<0> Fitch Affirms Lake Hospital System's (OH) Revs at 'A-'; Outlook Stable </0>
<0> Fitch RatingsPrimary Analyst:Jim LeBuhn, +1-312-368-2059Senior DirectorFitch Ratings, Inc.70 West MadisonChicago, IL 60602orSecondary Analyst:Dana Sodikoff, +1-312-368-3215Associate DirectororCommittee Chairperson:Eva Thein, +1-212-908-0674Senior DirectororMedia Relations:Elizabeth Fogerty, New York, +1 212-908-0526 </0>
Fitch Ratings has affirmed the 'A-' rating on the following hospital facility revenue bonds issued by Lake County, Ohio on behalf of Lake Hospital System, Inc.:
--$71 million series 2008C.
The Rating Outlook is Stable.
KEY RATING DRIVERS
STRONG OPERATING PROFITABILITY: Lake Hospital System (LHS) has generated strong and consistent operating cash flow margins in each of the last five fiscal years. From 2008 to 2012, LHS has generated operating EBITDA margins between 11.2% and 14.2%, which easily exceeds Fitch's 'A' category medians.
HIGH LEVERAGE POSITION: LHS' debt burden is elevated reflecting the development of its replacement hospital facility, TriPoint Medical Center which opened in 2009. Maximum annual debt service (MADS) of $17.4 million equates to 5.4% of 2012 total revenues, which is high when compared to the 'A' category median of 2.8%. In 2012 and 2011, LHS generated coverage of MADS by EBITDA of 2.7 times(x) and 3.1x, respectively.
IMPROVING LIQUIDITY METRICS: Due to LHS' strong cash flow generation, unrestricted cash and investments have grown to $203.6 million at April 30, 2013 from $157.4 million at FYE 2011 (year ending Dec 31). At April 30th, LHS' days cash on hand of 262.9 easily exceeds the 'A' category median of 191. However, cushion ratio of 11.7x and cash-to-debt of 93.6% lag the respective 'A' category medians of 16.3x and 116.4%
LEADING MARKET POSITION: LHS has been able to increase its market share position by in the competitive Lake County primary service area. Through the 3Q 2012, LHS' 56.4% market share position was more than twice its nearest competitor, Cleveland Clinic Foundation, at 25.2%.
SUSTAINING OPERATING PERFORMANCE: Due to LHS' elevated leverage position, maintaining strong operating cash flow is necessary to generate adequate debt service coverage.
The bonds are secured by interest in receipts, which include all revenues and accounts receivables of the obligated group and special fund moneys and investment earning of such moneys related to the seventh supplemental lease and the TriPoint Medical Center lease.
Lake Hospital System consists of two acute care hospitals (the 119-licensed bed new TriPoint Medical Center, which replaced the Lake East Hospital in Painesville, OH, and 226-licensed bed LakeWest in Willoughby, OH), various ambulatory ventures, a physician-hospital organization, a captive insurance entity and a foundation.
Over the last five fiscal years (2008-2012), LHS' operating profitability as measured by operating EBITDA has been very strong ranging between 11.2% and 14.6% annually. In 2011 and 2012, LHS generated operating EBITDA margins of 14.6% and 12.6%, respectively, which easily exceeds the 2012 'A' category median of 9.8%. Fitch believes the strong operating performance reflects the successful execution of LHS' strategy to develop a community based integrated health network in the northeast Ohio. The opening of TriPoint Medical Center in 2009 and further growth in its employed and aligned physician network has generated year over year growth in inpatient admissions. Fitch believes LHS' clinically integrated physician health enterprise (IPHE), which aligns the hospital and area physicians in managing resources and clinical care, should allow LHS successfully navigate the expected move to value based reimbursement models.
LEADING MARKET SHARE
While both the Cleveland Clinic and University Hospital and Health System have ambulatory sites in the primary service area (PSA), LHS' had a 56.4% market share position in the PSA in the third quarter of 2012. Since 2007 LHS has increased its market share position by 3.1%. Furthermore, as the only acute care hospital in the PSA, the TriPoint location should allow for further market share gains.
Due to LHS' strong cash flow generation, unrestricted cash and investments have grown to $203.6 million at April 30, 2013 from $157.4 million at FYE 2011 (year ending Dec 31). At April 30, LHS' days cash on hand of 262.9 easily exceeds the 'A' category median of 191. However, cushion ratio of 11.7x and cash-to-debt of 93.6% lag the respective 'A' category medians of 16.3x and 116.4%. Further improvement in liquidity metrics is unlikely as management is evaluating capital investment at its West campus which would be funded internally.
LHS' elevated debt burden and high exposure to bank placed debt constitute Fitch's primary credit concerns. MADS of $17.3 million equates to a high 5.4% of 2012 total revenues and exceeds the 'A' category median of 2.8%. Debt to capitalization at Dec. 31, 2012 of 48.8% exceeds the 'A' category median of 40.7%. Despite LHS' strong profitability, coverage of MADS by EBITDA is light 2.7x and 3.1x in 2012 and 2011, respectively. While Fitch views LHS' refinancing of its series 2002 and series 2008A&B variable rate demand bonds with a the series 2012 direct purchase variable rate issue favorably, LHS still maintains a high level of renewal risk in its capital structure. The series 2012A,B&C bonds have renewal dates in 2019, 2022 and 2017, respectively. LHS has three fixed-payer swaps with a notional amount of approximately $128 million. The total mark-to-market valuation of the swaps was negative $57.2 million, requiring a $24.2 million collateral posting.
LHS provides continuing disclosure on a quarterly basis to the Security and Exchange Commission's EMMA system within 45 days of quarter-end. The disclosure includes an unaudited balance sheet, statement of operations, and selected operating statistics. Lake Health also provides annual disclosure 150 days after the close of its fiscal year.
Additional information is available at ''
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.
For information on Build America Bonds, visit .
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria