Fitch Assigns 'BBB-' to John Fitzgibbon Memorial Hospital (MO); Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB-' rating to the following revenue bonds to be issued by the Industrial Development Authority of Saline, Missouri, on behalf of John Fitzgibbon Memorial Hospital (JFMH):

--Approximately $12.2 million health facilities bonds, series 2010.

The bonds are expected to price the week of Oct. 27, 2010 via negotiation, and will be used to refund the series 1998 revenue bonds, fund a debt service reserve, and pay associated costs of issuance.

In addition, Fitch has assigned a 'BBB-' rating to the following parity obligations of the same issuer:

--$9.3 million hospital revenue bonds, series 2005;

--$12.4 million hospital revenue bonds, series 1998.

The Rating Outlook is Stable.

RATING RATIONALE:

--JFMH has demonstrated solid profitability against 'BBB' rated medians that's supported by consistent revenue growth and stable utilization metrics.

--The organization has a leading market position in its primary service area (PSA) of 50.8%, which is enhanced through its strong relationship with Boone Hospital Center (BHC; revenue bonds rated 'A' by Fitch) dating back to 1998.

--Significant capital spending in prior years results in very modest ongoing capital needs, up-to-date physical plant, and no plans for additional debt.

--JFMH operates in a challenged service area illustrated by its payor mix with a high reliance on government payors.

--JFMH's small revenue base makes the organization highly susceptible to various risks, including physician departures, utilization downturn, payor mix, and other variables.

KEY RATING DRIVERS:

--Preservation of profitability metrics via continued top line revenue growth coupled with successful expense management.

--Continued solid operating cash flow combined with a small appetite for capital expenditures.

--Balance sheet maintenance.

SECURITY:

A pledge on gross revenues, mortgage on certain hospital and nursing home property, and fully-funded debt service reserve will provide security for the bonds.

CREDIT SUMMARY:

The 'BBB-' rating is supported by JFMH's consistent profitability, leading market position, relationship with BHC, and modest capital needs. These strengths help offset credit concerns that include the inherent risks associated with a small revenue size - a high governmental, uninsured payer mix, weak service area characteristics.

JFMH's financial performance on an operating EBITDA basis has been fairly stable and solid over the past four fiscal years, supported by consistent growth in net patient revenue and steady utilization. Financial performance in 2010 was improved significantly by settlements with Medicare and Medicaid totaling $1.28 million. However, the first four months of fiscal 2011 demonstrates a continuation of improved profitability with a 2.7% operating margin and 13.8% operating EBITDA margin. Fitch believes that JFMH benefits from a long-standing relationship with BHC that began in 1998, which was strengthened in 2005 by the signing of a formal management service agreement with annual evergreen renewals. JFMH maintains a leading market share, measured at 50.8% in 2009 in its PSA with the next leading competitor, BHC, having a 17.6% share.

JFMH's solid operating performance and positive investment performance have resulted in modest growth in unrestricted cash and investments, which stood at $18.4 million as of Aug. 31, 2010. Fitch views JFMH's liquidity as adequate for the category as days cash on hand, cushion ratio, and cash to debt averaged 148.7 days, 8.6 times (x), and 72.1%, respectively, over fiscal years 2005-2010.

Following the series 2010 refunding issuance, pro forma maximum annual debt service (MADS) is estimated at $1.72 million as calculated by the underwriter. Overall, JFMH has a moderate debt burden as MADS as a percentage of revenue equaled 3.3% in fiscal 2010, just under Fitch's 'BBB' category median of 3.5%. Still, pro forma coverage of MADS by operating EBITDA was 4.1x in fiscal 2010 and JFMH covered MADS by an average of 2.6x by operating EBITDA from fiscal 2005-2010, which compares favorably to Fitch's 'BBB' rating category median of 2.4x. While certain capital-related ratios demonstrate leverage, capital spending should be modest over the medium term as JFMH has a relatively low average age of plant at 8.6 years, and recently completed a period of significant capital projects in 2008. With routine capital expenses averaging $1.8 million per year through 2014, JFMH has no plans for additional debt.

Key credit concerns include JFMH's small revenue base, somewhat challenged service area, high reliance on government payors, moderate debt burden, and small active physician staff. JFMH's small revenue base of $52.6 million in fiscal 2010 subjects the hospital to higher risk of operating volatility, such as fluctuations in utilization, physician staffing levels, or reimbursement changes. Further, as a rural provider, JFMH has a small active physician base of 11, relying heavily on its top 10 providers to generate approximately 65% of its admissions, in addition to 28 courtesy and 41 consulting staff to provide specialty support. Still, management has a strong rapport with its physician base, and a history of successful recruitment (net addition of nine physicians since 2005), which mitigates some of this risk. JFMH also relies heavily on government payors and supplemental disproportionate share (DSH) payments, as Medicare and Medicaid paying patients made up approximately 61% of the total payor base in 2010. While DSH is being phased out in Missouri, JFMH receives supplemental Medicare reimbursement as a low-volume Medicare Dependent Hospital, which management anticipates will offset any DSH reductions going forward.

The Stable Outlook is supported by the expectation that JFMH's strong market position and relatively stable physician base should support operating performance at levels consistent with 'BBB' category medians. Additionally, Fitch expects JFMH to strengthen its balance sheet metrics over the short to medium term as the organization maintains solid operating cash flow against a minimal need for capital expenditures.

JFMH is a 60-licensed bed hospital located in Saline County, Missouri, approximately 80 miles east of Kansas City. Operations also include a 99-bed skilled nursing facility and several rural health clinics. Total revenues in 2010 were $52.6 million. JFMH will covenant to provide audited annual statements within 180 days of each fiscal year end and quarterly statements within 60 days of each quarter end to the Municipal Securities Rulemaking Board's EMMA system. Quarterly disclosure will include a balance sheet, income statement, and cash flow statement.

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

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from the Obligor, King Hershey PC as Underwriter, BKD as Auditor, and Stern Brothers & Co as Underwriter.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 8 2010;

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

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

Applicable Criteria and 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=564565

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CONTACT:

Fitch Ratings
Primary Analyst:
Emily Wadhwani, +1-312-368-3347
Associate Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Michael Burger, +1-212-908-0555
Associate Director
or
Committee Chairperson:
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Managing Director
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Media Relations:
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[email protected]

KEYWORDS:   United States  North America  Missouri  New York

INDUSTRY KEYWORDS:   Health  Hospitals

MEDIA:

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