<0> Fitch Affirms Beebe Medical Center (DE) at 'BBB-'; Outlook Remains Negative </0>
Fitch RatingsElizabeth Fogerty, +1-212-908-0526Media Relations, New YorkorPrimary Analyst:Eva Thein, +1-212-908-0674Senior DirectorFitch, Inc.One State Street PlazaNew York, NY 10004orSecondary Analyst:Gary Sokolow, +1-212-908-9186DirectororCommittee Chairperson:Emily Wong, +1-212-908-0651Senior Director
Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued on behalf of Beebe Medical Center (Beebe) by the Delaware Health Facilities Authority:
--Approximately $19.1 million series 2004A;
--Approximately $20.7 million series 2005A.
The Rating Outlook remains Negative.
SECURITY
The bonds are secured by a pledge of Beebe's gross receipts and a mortgage on its principal facilities.
KEY RATING DRIVERS
MEDIATION OF DR. BRADLEY LITIGATION ONGOING: The number of potential plaintiffs in the Dr. Bradley child abuse case has increased significantly, but the mediation process with the participation of Beebe's insurance carriers continues in an orderly fashion and it is expected that a proposed settlement will be presented to the court in the next several months. However, there remains significant uncertainty with regard to the ultimate resolution of the litigation.
INCREASED RESERVE FOR POTENTIAL SETTLEMENT: Beebe was able to settle with the carrier providing Beebe's Directors and Officers (D&O) insurance and used the $8 million of proceeds to increase the Board Designated reserve being held against a potential settlement to $13.7 million. The $13.7 million is not included in Fitch's calculations of unrestricted cash and investments.
IMPROVED OPERATING RESULTS: After an operating loss in fiscal 2010 and breakeven 2011 performance, operating income for the nine months ended March 31, 2012 showed marked improvement, with operating income of $3.1 million, exceeding budget, equating to an operating and operating EBITDA margins of 1.5% and 8.4%, respectively.
STABILIZED LIQUIDITY: Beebe reported unrestricted cash and investments at March 31, 2012 of $59.5 million, not including the $13.7 million reserve for litigation settlement and $18.5 million held as collateral for its series 2002 bonds, translating to 88.1 days cash on hand (DCOH), cushion ratio of 9.7x and cash equal to 110% of debt. Cash-to-debt increases to 158% when excluding the letter of credit-backed series 2002 bonds (not rated by Fitch), which is fully collateralized with cash.
MANAGEABLE DEBT LOAD: Beebe's debt load is lighter than the 'BBB' category median with EBITDA coverage of maximum annual debt service (MADS) of 4.7x through the interim period and MADS a very manageable 1.9% of revenues.
WHAT COULD TRIGGER A RATING ACTION
IMPACT OF PENDING LITIGATION: A negative judgment against Beebe could result in a multi-notch downgrade depending on the timing, magnitude and mechanism of such resolution or settlement.
CREDIT PROFILE
The granting of the class action status in the Dr. Bradley child abuse case brought the various lawsuits into a more controllable state and despite the increase of plaintiffs to a current 600, the parties, which include Beebe's insurance carriers, continue to be involved in mediation under a court-appointed mediator. It is expected that the mediation process will produce a proposed settlement, which would be presented to court sometime in late summer or early fall of this year.
Beebe was able to buy back their D&O insurance policy for the years 2009-2010 for 80 cents on the dollar and used the $8 million of proceeds to increase the reserve for any potential claims of the settlement to $13.7 million. Fitch does not include the reserve in any liquidity calculations.
The Negative Outlook reflects the uncertainty of the timing and magnitude of the ultimate resolution of the current litigation. A settlement exceeding the reserved amount would have a potentially material impact on Beebe. Fitch will continue to monitor the progress of the legal actions and adjust the rating as warranted.
Beebe's long-time CFO is retiring effective mid-July and is being replaced by a well-credentialed individual who has already been at Beebe for the last four months, assuring a smooth transition.
After an operating loss of $4.6 million in fiscal 2010 and an essentially breakeven operation performance last year, operating results for the nine-month interim period show substantial improvement. While admissions are 3.1% behind the prior year, outpatient utilization is robust, with outpatient surgeries 10.5% ahead of the prior year period. Additionally, management has instituted a number of expense control measures, such as close tracking of FTEs per adjusted admission, which alone produced savings of $1.9 million through March 31, 2012. The interim operating gain of $3.1 million equated to an operating margin of 1.5% and operating EBITDA margin of 8.4%. These compare well to the 'BBB' category medians of 1.7 and 8.5%, respectively. Beebe continues to subsidize employed physician losses, but the subsidies are key to physician recruitment and retention.
Beebe's liquidity has stabilized following the decline in 2010 resulting from the use of internal funds to redeem the series 2005B variable rate demand bonds (VRDBs) and terminate a related swap and the need to set aside collateral for the letter of credit supporting the series 2002 VRDBs. For the nine-month 2012 interim period Beebe reported cash and unrestricted investments of $59.5 million equal to 88.1 DCOH, below the 'BBB' category median of 128.6 DCOH, but the cushion ratio of 9.7x and cash to debt of 110% exceed the category medians of 8.8x and 79.8%, respectively. Including the $18.5 million of cash and investments currently restricted to collateralize the series 2002 VRDBs would increase DCOH to 115.5 days. Beebe can include the cash collateral in their requirement to meet a 100 DCOH liquidity covenant in the LOC agreement. The PNC LOC backing the series 2002 bonds has been extended for an additional three years with a February 2015 termination date.
Beebe Medical Center is a 195 licensed-bed acute hospital located in Lewes, DE with $266.7 million of operating revenues in fiscal 2011. Beebe covenants to disclose annual audited financial statements and management discussion and analysis as well as quarterly financial statements including balance sheet, income statement, and utilization statistics.
Additional information is available at ''. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012.
--'Nonprofit Hospitals and Health Systems Rating Criteria', Aug. 12, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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