Fitch Rates Harris County Hospital District's Revs 'A'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' underlying rating to the following Harris County Hospital District, TX (HCHD) revenue bonds:

--Approximately $103.5 million series 2010 senior lien refunding tax-exempt, variable-rate revenue bonds.

The bonds are expected to price via negotiation the week of Aug. 9, 2010 and are being used to refund the 2007B series taxable revenue bonds. The series 2010 bonds are expected to be supported by an irrevocable direct-pay letter of credit from JP Morgan Chase. Total outstanding debt after this issuance is approximately $300 million.

In addition, Fitch affirms the following ratings:

--$199.1 million in outstanding 2007A series senior lien tax-exempt fixed-rate revenue bonds at 'A';

--$103.5 million in outstanding 2007B series senior lien taxable fixed-rate revenue bonds at 'A';

The Rating Outlook is Stable.

RATING RATIONALE:

--HCHD's balance sheet remains a noted credit strength, with unrestricted cash and investments at $727.4 million at fiscal year end 2010 (Feb. 28), equating to 187.9 days cash on hand (DCOH), a strong 37.1 times (x) cushion ratio, and 246.1% cash to debt position. These metrics compare favorably to Fitch's 'A' rated medians of 183.8 DCOH, 14.4x cushion ratio, and 105.5% cash to debt.

--The series 2010 issuance will be variable rate and supported by a letter of credit which presents renewal, counterparty and put risk; however, HCHD's balance sheet strength offsets these risks somewhat. Additionally, HCHD has a relatively light debt burden, as illustrated by maximum annual debt service (MADS) at a low 1% of revenue, and debt to capitalization of 28.9% as of fiscal 2010.

--HCHD relies heavily on ad valorem tax revenue to offset the high levels of bad debt and charity care. HCHD received $528.6 million in tax revenues in fiscal 2010 over $522.1 million in fiscal 2009, which makes up the majority of its operating income of -$3.5 million (-0.2% operating margin) in fiscal 2010 and $70.5 million operating income (4.1% operating margin) in fiscal 2009.

--HCHD's position as the safety net provider for Harris County, Texas provides for significant community and legislative support.

KEY RATING DRIVERS:

--Significant planned capital projects present some construction and operational risk, and Fitch expects HCHD to maintain its EBITDA margins with no significant deterioration in balance sheet metrics through the construction period ending in 2013.

--HCHD's heavy reliance on Medicaid and DSH/UPL funding presents significant credit risk to its operating profile, and may be impacted negatively by changes from healthcare reform over the next 24-48 months.

SECURITY:

The bonds are secured by a lien on the pledged revenues of HCHD (excluding ad valorem tax revenue), and a debt service reserve fund.

CREDIT SUMMARY:

The 'A' rating is supported primarily by HCHD's strong balance sheet indicators, consistent support from ad valorem tax revenues, and essential role as the provider of healthcare services to Harris County's indigent and Medicaid population. As of fiscal 2010, HCHD had $727 million in unrestricted cash and investments, improved over the $650 million in fiscal 2009. Fitch believes this cash position provides financial flexibility against an operating profile that has fluctuating cash flow due to the timing of tax revenues and supplemental Medicaid payments. HCHD generated $1.9 billion in total revenues in fiscal 2010 (including $419.6 million of bad debt expense and $528.6 million of ad valorem tax revenues, which deviates from the audit) and $79.7 million in EBITDA, equating to a 4.2% EBITDA margin. The EBITDA margin has significantly declined from the 9.4% generated in fiscal 2009, due to higher levels of bad debt and charity care that were not offset by ad valorem tax revenue as a result of flat assessed valuation (AV) growth. In tax year 2009, AV only grew 1.2% compared to 9.5% the previous year. While the tax rate has been stable since 2005 at $0.19216 per $100 of AV, there is significant room between the current rate and the max rate of $0.75 per $100 of AV. However, management did not indicate consideration of an increase in the tax rate and anticipates a gradual return to more typical increases in AV growth between 3%-5% over the next few years. The fiscal year (FY) 2011 budget assumes flat to declining AV growth, offset by augmented DSH/UPL revenues from increased federal matching funds via the stimulus bill.

The 2010 debt issuance reflects a planned refunding of the series 2007B taxable bonds, for which HCHD will issue variable rate demand bonds, supported by a letter of credit from JP Morgan. As the new debt reflects a refunding, MADS is unchanged at $19.6 million. The series 2007A-B bonds were issued to provide funding for significant capital projects, the majority of which are scheduled for completion in 2012 and 2013. Major projects include the expansion of the emergency department at Lyndon B. Johnson General Hospital (LBJ), expansion of specialty services at LBJ and the Holly Hall, and renovation to the campus at Ben Taub General Hospital (BTG). While Fitch believes these projects are critical to HCHD's mission and will enable HCHD to better serve its patient base, there are noteworthy construction and operational risks associated with capital projects of this magnitude. It is Fitch's expectation that HCHD mitigate these risks via sufficient construction contracts and contingencies, and through preserving its liquidity position. To date, the projects are on time and slightly under budget. HCHD anticipates a shortfall of $25 million for its slated projects, which is expected to be funded from a combination of fundraising and cash flow.

Harris County Hospital District (HCHD) is the fifth largest metropolitan health system in the country, and consists of three hospitals: 586-bed Ben Taub General Hospital, 328-bed LBJ Hospital, and 49-bed Quentin Mease Community Hospital, 12 primary care outpatient clinics, various school-based clinics, and other ambulatory sites. In addition, the system includes a foundation and a 158,000 member Medicaid Health Maintenance Organization. In fiscal 2010, HCHD generated $1.87 billion in operating revenues, including $419.6 million in bad debt expense which is included as a deduction from revenue in the audited financials, and $528.6 million in ad valorem tax revenue which is included as nonoperating revenue in the audited financials. HCHD covenants to provide annual disclosure to bondholders, via the Municipal Securities Rulemaking Board's EMMA system. Fitch views best practice disclosure to also include quarterly statements.

Applicable criteria available on Fitch's website at www.fitchratings.com:

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

--'Revenue-Supported Rating Criteria', dated Dec. 29, 2009.

Additional information is available at www.fitchratings.com.

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=493154

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