Fitch Rates Lifespan's (RI) Series 2016 Revenues Bonds 'BBB+'; Outlook Stable
--$266,820,000 revenue refunding series 2016.
The Rating Outlook is Stable
SECURITY
The bonds are secured by a pledge of gross revenues of the Lifespan obligated group and mortgages on certain property of the Lifespan obligated group.
The series 2016 bonds are expected to be issued as tax exempt, fixed rate bonds and sold via negotiation the week of July 25. Proceeds of the series 2016 will be used to current refund Lifespan's series 1996 and 2006A and advance refund the series 2009A. The series 2016 will have a May 2039 final maturity and result in maximum annual debt service (MADS), provided by the underwriters, including other Lifespan debt, of $33.6 million occurring in fiscal 2017. A debt service reserve fund will not be funded in connection with the series 2016 bonds.
KEY RATING DRIVERS
UNIQUE POSITION IN MARKET: Lifespan is a major provider of services in Rhode Island, including high end tertiary and quaternary services operated at its flagship 719-bed Rhode Island Hospital (RIH). Its integrated delivery network includes a large network of affiliated physicians and outpatient facilities and the system holds a leading market share of Rhode Island discharges, and a 90% share of the pediatric market.
SOLID LIQUIDITY: While Lifespan's days cash on hand (DCOH) are below Fitch's 'BBB' category median, liquidity relative to debt, with cash to pro forma debt at 162%, is considered a major credit positive supporting the 'BBB+' rating and serves to offset the soft operating profile.
HISTORICALLY SLIM OPERATING PERFORMANCE: The organization's consolidated operating results over the last four fiscal years (fiscal year-end Sept. 30) and the most recent interim period ended March 31, 2016 have been slim and somewhat volatile. The performance reflected pressured reimbursement rates during this period, as well as a number of one-time expenses, the most significant of which were a workforce reduction in 2013 and in 2015 the implementation of a new electronic health record and expenses related to the harsh winter weather.
MODERATE LEVERAGE: The system has a relatively moderate leverage position with pro forma MADS of $33.6 million equal to 1.8% of fiscal 2015 revenues, favorable to Fitch's 'BBB' category median of 3.6%. Pro forma MADS coverage by EBITDA at 2.4x in fiscal 2015 and through the interim period is slightly lower than the 'BBB' category median of 2.7x. The organization's capital needs are manageable going forward at approximately equal to its depreciation expense, with no major financing needs on the near horizon.
GOOD VOLUMES: Through its several components, including the Hasbro Children's Hospital, a division of RIH and the Emma Pendleton Bradley Hospital, providing psychiatric care of children and adolescents, Lifespan offers a comprehensive array of services to its Rhode Island market, with only the exception of heart and liver transplants. Admissions have increased in each of the last three years - most recently by 4.2% in fiscal 2015 and a further 4.4% though the second quarter of 2016.
RATING SENSITIVITIES
NEED TO STRENGTHEN OPERATING PROFITABILITY: Fitch expects Lifespan management to continue with the implementation of the operational improvement plan leading to stable and strengthened operating results, while maintaining balance sheet stability. Failure to continue on the improvement path, or deterioration in liquidity would introduce downward rating pressure.
CREDIT PROFILE
Lifespan Corporation was formed in 1994 as a result of the coming together of Rhode Island Hospital (RIH; 719-beds) and the Miriam Hospital (Miriam; 247 beds) and the system was expanded further by Emma Pendleton Bradley Hospital (Bradley; 60 pediatric psychiatric beds) in 1996 and Newport Hospital (Newport; 129 beds) in 1997. RIH is a major provider of high end services to the Rhode Island service area, is the region's designated Level I trauma center and both RIH and Miriam serve as primary teaching hospitals for the Warren Alpert Medical School of Brown University (Medical School). The system includes approximately 2,390 physicians on the medical staffs and conducts a significant level of research independent of the Medical School.
The system had revenues of $1.9 billion in fiscal 2015 and the obligated group represented 78% of consolidated system assets and 88% of system revenues. The system governance has been streamlined with the system hospitals now having identical boards. The financials and figures cited in this press release represent consolidated system results.
