Fitch Affs North Mississippi Health Services (MS) Revs at 'AA/F1+'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the rating on the following Mississippi Hospital Equipment and Facilities Authority Revenue Bonds (North Mississippi Health Services) bonds issued on behalf of North Mississippi Health Services (NMHS):

--$71,630,000 revenue bonds, 2010 series 1, at 'AA';

--$24,200,000 revenue bonds, 2003 series 1, at 'AA/F1+';

--$29,175,000 revenue bonds, 2003 series 2, at 'AA/F1+';

--$40,000,000 variable-rate revenue bonds, 2001 Series 1, at 'AA/F1+';

--$20,770,000 variable-rate revenue bonds, 1997 series 1, at 'AA/F1+'.

The 'F1+' rating is based on self-liquidity.

SECURITY: Pledge of net revenues of the obligated group (North Mississippi Medical Center [NMMC}, Clay County Medical Corporation, and Webster Health Services, Inc.).

KEY RATING DRIVERS

STRONG MARKET POSITION: NMHS' leading 40% market share in a large 22-county region of northeast Mississippi and southwest Alabama is a credit strength. Its main competitor, Baptist Health System, has an approximate 27% market share in the same region. NMHS' market position is supported by a large base of employed physicians, approximately 55% of its active medical staff, including more than 100 primary care physicians.

MIXED FINANCIAL PROFILE: NMHS has excellent liquidity with all its liquidity metrics exceeding Fitch's 'AA' category median, while its operating performance is soft for the rating level. However, its operating performance has been very steady, reflecting NMHS' market position and management practices around efficiency and cost control.

MANAGEABLE DEBT BURDEN: NMHS' manageable debt burden is a key credit strength. For fiscal 2011 (Sept. 30 year end), results show maximum annual debt service (MADS) coverage by EBITDA of 5.4x and MADS as a percent of revenue of 1.8%, both better than their respective 'AA' category medians of 5x and 2.6%.

CAPITAL PROJECTS PROGRESSING: In fiscal 2010, NMHS issued bonds to finance major projects on its main campus that included a new west tower, a new central sterile processing facility, and a significant upgrade to its information technology (IT) systems. The sterile project has been completed. The west tower is on time and is expected to be completed in fiscal 2013. The IT project is currently being implemented, but NMHS has attested for phase 1 'meaningful use' funds and is expected to receive $3 million in funds in the current fiscal year.

CREDIT PROFILE

North Mississippi Health Services is a diversified regional health care organization with six owned hospitals and one managed hospital and more than 30 primary and specialty clinics located across the region. Its flagship hospital, North Mississippi Medical Center, is located in Tupelo, MS, and is the largest hospital in Mississippi with 621 staffed beds. Tupelo is located roughly 100 miles southeast of Memphis, TN. The obligated group (OG) consists of NMMC, Clay County Medical Corporation, and Webster Health Services, Inc. In fiscal 2011, the OG accounted for 89% of the total assets and essentially all of the system's operating income. Total system net revenue in fiscal 2011 was $834.7 million. Fitch's financial analysis is based on the consolidated statements of the complete system, although interim results are reported on an OG basis.

The 'AA' long-term rating reflects NMHS' leading market position, strong liquidity, and excellent debt service coverage. As of March 31, 2012, the six-month interim period, the obligated group had 330.1 days cash on hand, a 34.5x cushion ratio, and 258.4% cash to debt, which all exceed Fitch's 'AA' category medians.

Through the first six months of fiscal 2012, the OG had an operating margin of 2.5% and an operating EBITDA margin of 8.6%. These figures are lower year over year and trail Fitch's 'AA' medians of 4.3% and 10.6%, respectively. The softer operating performance was a result of lower inpatient volumes, but was offset slightly by growth in outpatient services. NMHS management reports that April and May were stronger months with improved inpatient volumes. NMHS' operating performance has trailed the medians for the last few years, but its operations have remained fairly stable with an annual average of 3% operating margin and an 8.8% operating EBITDA margin over the last four audited years. NMHS' MADS coverage by EBITDA over these four audited years averaged a very strong 5.6x, reflecting the manageable debt burden. MADS coverage by EBITDA for the OG dropped to 3.9x for the six-month interim period compared to 4.2x for the same prior year period.

Of concern is the significant amount of funds that NMHS receives from the federal disproportionate share and upper payment limit programs, which is expected to be phased out beginning in 2014 under federal health care reform. NMHS would be unprofitable without the supplemental funding and received $38.2 million in fiscal 2011 compared to its operating income of $27.5 million.

Fitch believes the current capital projects are essential to NMHS maintaining its competitive position. The new west wing patient tower replaces significantly outdated patient rooms, the oldest on the medical center's campus, and will enable NMHS to renovate those older rooms as well. The completed central sterile facility provides a necessary infrastructure update that is more technologically advanced, more efficient, and now handles the sterilization for all the hospitals in the system (the old one served only the medical center). The IT project will upgrade NMHS' current system to Allscripts and will include computer physician order entry and the upgrading and integrating of back-office functions.

Total outstanding debt is $185.8 million and NMHS' debt portfolio is aggressive with approximately 62% of variable-rate demand bonds supported by self-liquidity and 38% fixed rate. Concerns about this level of variable debt are offset by NMHS' excellent liquidity especially relative to its $114.1 million of puttable bonds. The OG had $506.2 million of unrestricted cash and investments as of March 31, 2012. NMHS has two swaps in place with a notional value of $48.1 million that synthetically fix a portion of the variable-rate debt. The mark-to-market on the swaps as of March 31, 2012 is ($6.3 million). NMHS' collateral threshold at the 'AA' rating is $20 million.

The 'F1+' short-term rating is supported by the availability of highly liquid securities to cover potential maximum liquidity demands presented by NMHS' $114 million of outstanding VRDBs, which exceeds the 1.25x rate as per Fitch's criteria. NMHS has a detailed procedures letter in place that delineates the process of liquidating funds in case of a tender.

The Stable Rating Outlook reflects Fitch's belief that NMHS' significant clinical footprint in the region and its manageable debt burden will continue to offset softer inpatient volumes and challenges in the local area demographics (bad debt expense remains a high 10.9% of revenues compared to a median of 4.8%). Additionally, NMHS' management continues to focus on operational efficiencies, quality initiatives, and patient and employee satisfaction, which led to the organization receiving the rigorous and prestigious Baldrige National Quality Award in 2006, which should also help sustain current levels of performance.

NMHS covenants to provide annual and quarterly financial information (for the first three quarters) to bondholders. To date, NMHS' disclosure has been timely and accurate.

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:

--'Nonprofit Hospitals and Health Systems Rating Criteria' (Aug. 12, 2011);

--'Revenue-Supported Rating Criteria' (June 12, 2012);

--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 15, 2012).

Applicable Criteria and Related Research:

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681822

Revenue-Supported Rating Criteria

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

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Contacts

Fitch Ratings
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com
or
Primary Analyst:
Gary Sokolow, +1-212-908-9186
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10014
or
Secondary Analyst:
Michael Borgani, +1-415-732-5620
Director
or
Committee Chairperson:
Emily Wong, +1-212-908-0651
Senior Director

Sharing

Contacts

Fitch Ratings
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com
or
Primary Analyst:
Gary Sokolow, +1-212-908-9186
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10014
or
Secondary Analyst:
Michael Borgani, +1-415-732-5620
Director
or
Committee Chairperson:
Emily Wong, +1-212-908-0651
Senior Director