Fitch Affirms Northern Berkshire Healthcare, Massachusetts at 'BB'; Outlook to Positive.

NEW YORK -- Fitch has affirmed the 'BB' rating on approximately $26.7 million of Massachusetts Health and Educational Facilities Authority (Northern Berkshire Healthcare), revenue bonds, series 2004. Fitch does not rate the $21.3 million of outstanding series 1996 and 1999 bonds. The Rating Outlook is revised to Positive from Negative.

The rating affirmation at 'BB' and Positive Outlook reflect Northern Berkshire Healthcare's (NBH) improved operating performance in fiscal 2006 which was the result of the implementation of a financial and operational improvement plan and the transition to a new management team. Under the direction of a turnaround consultant, FTI Cambio Health Solutions (Cambio), NBH is on track to realize an annualized $4.4 million improvement to earnings before interest, taxes, depreciation, and amortization (EBITDA), which will exceed the original target of $3.5 million. The turnaround initiatives have focused primarily on case management, FTE reductions, and labor productivity, denial management and coding, and managed care renegotiations.

Current initiatives resulted in an operating income improvement of $3.8 million for fiscal 2006 over 2005. For 2006, NBH posted a negative operating margin of 1.6% (loss of $1.2 million), comparing favorably to a budgeted negative 2.0%, and up from 2005's negative 7.0%. EBITDA margin improved to 7.8% from 3.8%, resulting in maximum annual debt service (MADS) coverage of 1.5 times (x). The positive operating trend has continued through the first quarter of fiscal 2007. For fiscal 2007, NBH budgeted a positive 1.0% operating margin ($815 thousand), which Fitch believes is achievable given the amount of cost-saving opportunities identified but not yet implemented. In fiscal 2007, NBH will benefit from a one-time $2 million essential community hospital grant, and will begin to receive additional reimbursement through the Medicare-dependent hospital program, which management estimates will add net revenues of $800 thousand on an annualized basis. The latter item is not included in the 2007 budget.

NBH has installed a new senior management team and has significantly reconstituted its board of trustees; Fitch views both developments positively. The current CEO started in April 2006 and an interim CFO (the current controller) started in June 2006. In addition, NBH is in the final stages of hiring a new permanent CFO. In concert with the Cambio engagement, the management team and board have focused on improving governance, accountability, and financial results, and are developing strategies for regionally expanding selected services. NBH has extended the engagement with Cambio through Dec. 31, 2007 in order to ensure a successful transition.

A rating upgrade to 'BB+' may be warranted over the next two years if NBH is able to generate additional improvement to operating profitability and liquidity. Ongoing strengths include the hospital's location in a rural, isolated area, with a market share that has remained above 70% over the past five years. The nearest competitor, Berkshire Medical Center (rated 'BBB+' by Fitch), is approximately 25 miles away and had only 16.7% market share. The service area has a large elderly population with 19% of the primary service area over 65 years of age, a cohort that typically requires greater health care services. In addition, acute discharges, outpatient surgeries, and emergency room visits demonstrated solid growth in fiscal 2006 and the first quarter of fiscal 2007. This improvement is attributed to the completion of the expansion and upgrade to the hospital's facilities in 2006, as well as improved classification of observation visits.

Primary concerns include NBH's historical operating losses, weak liquidity levels, and high debt burden. NBH has generated operating losses every year since fiscal 2000. In addition, losses at the non-acute-care business lines have diminished the recent improvements that have been realized at the hospital. As a result, liquidity levels are weak with unrestricted cash and investments of $13.1 million at Dec. 31, 2006, translating into 65.6 days cash on hand and cash to debt of 23.8%. However, these levels are improved from Sept. 30, 2005, which had 53.7 days and 18.9%, respectively. Further, NBH's debt burden remains high with MADS at 5.7% of revenues and debt to capitalization of 90.4% in Dec. 31, 2006.

NBH is located in North Adams, MA with North Adams Regional Hospital (66 staffed bed hospital), Sweetwood Continuing Care Retirement Community (70 independent living units), and Sweet Brook Care Centers (184 bed skilled nursing facility) as the main revenue generating components. Operating revenue of the health system was $75 million in fiscal 2006. NBH covenants to provide quarterly disclosure to bondholders, which includes a consolidated and consolidating balance sheet, income statement, utilization statistics, and management discussion and analysis (does not include a cash flow statement). Financial disclosure is disseminated through the nationally recognized municipal securities information repositories (NRMSIRs).

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.