[November 07, 2012]

Fitch Affirms Peterson Regional Medical Center (TX) Revs at 'BBB-'; Outlook Negative

Fitch Ratings has affirmed the 'BBB-' rating on the following Kerrville Health Facilities Development Corporation bonds, issued on behalf of Sid Peterson Memorial Hospital (dba Peterson Regional Medical Center, PRMC):

--$70.8 million hospital revenue bonds, series 2005;

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are secured by a pledge of gross revenues, a debt service reserve, and a mortgage on hospital property.

KEY RATING DRIVERS

LOSS OF ENHANCED MEDICARE STATUS: The Outlook revision to negative reflects Fitch's concern regarding the loss in supplemental funding as the hospital's sole community hospital (SCH) status was terminated in 2012. The hospital had to book the impact of the loss of SCH status, which was retroactive to fiscal 2008 and totaled $14.7 million for the fiscal years 2008 - 2012. This resulted in a material decline in profitability and coverage ratios for fiscal 2012 (June 30 year end; draft audit).

WEAKENED DEBT SERVICE COVERAGE: PRMC will have a debt service coverage covenant violation in fiscal 2012 (less than 1.15x), but will not trigger an event of default. PRMC has engaged a consultant to comply with its indenture requirement, and will continue undertaking significant expense adjustments and operating improvements and expects to which should produce coverage more in line with Fitch's 'BBB' medians in fiscal 2013.

STRONG BALANCE SHEET: The 'BBB-' rating continues to be supported by PRMC's solid balance sheet, with metrics which outperform Fitch's 'BBB' category medians. Solid liquidity is expected to offset its small revenue base and history of light profitability for the rating category.

STABLE MARKET POSITION: PRMC's position as the only hospital within its service area provides for a stable and leading market position. In 2012, PRMC maintained an inpatient market share of 66% against the 10% share of its closest competitor.

CREDIT PROFILE

The outlook revision is driven by the financial impact of the reduced revenue going forward, which will be a challenge to manage especially since PRMC still had operating losses with the supplemental funding in the last four years.

PRMC's SCH status was terminated in 2012, with retrospective impact to fiscal years 2008-2012. The impact to fiscal 2012 was $14.8 million, of which $2.7 million is included in net patient revenue and $12.05 million was reflected as a one-time non-operating expense. With this impact, PRMC's EBITDA was a negative -$2.6 million, and as such the 1.15x rate covenant will be missed.

It is Fitch's expectation that PRMC will improve its profitability and debt service coverage levels in 2013 to levels more reflective of the 'BBB' category. In addition to the consultant engaged for the bond covenant violation, PRMC retained a consultant in late 2011 ahead of its SCH status termiation, and is now implementing many of their recommendations. PRMC is undergoing several initiatives to improve its operating performance, and is budgeting for better than breakeven operating margin performance in fiscal 2013. Should PRMC fail to improve its operating performance in fiscal 2013, negative rating pressure is likely.

Without the $12.05 million in estimated losses (included as a non-operating expense in fiscal 2012) pertaining to 2008-2011, PRMC would have produced a 9.2% EBITDA margin and 1.6x coverage of MADS in fiscal 2012. Further, coverage by operating EBITDA was 1.3x, which includes the $2.7 million estimated loss to revenue for 2012. PRMC has appealed Medicare's decision to terminate its SCH status, and PRMC has already made a $1.8 million requested payment to Medicare. Fitch does not expect the appeal to be successful.

PRMC's key credit strengths include a healthy balance sheet and a stable and leading market position. At June 30, 2012 PRMC had $89 million in unrestricted liquidity, equating to 362.8 days of cash on hand (DCOH) and 125.8% cash to debt, well ahead of Fitch's 'BBB' category medians of 138.9 DCOH and 82.7% cash to debt. However, a healthy balance sheet is expected to offset the risks associated with PRMC's small revenue base including exposure to negative events, such as the impact in fiscal 2012.

PRMC's capital needs are light, as reflected in a low 6.4 year age of plant in fiscal 2012. No additional debt is expected, and at June 30, 2012 PRMC had $70.8 million in long-term fixed-rate debt, which is all fixed rate. MADS is $5.9 million.

The service area has somewhat mixed economic indicators against state averages, but PRMC's leading 66% inpatient market share should help provide for stable volume and patient revenues going forward. The nearest competitor, Hill Country Memorial Hospital, had 10% share in 2012. Further, despite its rural location PRMC has managed to recruit at sufficient levels to preserve its physician base, and now has 32 total primary care physicians, up from 25 in 2011.

The Negative Outlook reflects Fitch's concern about PRMC's ability to improve operating performance to offset the loss in supplemental funding and potential Medicare reimbursement cuts (Medicare comprises approximately 60% of gross revenues). The failure to improve operating performance and debt service coverage in fiscal 2013 would likely result in negative rating pressure.

PRMC is a 124-licensed-bed community hospital located in Kerrville, TX. PRMC had total operating revenues of $99.7 million in unaudited fiscal 2012. PRMC covenants to provide audited annual financial statements within 150 days of fiscal year end and quarterly disclosure within 45 days of quarter end to bondholders. Disclosure information is disseminated through the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system and includes balance sheet, income statement, statement of cash flows, and utilization statistics.

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' (June 12, 2012;

--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=681015

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=683418

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