Fitch Revises Sheppard Pratt, MD Outlook to Positive; Affirms $88MM Revs at 'A-'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the underlying rating on approximately $88 million Maryland Health and Higher Education Facilities Authority revenue bonds (Sheppard Pratt Issue), series 2003 at 'A-'. The Rating Outlook is revised to Positive from Stable.

The revision of Outlook to Positive reflects Sheppard Pratt Health System, Inc.'s (SPHS) improved profitability in fiscal 2008 and budgeted fiscal 2009. The improvements are largely a result of an increase in Medicaid rates (effective April 2008), which have an annualized impact of approximately $4 million. Additionally, in fiscal 2008, SPHS reduced full-time equivalents (FTEs) by 50 through a combination of attrition and layoffs, generating approximately $3 million in annualized savings. SPHS' gain from operations improved in fiscal 2008 (ended June 30) (obligated group only; unaudited) to $812,000 (0.5% operating margin) from a loss of $3.2 million (negative 1.9% operating margin) in fiscal 2007. On a consolidated basis, the system is budgeting for an operating gain of $2.6 million for fiscal 2009. The improvement is a turnaround from the historical annual losses of roughly $1 million the system has experienced since fiscal 2003. If the budgeted improvement materializes in fiscal 2009 and proves sustainable thereafter, an upgrade is likely.

The 'A-' underlying rating is supported by SPHS' strong liquidity, its position as the largest provider of psychiatric services in central Maryland, and good revenue diversification. As of June 30, 2007, SPHS had $137.6 million of unrestricted cash and investments equating to 238.6 days cash on hand (DCOH) and 134% cash-to-debt. These ratios exceed Fitch's 'A' category medians of 185.2 days and 111.6%, respectively. SPHS captures roughly 30% of psychiatric discharges in central Maryland compared to roughly 10% for its nearest competitor (Johns Hopkins Health System, rated 'AA-' by Fitch). The system draws revenue from multiple lines of service including hospital care (57%), residential care (7%), and education (16%) as well as from non-obligated affiliates (26%; support housing and psychiatric rehabilitation).

The ongoing main credit concern is SPHS' exposure to governmental reimbursement, which made up 73% of gross revenues in fiscal 2007. Potential cuts in reimbursement on state, federal, and/or local level may have substantial adverse effects on SPHS' profitability. Also a credit concern are the historical operating losses SPHS experienced from fiscal 2003 to fiscal 2007, averaging a $1.2 million loss annually, an indication of somewhat volatile operations.

The rating and Outlook take into consideration SPHS' plans to issue upwards of $25 million in fiscal 2009. The proceeds will be used to retire a $16.9 million bridge loan used to acquire a 44-acre campus that is expected to replace the system's Forbush School, which provides special education to children in pre-school to 12th grade. The remainder of the proceeds will be used for retrofitting the existing buildings on the site for SPHS' needs. Management expects the new school to accommodate approximately 180 students, up from 136 in the current facility, and experience operating losses for one to two years while the ramp-up occurs. Given SPHS' moderate debt burden, Fitch does not believe that this borrowing will have any adverse impact on the rating.

SPHS provides various mental health treatment services at numerous facilities around the state of Maryland. Its flagship facility, a 298-operated bed inpatient psychiatric hospital, is located on an 80-acre campus in Towson, MD, adjacent to Towson University and approximately seven miles north of downtown Baltimore. Annual revenue for the consolidated organization totaled approximately $227.3 million in fiscal 2007. In fiscal 2007, the obligated group made up 74% of revenues and 88% of assets of SPHS. SPHS covenants to disclose annual and quarterly information to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) and financial disclosure has been thorough and timely.

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