Fitch Rates St. Tammany Parish Hospital Service Dist No. 1 (LA) Ser 2012 Revs 'A'; Outlook Negative

SAN FRANCISCO--()--Fitch Ratings has assigned its 'A' rating to $21.5 million St. Tammany Parish Hospital Service District No.1 hospital revenue bonds (St. Tammany Parish Hospital Project), series 2012. In addition, Fitch has affirmed its 'A' rating on $50.7 million St. Tammany Parish Hospital Service District No.1 Hospital Revenue Refunding Bonds (St. Tammany Parish Hospital Project), series 2011, (STPH).

The Rating Outlook is revised to Negative from Stable.

The series 2012 bonds are expected to be issued as fixed-rate debt. Bond proceeds will fund STPH's emergency department expansion project, fund a debt service reserve fund, and pay cost of issuance. The series 2012 bonds are expected to be sold via negotiation during the week of November 26.

SECURITY

The bonds are secured by a general revenue pledge of the obligated group. A debt service reserve fund provides additional security for the bonds.

KEY RATING DRIVERS

PRESSURED PROFITABILITY GOING FORWARD: The Outlook revision to Negative from Stable reflects Fitch's concerns that recent declines in inpatient volumes will be sustained and pressure revenue and profitability. Fitch believes the flattening of net patient revenues through the nine months ended Sept 30, 2012 is indicative of declining in-patient (IP) use rates in STPH's service area, which is likely to compress profitability over the outlook period.

INCREASED DEBT BURDEN: On a pro-forma basis, certain of STPH's debt burden metrics are moderately high. Historical coverage of pro forma maximum annual debt service (MADS) by EBITDA in 2011 and through the nine-month interim period were 3.8x and 3.2 x, respectively, compared to Fitch's 'A' category median of 4.1x. Further, pro-forma MADS equates to 3.2% of 2011 total revenues compared to the 'A' category median of 2.8%.

GOOD BALANCE SHEET CUSHION: STPH's balance sheet strength is a key credit factor. At Sept 30, 2012 STPH's unrestricted cash and investments translated to 207.4 days-cash-on-hand and 158.5% pro forma cash-to-debt which exceed Fitch's respective 'A' category medians of 191 days and 116.4%.

SIZABLE CAPITAL PLAN: STPH'S three-year capital plan (2013-2015) is sizable and totals $49 million, averaging 145% of depreciation annually. Funding sources include the series 2012 bond proceeds and operating cash flow. The series 2012 revenue bonds are being issued to fund the expansion of STPH's emergency department ($18 million).

MARKET SHARE LEADERSHIP: STPH remains the market share leader, garnering a 44% market share in its primary service area.

WHAT COULD TRIGGER A RATING ACTION

WEAKENED FINANCIAL PERFORMANCE: Failure to generate profitability margins commensurate with Fitch's 'A' category medians could result in a rating downgrade.

CREDIT PROFILE

St. Tammany Parish Hospital (STPH) is a 222 licensed-bed not for profit hospital in Covington, Louisiana, approximately 35 miles north of New Orleans. STPH had $244.7 million in total operating revenues in fiscal 2011 ($182.1 million through the interim period).

Compressed Financial Performance Going Forward

The Outlook revision to Negative from Stable reflects Fitch's concern that STPH's recent compression in revenue growth and operating profitability will be sustained over the next two years, generating profitability margins and coverage metrics below recent performance and more in line with the low-end of Fitch's 'A' category medians. Management has revised its financial projections to reflect recent declines in inpatient volumes that have challenged net patient revenue growth.

While STPH's operating margins in fiscal 2011 and through the nine month interim period of 5.3% and 4.2%, respectively, exceed the 'A' category median of 2.8%, profitability through the interim period is below the prior year results. Management is budgeting a 2.9% operating margin in 2013 reflecting weaker IP volumes. Further, management projections reflect further compression in operating margin to 2.2% in fiscal 2014 and 2015. Management implemented certain cost control measures addressing labor and supply expenses, with additional and stronger measures being readied should inpatient volumes fail to stabilize.

Unexpected New Debt

Adding additional support to the revised Outlook is the unexpected new debt, which Fitch was unaware of during its last rating action. As a result, pro forma capital-related metrics show pro forma MADS coverage by EBITDA ratios ranging between 2.8x and 2.7x over the next two fiscal years, which are well below Fitch's 'A' category median of 4.1x. Further, pro forma MADS accounted for 3.2% of total fiscal 2011 operating revenues (3.3% for the interim), compared to Fitch's 'A' category median of 2.8%.

Good Liquidity

Fitch views STPH's liquidity favorably and believes balance sheet strength affords STPH sufficient financial flexibility at the current rating. As of Sept. 30, 2012, STPH had $114.4 million in unrestricted cash and investments, equating to a very good 207.4 days cash on hand and a good 158.5% pro forma cash to debt position, when compared to Fitch's respective 'A' medians of 191 days and 116.4%.

Leading Market Share

STPH enjoys a leading market share of 44% in the primary service area of the city of Covington and the surrounding area. The leading market share has been sustained through an ambulatory growth strategy in demographically favorable areas.

Sizable Capital Plan

Heavy capital spending is expected to continue through the 2013-2015 forecast period, averaging 145% of depreciation. STPH's sizable three-year capital plan totals $49 million ($12.5 million for fiscal 2013, $15.5 million for fiscal 2014, and $21 million for fiscal 2015). The plan includes STPH's expansion of its emergency department ($18 million), IT systems and equipment needs, and routine maintenance. Funding sources include series 2012 bond proceeds and operating cash flow. Fitch believes STPH's balance sheet strength provides sufficient financial flexibility should operating cash flow wane.

Long-Term Debt

Post issuance of the series 2012 revenue bonds, STPH will have $72.2 million in fixed rate long term debt. Pro forma MADS increases to $7.9 million from $6.8 million.

Negative Outlook

The Negative Outlook reflects Fitch's concerns over the recent flattening of net patient revenues in the interim period and the implication of weak IP volumes on profitability over the near term. Fitch expects management to exercise strong cost control measures should inpatient volumes continue to decline. Additionally, failure to generate profitability margins commensurate with Fitch's 'A' category medians could result in a rating downgrade.

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.

In addition to the sources of information identified in Fitch's U.S. Revenue-Supported Rating Criteria, this action was additionally informed by information from Cain Brothers & Company, LLC, the underwriter

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 12, 2012;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 23, 2012.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

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

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418

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Contacts

Fitch Ratings
Primary Analyst:
Michael Borgani, +1-415-732-5620
Director
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst:
Dana Sodikoff, +1-312-368-3215
Associate Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Michael Borgani, +1-415-732-5620
Director
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst:
Dana Sodikoff, +1-312-368-3215
Associate Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com