TMH prior to the fiscal year end. Fitch views the declining profitability trend negatively and as a primary credit concern.

MAINE HEALTH AFFILIATION

On January 1, 2014 TMH became a member of MaineHealth (MH), with MH becoming the sole corporate member of TMH. TMH did not join MH's OG and continues to be solely obligated on its debt. The affiliation will allow TMH access to a number of financial and operational opportunities including group purchase ordering, MH's legal counsel, revenue-cycle enhancements, as well as financial support designated to the installation of the EPIC platform on TMH's campus.

MANAGEABLE DEBT BURDEN

TMH's debt burden remains manageable with a strong cash position relative to debt and MADS of $1.6 million representing 2.7% of total revenue through the 2014 interim period. Further, over the past five fiscal years MADS coverage by EBITDA has averaged 3.8x, which compares favorably against Fitch's median of 3.1x. MADS coverage was compressed through the interim period at 2.4x. All of TMH's outstanding debt is fixed rate with swaps. Fitch views the organization's debt profile as conservative.

CONTINUING DISCLOSURE

TMH covenants to provide annual financial statements and quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA system.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

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