CHICAGO--(BUSINESS WIRE)-- Fitch Ratings downgrades and removes from Rating Watch Negative the following ratings:

--$94 million Tarrant Co Health Facilities Development Corporation series 2007 revenue bonds (Valley Baptist Medical Center- Brownsville)* to 'BB' from 'BBB';

--$37.6 million Rio Grande Valley Health Facilities Development Corporation revenue bonds series 1992A&B (Valley Baptist Medical Center Project)** to 'BB' from 'BBB'.

* The bonds are supported by an irrevocable letter of credit issued by JP Morgan Chase Bank, N.A. which Fitch was not asked to rate.

** The bonds are insured by MBIA, Inc. whose Insurer Financial Strength is not rated by Fitch.

The Rating Outlook is Negative.

RATING RATIONALE:

--The downgrade reflects the release of audited financial statements for fiscal years 2008 and 2009 (year-ending Aug. 31) in March 2010 which show a significant deterioration in balance sheet liquidity since fiscal 2007 and negative operating profitability in each of the last two fiscal years.

--The Negative Outlook reflects Fitch's concerns over the lack of liquidity growth in spite of improved profitability in the interim period.

--While Valley Baptist Health System (VBHS) maintains a leading market share position of nearly 60% in Cameron County, the service area demographics reflect wealth levels that are well below state and national averages which is evidenced in a weak payor mix.

--Although weakened from the time of the original rating in 2007, interim profitability is improved over fiscal 2008 and 2009 results.

--VBHS was in default of certain covenants under its bank reimbursement agreement related to the series 2007 variable rate demand bonds as well as its line of credit agreement. VBHS has received waivers to the defaults and was in compliance with all covenants at the end of the third fiscal quarter ended May 31, 2010. There was no default under the master trust indenture (MTI).

WHAT COULD TRIGGER A DOWNGRADE?

--Further deterioration in the already slim liquidity position.

--Default or covenant violation under the reimbursement or credit agreements.

SECURITY:

Gross revenue pledge, mortgage lien on property and debt service reserve fund.

CREDIT SUMMARY:

VBHS did not release audited financial statements for 2008 and 2009 until March 2010 due to negotiations between VBHS and the bank group regarding receipt of various waivers under the reimbursement and credit agreements. Since fiscal 2007, VBHS' position of unrestricted cash and investments has declined from $130.1 million to $73.2 million as of May 31, 2010. As a result, VBHS' liquidity ratios are no longer consistent with Fitch 'BBB' category medians. At May 31, 2010, VBHS' 59 days cash on hand (DCOH), 4.2 times (x) cushion ratio and 41.9% cash to debt ratio are all weaker than the respective Fitch 'BBB' category medians of 114 DCOH, 8.1x and 62.6%. Additionally, Fitch expresses concern with the rise in accounts receivables to a high 68 days at fiscal year-end (FYE) 2009 from 54 days at FYE 2008. According to management, the increase reflects mistreatment of certain billings related to the implementation of a new software system. The billing issue is being resolved and management projects days in accounts receivable to be closer to 60 days by FYE 2010.

Excluding proceeds from the sale of certain operations, VBHS posted a loss from operations of $33 million in fiscal 2008 (-6.2% operating margin) and $29.6 million in fiscal 2009 (-5.7% operating margin). Operating EBITDA margins of -0.9% and 2.1% in fiscal 2008 and 2009 are well below Fitch's 'BBB' category median of 8%. While damage and the resulting interruption in service due to Hurricane Dolly negatively impacted operating results in 2009, Fitch also believes the weak operating performance reflects VBHS' poor payor mix and losses from non-acute care business ventures approved by the Board prior to 2008 and 2009. In fiscal 2009, Medicare, Medicaid and self-pay payors composed 29.7%, 29.9% and 14.4% of gross revenues, respectively. As a result, VBHS receives substantial payments under Disproportionate Share (DSH) and Upper Payment Limit (UPL) programs. In fiscal 2008 and 2009, UPL and DSH payments totaled $22.6 million and $29.4 million, respectively. While Fitch expects payments under both program to continue in FY 2010 and 2011, the variability in timing and amounts under each program can materially impact VBHS' profitability.

In September 2009, VBHS engaged FTI Healthcare to perform an operational assessment. Through the nine-month interim period, operating profitability has improved significantly with a $1.2 million loss from operations (-0.3% operating margin) and $28.2 million in operating EBITDA (7.1% operating EBITDA margin).

With acute facilities in Harlingen and Brownsville, TX, VBHS operates a total of 828 acute beds. In fiscal 2009, VBHS reported $534.4 million of total revenues and support. VBHS is not required to provide annual or quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA system. Although the release of the 2008 and 2009 audits were delayed, management has been responsive to requests for information from Fitch and has included balance sheet, income statement and utilization statistics.

Additional information is available at 'www.fitchratings.com'

Related Research:

--'Revenue-Supported Rating Criteria', dated Aug. 16, 2010.

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606

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Director
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KEYWORDS:   United States  North America  Illinois  New York  Texas

INDUSTRY KEYWORDS:   Health  Hospitals  Managed Care

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