Fitch Affirms Halifax Health's (FL) Revs at 'BBB+'; Outlook to Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following Halifax Hospital Medical Center (Daytona Beach, FL) revenue bonds:

--$173,901,000 series 2006A;

--$100,388,000 series 2006B-1, 2006B-2;

--$70,000,000 series 2008 (underlying rating).

The Rating Outlook is revised to Stable from Positive.

The series 2008 bonds are supported by a direct pay letter of credit (LOC) from Wells Fargo Bank, which is rated 'AA-/F1+' with a Stable Outlook by Fitch.

RATING RATIONALE:

--The Outlook revision to Stable from Positive is primarily related to Halifax Health's (HH) softened profitability position. Operating income has been on a declining trend since fiscal 2006 when the hospital made approximately $53.1 million from operations. For the year ended Sept. 30, 2009 (fiscal-year end), HH recorded $16 million in operating income, an approximate 70% drop. The decline in profitability has been driven by lower tax revenue and volume due to the economic downturn.

--HH's debt-related metrics through the year-end period remain consistent with Fitch's 'BBB' category medians, with 2.2 times (x) EBITDA coverage and MADS as a percentage of revenue of 3.6%, reflecting satisfactory performance within the rating category when compared against Fitch's 2010 medians of 2.5x and 3.5%, respectively.

--HH maintained a dominant market share of 67% in its primary market area (PSA) in 2009. HH's main competitor remains Florida Hospital-Memorial (FH, part of Adventist Health System/Sunbelt; rated 'AA-/F1+' by Fitch), which has an approximate 33% market position.

--Unrestricted cash and investments is a primary credit strength for the organization as $364.5 million translated into 305 days cash on hand, a 15.7x cushion ratio, and 101.1% cash to debt at the end of the June 30, 2010 (unaudited) interim period. The strong liquidity position was driven by the sale of its health plan for $85 million in December 2008.

--HH is a taxing district with authority to levy up to 4 mills. The district has been trying to reduce its reliance on tax revenue and left the millage rate unchanged at 2.25 mills for fiscal 2010 from fiscal 2009, which was reduced from 2.5 in fiscal 2008. However, given the decline in the tax base, tax revenue has significantly dropped from $50.7 million in fiscal 2008 to $34.6 million in fiscal 2010. The board of the district has the power to increase the millage rate, which is currently being considered.

--Inpatient volume has declined by approximately 6-7% in 2009 and year to date fiscal 2010 mainly due to more patients being classified as observation status and weakened local economy due to a decline in tourism.

KEY RATING DRIVERS:

--Maintaining a dominant market position in the PSA;

--Sustained profitability and liquidity at current levels.

SECURITY:

The bonds are secured by a pledge of gross revenues, property, and all other collateral held by or pledged to the master trustee.

CREDIT SUMMARY:

HH is located in Daytona Beach, FL and anchored by its flagship tertiary facility, Halifax Medical Center and an 80-bed acute care hospital in Port Orange. In fiscal 2009, HH had total revenue of approximately $653.9 million, which was down from 2008's $927.8 million due to the sale of the organization's Florida Health Care Plan to Blue Cross Blue Shield of Florida.

The Stable Outlook takes into account HH's weakened profitability position, continued patient volume pressures, and depressed service area characteristics. Although HH's liquidity is strong for the rating category, its leverage metrics remain unfavorable when compared to Fitch's 'A' category medians. Additionally, inpatient volumes have declined due to a shift of services to outpatient settings and continuing effects from the recession.

The 'BBB+' rating is supported by HH's strong market share, unrestricted liquidity position, tax revenue support, and solid investment in its physical plant. Credit concerns include weakened operating performance, declining patient volumes, continued competition, and softened economy in the local service area. HH's primary credit strengths include the organization's market position of 67% in its PSA and a healthy unrestricted cash and investments total of $364.5 million at June 30, 2010. Fitch views HH's taxing ability favorably, however, and notes HH's dependence on the tax revenue for profitability. HH has the ability to levy up to four mills, and the unused taxing authority is estimated to generate approximately $27 million in additional revenue for fiscal 2010. However, Fitch believes it is unlikely that the board would raise the millage to the maximum levy.

HH's investment into its physical plant is an additional credit strength evidenced by a capital expenditure as a percentage of depreciation average of 479.6% a year over the past four fiscal years. For comparison, Fitch's 'BBB' expenditure median in 2010 was 128.8%. HH recently opened a new inpatient tower in June 2009 on time and on budget. Other capital investments include a new emergency room, operating room renovations, and information technology needs.

In 2009, HH's competitor, FH-Memorial opened a new facility in Daytona Beach, illustrating the ongoing competitive situation in the service area. However, management does not expect any sizeable shift in market share. Additionally, HH's operating performance is a concern as profitability has steadily declined since fiscal 2006 due to revenue pressures and additional facility costs with the opening of the new patient tower. Through the nine months ended June 30, 2010 (unaudited) HH recorded $5.1 million in operating income, which equated to a 1.3% operating margin and 8.7% operating EBITDA margin. HH's average margins over the previous four fiscal years were 4.2% and 7.4%, respectively. HH's fiscal 2010 operating margin budget is approximately 1%.

HH's total outstanding debt was $368 million as of June 30, 2010 and was 81% fixed rate 19% variable rate. HH has one outstanding swap with a notional amount of $70 million. As of June 30, 2010, the mark to market value of the swap was negative $19.3 million. Citigroup is the swap counterparty and management states there is no collateral posting requirement. Fitch does not view the swap as a credit concern due to HH's liquidity position and the fact that the swap will be used as a financial tool to limit interest rate risk on its variable-rate demand bonds.

DISCLOSURE:

HH covenants to submit certain annual financial and utilization information to the MSRB's EMMA system.

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

In addition to the sources of information identified in the report 'Revenue-Supported Rating Criteria', this action was additionally informed by information from the Underwriter and HealthLeaders InterStudy.

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated Aug. 16, 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:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186

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