Fitch Affirms Pella Regional Health Center (IA) Revs at 'BBB-'; Outlook Revised to Positive

<0> Fitch Affirms Pella Regional Health Center (IA) Revs at 'BBB-'; Outlook Revised to Positive </0>

Fitch RatingsPrimary AnalystEmily E. WadhwaniAssociate Director+1-312-368-3347Fitch Ratings, Inc.70 W. Madison StreetChicago IL 60602orSecondary AnalystMichael BurgerDirector+1-212-908-0555orCommittee ChairpersonJames LeBuhnSenior Director+1-312-368-2059orMedia RelationsElizabeth Fogerty+1-212-908-0526

Fitch Ratings has affirmed the 'BBB-' rating on the following Iowa Finance Authority bonds issued on behalf of Pella Regional Health Center (PRHC):

--$46.7 million health facilities revenue bonds, series 2006.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by a pledge of gross revenues of the obligated group, and a first-priority mortgage on certain property.

KEY RATING DRIVERS

BALANCE SHEET GROWTH: The Outlook revision to Positive is prompted by Pella Regional Health Center's (PRHC) improving liquidity metrics, which have grown consistently over the past five years. At March 31, 2013 PRHC had 253.3 days cash on hand (DCOH), a cushion ratio of 13.4x and cash to debt of 95.4%. Further incremental growth is expected via healthy cash flow in excess of capital needs.

CONSISTENTLY HEALTHY CASH FLOW: PRHC's critical access hospital (CAH) designation provides beneficial Medicare and Medicaid reimbursement, which has supported robust operating profitability. In each of the last five years, PRHC has generated operating EBITDA margins above 13%.

LEADING MARKET POSITION: By virtue of its CAH designation PRHC remains the market leader in Marion County, a position which has been enhanced through clinic expansion within a three county service area, and via successful clinician recruitment. Good service area economic indicators has meant that PRHC's bad debt, self-pay, and Medicaid levels remain low.

SMALL REVENUE BASE: PRHC's revenue base of $73.8 million in 2012 is the primary credit concern as it provides only limited ability to absorb adverse events, making it inherently vulnerable to volatility in its medical staff, utilization trends and changes in reimbursement methodology.

RATING SENSITIVITIES

CONTINUED GROWTH IN LIQUIDITY: Fitch believes ample liquidity is required as a cushion against the risks associated with PRHC's modest revenue base and debt level. Upward rating movement is likely upon further balance sheet growth over the next two years.

CREDIT PROFILE

The Outlook revision to Positive is driven primarily by ongoing growth in PRMC's liquidity, via robust cash flow and modest capital outlays. Upward rating movement over the next 24 months is likely upon further improvement in balance sheet liquidity via strong cash flow. Any impact from health reform, via reimbursement pressure or other market dynamics could also impact the rating.

Unrestricted liquidity has more than doubled since 2008, from $20.7 million to $45.5 million via robust cash flow and limited capital needs. PRHC's capital needs are modest going forward, with $3.6 million in expected expenditures against $11.5 million in budgeted operating EBITDA. Total debt equals approximately $47 million, which is fixed rate, and PRHC has no additional debt planned.

The primary credit concern is PRHC's modest revenue base, which limits its overall financial flexibility in the face of adverse events, and highlights the need for strong balance sheet flexibility against a somewhat high debt burden. Still, debt levels continue to moderate. Through the March 31, 2013 interim period PRHC's debt to EBITDA was 3.7x, which is slightly favorable to Fitch's 'BBB' category median of 4.2x. In addition, cash to debt was 95.4% at March 31, 2013, improved from 42.8% in 2008 and slightly above Fitch's 'BBB' category median of 82.7%.

The rating incorporates PRHC's CAH designation, which provides enhanced reimbursement for both Medicare and Medicaid services, and supports its leading market position. Fitch notes that socioeconomic metrics (median income, poverty rate, and unemployment rate) within the service area compare favorably against the state and U.S. averages through 2012 and into 2013. This has resulted in a good payor mix with relatively small exposure to Medicaid (7% of gross revenues) and self-pay (4% of gross revenues) through March 2013.

PRHC is budgeting for improved performance in fiscal 2013, producing a 4.4% operating and 14.2% operating EBITDA margin. While interim performance is below budget, the first quarter has been historically light and PRHC is currently implementing operating improvements with expected $2 million in net benefit to be realized in fiscal 2013.

Located in Pella, IA in Marion County, approximately 50 miles southeast of Des Moines, PRHC is a critical access hospital with 25 acute care beds. Other entities include six medical clinics, a 63-bed skilled nursing facility, and the Pella Hospital Foundation. Total revenues were $73.8 million in fiscal 2012. PRHC covenants to provide annual and quarterly disclosure to the Municipal Securities Rulemaking Boards EMMA system, consisting of a management discussion and analysis, balance sheet, income statement, statement of cash flows, and utilization statistics.

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', dated May 20, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

U.S. Nonprofit Institutions Rating Criteria

Additional Disclosure

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