Lifespan has a leading 43.1% of its primary service area market share, compared to 30.2% of the next competitor, Care New England ('BBB', Negative Outlook by Fitch [October 2015]) and 30.7% of both the primary and the secondary service areas combined. When including all Rhode Island patients discharged from Rhode Island hospitals, Lifespan holds a 57% share, triple that of its next competitor.
Solid Liquidity and Moderate Leverage
Fitch views Lifespan's moderate leverage and solid liquidity relative to debt as primary credit strengths supporting the 'BBB+' rating. The system's unrestricted cash and investments of $599.9 million at March 31, 2016 translate to approximately 160% of pro forma debt, better than Fitch's 'BBB' category median of 144%. Despite the weak operating results, the system's unrestricted liquidity has been maintained at approximately $600 million throughout the four year historical period. However, as the system's revenue and expense base increased, DCOH have declined to 112 days as of March 31, 2016.
Coverage of pro forma MADS was 2.4x in both fiscal 2015 and through the second quarter of fiscal 2016, slightly below Fitch's 'BBB' category median of 2.7x. MADS is equal to a moderate 1.7% of revenues, favorable to Fitch's 3.6% median and Lifespan has a relatively front loaded debt structure. Management is not anticipating need for additional debt issuance in the near term and the capital budget is projected to mirror the system's depreciation expense of between $80 million-$90 million annually for the next three years.
Slim and Volatile Operating Performance
It was management's expectation that the 2013-2015 period was going to be challenged based on both fairly tight reimbursement, increased pharmacutical and orthopedic implant expenses, as well as a planned implementation of a system-wide new electronic health record (EHR). Additionally, despite the system's sizeable Medicaid load - 21% of gross revenues in 2015, up from 15% in 2012, Lifespan is in a deficit position vis-a vis the Rhode Island Health Care Provider Tax, with the tax in excess of disproportionate share receipts equal to $5.4 million last year and expected to be double that in the current fiscal year.
The system's operating margin vacillated between a positive 1.1% in 2012 and negative 1.7% in 2015. In 2015, the consolidated system recorded operating loss of $32.6 million, equal to a slim operating EBITDA margin of 3.1%, with both the operating and operating EBITDA margins in 2015 comparing unfavorably to Fitch's 'BBB' category medians of 0.6% and 7.7%, respectively. The 2015 performance was negatively affected by over $25 million of one-time expenses. A major component of the one-time expenses was $17.5 million attributable to the EHR implementation. The implementation was successful and the system has actually been able to demonstrate a positive impact on certain quality outcomes leveraging the EHR features, and days in accounts receivable have returned to their normal level.
Realizing the need to focus on further expense management, the system has retained FTI Consulting to explore potential savings in all areas, including revenue cycle, labor and physician productivity. The budget for the current fiscal year is for essentially breakeven operations, with slim, but positive operating margins between 2017-2018, projected to increase gradually to close to 1%, based on fairly a conservative assumption of a 1% increase in inpatient and 2% increase in outpatient volumes.
Debt Profile
Lifespan has a very conservative debt profile with essentially an all fixed rate debt structure and no exposure to swaps. The proposed transaction will refund all of the OG's outstanding long term indebtedness for substantial debt service savings. With the proposed 2016 series aggregate debt service gradually declines from $33.6 million in 2017 to approximately $11.5 million by 2030. The refunding will reduce Lifespan's current MADS by approximately $4.4 million, resulting in net present value savings estimated at $62 million.
The bonds are being issued pursuant to a new Master Trust Indenture dated Aug. 1, 2016 and a Loan Agreement between the Rhode Island Health and Educational Building Corporation and the member of the OG. Security for the series 2016 bonds will be provided by a pledge of gross revenues of the obligated group, which includes RIH, The Miriam and Bradley and the RIH and Miriam Foundations. Further securing the bonds are mortgages on portions of the property of the OG, including certain property on RIH and Miriam campuses. System components that are not in the OG are the Newport Hospital (Newport) and the Newport and Bradley Foundations and Lifespan Corporation, which is the sole member of the OG members and other system components.
DISLOSURE: As part of the continuing disclosure agreement, the obligated group covenants to provide audited financial statements within 150 days following the end of the fiscal year and quarterly financial information within 75 days.
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