NEW YORK - Standard & Poor's Ratings Services said it revised its rating outlook to positive from stable and affirmed its BBB underlying rating (SPUR) on Massachusetts Health and Educational Facilities Authority $60 million series 1998A bonds issued on behalf of Hallmark Health System (Hallmark).
The positive outlook reflects Hallmark's financial profile, which S&P believes is generally in line with a higher rating; however, the improved financial results have largely been achieved through cost containment and expense reductions and not through business and revenue growth. The increased controls over expenses and financial improvement have been reflected in multiple rating upgrades since 2003. In order to achieve a BBB-plus rating, Hallmark must demonstrate a longer record of positive earnings, especially after posting fairly significant operating losses in 2007 and 2008, as well as more robust revenue growth.
The BBB rating reflects Hallmark's strong balance sheet characterized by ample liquidity and relatively moderate debt levels, and although Hallmark has capital needs, there is room at the current rating for additional debt or lighter liquidity. Also supporting the rating are Hallmark's improved earnings in 2009 and year to date in 2010 after unexpected losses in 2007 and 2008, coupled with good debt service coverage.
Partially mitigating Hallmark's credit strengths is its highly competitive service area -- there is significant competition from nearby Boston and other suburban providers and limited service area population growth.
"The positive outlook reflects the possibility of an upgrade to BBB-plus if Hallmark is able to achieve a full year of revenue and volume increases in 2010 that continue into 2011," said Standard & Poor's credit analyst Cynthia Keller Macdonald. "Hallmark must also maintain a balance sheet similar to 2009 levels although limited additional debt or liquidity reductions would be acceptable, even at a higher rating level," said Keller Macdonald.
In Standard & Poor's opinion, a lower rating is unlikely in light of Hallmark's recently strong financial earnings and solid balance sheet cushion.
