OREANDA-NEWS.  Fitch Ratings has affirmed Northumbria Healthcare NHS Foundation Trust's (Northumbria FT) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A' with Stable Outlooks and Short-term IDR at 'F1'.

The affirmation reflects Fitch's unchanged assessment of Northumbria FT's standalone performance and potential government support since the last review.

KEY RATING DRIVERS
Northumbria FT is rated as a non-credit linked public sector entity. Fitch rates FTs on a standalone basis using its not-for-profit hospitals and health systems rating criteria as well as its criteria for rating public sector entities. We then add a two-notch credit enhancement to reflect the regulatory support through its economic regulator, Monitor. Fitch assesses the credit quality of Northumbria FT based on factors such as its large catchment area, operational efficiency, strong management and the dependability of cash flows, provided by public and government-supported funding but also factors in its gearing, which is high for the sector.

Northumbria FT is a major provider of healthcare in the north east of England and operates with three general hospitals, a brand new specialist emergency care hospital, six community hospitals and multiple community sites. Northumbria FT receives 91% of its operating revenue for delivering health care from NHS Commissioners, which include Clinical Commissioning Groups (CCGs) and NHS England. This reliable source of funding facilitates revenue forecasting and expense management during the year.

The trust has posted surplus/deficits of between GBP1.6m and negative GBP14m over the past five years, with the exception of FY14 as a consequence of terminating the Hexham PFI. Surpluses of GBP13m-GBP16m are forecast over five years to FY20 and operating margins of about 10%, which considering its not-for-profit mission, is consistent with its ratings. Since the financial year to March 2009 (with the exception of FY14), Northumbria FT has reported operating margins of 4%-6% and expects to achieve higher margins by rigorously controlling costs.

At FYE15 Northumbria FT had total debt of GBP215m, a decrease from its peak of GBP259m at FYE14. During FY14 a GBP111m loan was drawn from Northumberland County Council, enabling the termination of two PFI agreements with Hexham General Hospital. However, debt is projected to reduce by GBP9m annually over the next few years. Within the trust's forecast achievement of its regulatory requirements, it is planning capital investment of GBP86m over the next five years, GBP28m of which is for the redevelopment of Berwick. This will be primarily funded through internally generated funds.

The trust forecasts that it will be able to meet its regulatory requirements in its business plan, which is a continuity of services risk rating of no worse than 3 throughout the life of the plan. The plan is subject to a risk rating assigned by Monitor in line with the FT compliance regime and is used to assess each provider's financial viability.

Northumbria FT has a strong record of meeting national standards for performance, including waiting times and patient safety issues as demonstrated by Care Quality Commission inspections and assessments by Monitor. In September 2015, Northumbria FT was selected along with another two organisations to take a national lead on new ways of working across local hospitals to drive efficiency and improvement.

RATING SENSITIVITIES
An upgrade could result from the following:
- An improvement in profitability and notable reduction of debt burden to levels pre-FY14, although this is unlikely in the medium term.
- A reassessment of regulatory support leading to an increase in notching of the credit enhancement.

A downgrade could result from the following:
- Further cuts in government funding over and above those currently expected if they look likely to materially impair the trust's financial flexibility.
- Northumbria FT's ability to secure annual contracts with CCGs will have a direct impact on revenues and, consequently, on the ratings. Thus any significant deterioration in clinical or financial performance making it harder to secure expected levels of funding could lead to a downgrade.

KEY ASSUMPTIONS
The ratings assume continuing demand for health services, a significant majority of cash flow funding from state sources and effective government-approved regulation.