Fitch Affirms Pella Regional Health Center (IA) Revs at 'BBB-'; Outlook Remains Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on the following Iowa Finance Authority bonds issued on behalf of Pella Regional Health Center:

--$46.7 million health facilities revenue bonds series 2006 at 'BBB-'.

The 'BBB-' is an underlying rating. The series 2006 bonds are insured by Radian Asset Insurance, whose Insurer Financial Strength is not rated by Fitch.

The Rating Outlook is Stable.

RATING RATIONALE:

--Pella Regional Health Center's (PRHC) critical access hospital (CAH) designation enables the organization to maintain strong operating profitability, demonstrated by a 15.2% EBITDA margin and 14.7% operating EBITDA margin in 2010.

--Despite a decline in revenue to $64.2 million in 2010 from $65.3 million in 2009, continued attention to expense management and improved utilization has generated stronger performance in the three-month interim period ending March 31, 2011.

--PRHC continues to bolster its liquidity metrics to approximately 203.2 days cash on hand (DCOH), a cushion ratio of 9.2 times (x) and cash to debt of 68.1% as of March 31, 2011.

--By virtue of its CAH designation, PRHC remains to be the market leader in Marion County, which sustained its solid economic and demographic indicators through the recession.

--Credit concerns include PRHC's high debt burden, and its small revenue base of approximately $64 million, which limits the organization's financial ability to absorb adverse events.

KEY RATING DRIVERS:

--Fitch expects that PRHC will return to top-line revenue growth, which coupled with continued expense controls should generate strong operating cash flow and strengthened liquidity.

--It is essential that PRHC maintain its CAH designation for operating profitability to continue at its current pace. Although Fitch does not expect any structural changes to the CAH program, negative modifications could result in rating pressure.

SECURITY:

The bonds are secured by a pledge of gross revenues of the obligated group, and a first-priority mortgage on certain property.

CREDIT SUMMARY:

The 'BBB-' rating affirmation is supported by PRHC's CAH designation, strong operating profitability, improved liquidity metrics, and leading market position in Marion County.

Despite a decrease in overall profitability in 2010, driven primarily by a decline in utilization, PRHC has rebounded somewhat in the three-month interim period. In 2010, PRHC generated approximately $63 million in net patient revenue and met its budget for a 1.4% operating margin, down from $64.4 million in net patient revenue and a 2.7% operating margin in 2009. Further, $1.2 million in realized investment losses had a negative impact on EBITDA, which was down to a 12.0% margin in 2010 from 15.2% in 2009. Still, core operations remained steady, as demonstrated by a 13.3% operating EBITDA in 2010, and performance has improved through the three-month interim period ending March 31, 2011. PRHC has generated a robust 13.9% operating EBITDA margin, 19.4% EBITDA margin, and an improved 2.0% operating margin, all ahead of Fitch's 'BBB' category median metrics of 8.7%, 8.9%, and 1.9%, respectively. While March 31 performance was slightly behind the 2011 budget for a 2.3% operating margin, Fitch believes PRHC will continue its positive trajectory through fiscal 2011 via expense management and healthy ambulatory volumes. Through March 31, 2011, outpatient surgeries, emergency visits and clinic visits have improved year-over-year by 32.8%, 2.5% and 2.8%, respectively.

Liquidity continued to improve in 2010 to $29.9 million in unrestricted cash (192 DCOH) and remained solid at $32.8 million (203.2 DCOH) at the three-month interim period ending March 31, 2011. Finally, PRHC maintained its leading market position in Marion County, which weathered the recession well with no significant company closings or layoffs. In fact, median income, poverty rate, and unemployment rate in Marion County have all remained favorable compared to the state and U.S. averages through 2010 and into 2011. PRHC's outpatient market share in Marion County was 41% in 2010, while inpatient market share was 34% in 2010, reflecting an ongoing shift from inpatient to outpatient services.

Credit concerns include PRHC's elevated debt burden and small revenue base. PRHC is significantly leveraged, as demonstrated by maximum annual debt service (MADS) as a percentage of revenue of 5.3% through the March 31, 2011 interim period, which compares unfavorably with the Fitch 'BBB' median of 3.5%. Also, PRHC's light cash to debt position of 68.1% and 9.2x cushion ratio at March 31, 2011 reflects its high debt load. Still, healthy operating profitability has equated to solid coverage of MADS, with PRHC generating 2.4x coverage by operating EBITDA in 2010, equal to Fitch's 'BBB' category median of 2.4x. An additional concern is PRHC's modest revenue base of $64.2 million, which limits its overall financial flexibility in the face of adverse events. These concerns are mitigated somewhat by PRHC's cost-based reimbursement from both Medicare and from Iowa Medicaid, which Fitch believes provides for some stability in revenue generation going forward.

The Stable Outlook is based largely on PRHC's CAH designation, which should help it generate healthy operating profitability going forward and allow the organization to grow into its current debt burden. Fitch notes that all of PRHC's major capital projects have been completed and it has no plans for additional debt. Solid cash flow absent capital expenditures should allow PRHC to continue to build its balance sheet over the near to medium term.

Located in Pella, IA, in Marion County, approximately 50 miles southeast of Des Moines, PRHC is a critical access hospital with 25 acute care/swing beds. Other entities include five medical clinics, one nursing home with a total of 92 beds, and a 46-unit assisted living facility. Total revenues were $64.2 million in fiscal 2010. PRHC covenants to provide annual and quarterly disclosure to the Municipal Securities Rulemaking Boards EMMA system, consisting of a management discussion and analysis, balance sheet, income statement, statement of cash flows, and utilization statistics.

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

This action was informed by the sources of information identified in the Revenue-Supported Rating Criteria.

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:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

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

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