OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB' rating on the approximately \$43,490,000 Massachusetts Development Finance Agency revenue bonds, series 2014A issued on behalf of Lawrence General Hospital (LGH).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues of the obligated group, a first lien mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

SIZEABLE CAPITAL PLANS: LGH is in the midst of a \$72 million master facilities plan (2014-2019) with major projects including inpatient renovations and the upgrade of its surgical suites. A portion was funded with the series 2014A bond issue and as anticipated, LGH is contemplating a \$30 million bond issue and/or direct placement in spring 2015, which will fund part of the surgical suite renovations. Fitch views the investment in the plant positively as it will provide better access and service capabilities. Fitch believes LGH has sufficient capacity at the current rating level for additional debt, but will review its full impact as plans are finalized in the coming months.

DEBT CAPACITY: A key credit strength is LGH's light leverage, with maximum annual debt service (MADS) equal to 1.6% of fiscal 2014 (Sept. 30 year-end) revenue resulting in 4.8x MADS coverage. As such, Fitch believes that LGH has sufficient capacity for the additional \$30 million debt at the current rating level assuming the corporation maintains metrics in line with the 'BBB' rating.

AFFILIATIONS WITH OTHER PROVIDERS: LGH has clinical affiliations with Beth Israel Deaconess Medical Center (BIDMC), Floating Hospital for Children at Tufts Medical Center, and the Choice Plus PHO, which includes the Greater Lawrence Family Health, Beth Israel Deaconess Care Physicians, specialists and Pentucket Medical Associates (PMA). LGH and PMA collaborated recently on opening a primary, pediatric, and urgent care center . The site also includes obstetrics and LGH imaging. Fitch views these relationships favorably as they broaden LGH's geographic footprint and help to stem outmigration.

ADEQUATE OPERATING PROFILE: LGH's operating profile is adequate for the rating category, with a 2.9% operating margin and 7.3% operating EBITDA margin in fiscal 2014, compared with 'BBB' medians of 1.1% and 7.9%, respectively. Profitability has varied somewhat over the past four years, with an operating margin of 2.3% in 2011, 4.7% in 2012, and 3% in 2013, but was consistently above category medians.

MIXED LIQUIDITY: LGH had \$59.8 million in unrestricted cash and investments at fiscal year-end (FYE) 2014, equating to 100.2 days cash on hand, which is below the 'BBB' category median of 145 days but adequate for the rating. Despite significant capital spending over the last year for the master facilities plan, cash to debt of 101.7% and cushion ratio of 16.1x were both favorable compared to the 'BBB' category medians of 93.6% and 10.5x, respectively.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PERFORMANCE: Including the impact of the additional debt in 2015, Fitch expects LGH to maintain sufficient cash flow to support debt service coverage levels in line with a 'BBB' rating.

CREDIT PROFILE

LGH is a 189 licensed-bed non-profit hospital located approximately 25 miles north of Boston, MA. LGH had total revenue of \$232.9 million in fiscal 2014.

SIGNIFICANT CAPITAL INVESTMENT UNDERWAY

LGH is undertaking significant capital investment through 2019, which Fitch believes is manageable and strategic in nature. The total cost of LGH's master plan is approximately \$72 million of which about \$14 million will be funded via operating cashflow. The renovation and upgrading of the surgical suites are expected to cost approximately \$55 million and are expected to be funded through cash flow and a \$30 million debt issuance and/or direct placement likely to occur in spring 2015. In addition to the infrastructure changes above, routine capital expenditures are expected to approximate \$6 million annually over the next three years.

In 2014, LGH was awarded a second phase of Delivery System Transformation Initiative (DSTI) funding totaling \$48 million through June 2017. This funding is in addition to the \$43.3 million DSTI grant funding LGH received through June 2014, which allowed LGH to focus on population health and alternative payment models. Projects identified for phase two of the DSTI grant include upgrades to health information exchange technology, medication safety, LGH's post-acute care network, and population health and alternative payment models.

SUCCESSFUL PARTNERSHIPS

Fitch believes LGH's successful affiliations with physicians and other clinicians in certain service lines has resulted in expanded clinical programs and access to providers. LGH is working to add service capabilities to address needs in the service area, including bariatrics, endocrinology and oncological surgery as well as pediatric specialties. LGH strengthened is clinical affiliations with BIDMC in 2014 and joined its Pioneer ACO, Beth Israel Deaconess Care Organization. LGH also has an affiliation with Floating Hospital for Children at Tufts Medical Center and collaborates with Pentucket Medical Associates, opening an urgent care and imaging center in Andover, a growing service area, in 2014.

MIXED LIQUIDITY PROFILE

LGH had \$59.9 million in unrestricted cash and investments at fiscal year-end (FYE) 2014, equating to 100.2 days cash on hand, 16.1x cushion ratio and 101.7% cash to debt compared to Fitch's respective 'BBB' category medians of 145 days, 10.5x and 93.6% Although management is planning on spending about \$49 million from cash over the next four years for capital projects, projections show days cash on hand remaining above 100 days and cushion ratio above 11.5x, which Fitch believes is achievable.

ADEQUATE PROFITABILITY

LGH has demonstrated good revenue growth over the last few years. LGH's operating performance has fluctuated somewhat over the last few years but is solid for the rating. In fiscal 2014 LGH produced a 2.9% operating margin and 7.3% operating EBITDA margin, in line with the respective 'BBB' category medians of 1.1% and 7.9%. Management is budgeting for a 1.8% operating margin and 6.6% operating EBITDA margin in 2015, which Fitch views as manageable and adequate for the rating level.

DEBT PROFILE

LGH currently has approximately \$58 million in debt outstanding of which about 75% is fixed and 25% is variable. The \$14.6 million series 2013A variable rate bonds are privately placed with TD Bank and not rated by Fitch but considered in its analysis. MADS is currently \$3.7 million. EBITDA and operating EBITDA MADS coverage was strong at 4.8x and 4.6x in 2014, well above the respective 'BBB' category medians of 2.6x and 2.3x. Fitch will review the full impact of the additional \$30 million in debt when details become available; however, LGH's light debt burden provides capacity at the current rating level for additional debt.