Fitch Affirms King's Daughters Medical Center (KY) Revs at 'A+'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A+' rating on the following bonds issued on behalf of King's Daughters Medical Center, Kentucky (KDMC):

--$50 million series 2008A Kentucky Economic Development Finance Authority revenue improvement bonds;

--$50 million series 2008B Kentucky Economic Development Finance Authority revenue improvement bonds;

--$46.4 million series 2008C Kentucky Economic Development Finance Authority revenue refunding and improvement bonds;

--$75 million series 2010A Kentucky Economic Development Finance Authority revenue improvement bonds;

--$28.2 million series 2010B City of Ashland, Kentucky revenue improvement bonds.

The Rating Outlook is Stable.

SECURITY

Bond payments are secured by a pledge of the gross revenues, a first lien mortgage, and a security interest in certain property of the obligated group.

KEY RATING DRIVERS

SOLID OPERATING PERFORMANCE: Operating profitability in both fiscal years 2010 and 2011 decreased from historic levels but improvements achieved in fiscal 2011 remain consistent with the rating category and appears to be on an upward trajectory.

STRONG HISTORICAL DEBT SERVICE COVERAGE: Historically, KDMC has generated coverage of maximum annual debt service (MADS) by EBITDA which exceeds Fitch's 'A' category median.

LIGHT FUTURE CAPITAL NEEDS: Strong historic capital investment has resulted in a low average age of plant and portends light capital spending needs in the near term.

SOLID LIQUIDITY METRICS: KDMC has been able to maintain solid liquidity metrics which are in line with Fitch's 'A' category medians despite a high level of capital spending over the last four years.

LEADING MARKET SHARE: KDMC has increased its leading market share position in its primary service area to 40.2% in 2010 from 38.7% in 2006. However, service area demographics remain challenging.

CREDIT PROFILE

The affirmation of the 'A+' rating reflects KDMC's solid operating performance, strong coverage of debt service, solid liquidity metrics, growing market share and modest capital needs.

While diminished from levels achieved in fiscal 2009, operating profitability metrics remain solid for the rating category and provide for strong coverage of debt service. Operating EBITDA margin decreased to 8.6% in fiscal 2010 from 12.7% in fiscal 2009 primarily due to soft volumes and deterioration in KDMC's payor mix. Management has implemented a financial improvement plan which includes improved revenue cycle initiatives, a work force reduction, benefit changes and increased supplier negotiations. Operating EBITDA margin increased to 9.6% in fiscal 2011 and is consistent with Fitch's 'A' category median of 9.4%. Coverage of MADS by EBITDA of 4.6 times (x) in fiscal 2011 exceeds the 'A' category median of 3.7x.

KDMC has maintained robust liquidity metrics despite strong historic reinvestment in property and plant. KDMC's unrestricted cash and investments position has increased 15.6% since fiscal 2009 to $266.3 million as of Dec. 31, 2011 and equates to 215.9 days cash on hand, 17.2x cushion ratio and 109.1% cash to debt and compares favorably to the respective 'A' category medians of 194.1 days, 15.4x and 113.8%.

Capital expenditures have averaged $52 million per year between fiscal 2006 and fiscal 2010 before dropping to $30 million in fiscal 2011. Management expects capital expenditures to average between $30 million and $45 million for the next three years. Fitch expects the lower level of capital spending to further strengthen KDMC's balance sheet. The strong capital reinvestment resulted in a low average age of plant of 9.0 years at Sept. 30, 2011 relative to Fitch's 'A' category median of 10.2 years.

KDMC's leading market share of 40.2% in its primary service area lends to its operating stability, however, the service area's demographics remain challenging. The service area is characterized by flat population growth and low median household income levels relative to both state and national averages. These demographic characteristics are reflected in KDMC's high exposure to Medicaid at 16.4% of revenues in fiscal 2011, increasing exposure to self-pay at 7.2% of revenues and increasing bad debt expense at 9.7% of revenues.

The Stable Outlook is based upon Fitch's expectation that operating profitability will improve from levels achieved in fiscal 2011 while decreased levels of capital spending should allow the balance sheet to be further strengthened. Failure to continue recent improvements in operating profitability may result in downward rating pressure.

King's Daughters Medical Center is a 465-staffed bed regional tertiary referral center located in Ashland, KY, approximately 120 miles east of Lexington, KY and 120 miles south of Columbus, OH. Total operating revenue in fiscal 2011 equaled $596.4 million. KDMC covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 45 days of the end of each quarter to the Municipal Securities Rulemaking Board's EMMA website.

Additional information is available at 'www.fitchratings.com'. 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', dated June 20, 2011;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

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CONTACT:

Fitch Ratings
Primary Analyst:
Adam Kates, +1-312-368-3180
Director
Fitch, Inc.
70 West Madison Street
Chicago, IL 60606
or
Secondary Analyst:
Emily Wadhwani, +1-312-368-3347
Associate Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278 (New York)
[email protected]

KEYWORDS:   United States  North America  Illinois  Kentucky  New York

INDUSTRY KEYWORDS:   Health  Hospitals

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