Fitch Affirms Snohomish County PHD #1 (WA) GOs at 'B'; Negative Watch Removed

SAN FRANCISCO--()--Fitch Ratings has taken the following rating action on Snohomish County Public Hospital District's (PHD) limited tax general obligation (LTGO) bonds:
--$2.9 million series 2004 affirmed at 'B'.

The Rating Watch Negative is removed and the bonds are assigned a Negative Rating Outlook.

SECURITY

The bonds are secured by a full faith and credit general obligation pledge of the district. The district also irrevocably pledges to annually levy and collect property taxes within the constitutional and statutory limits, to pay debt service principal and interest on the bonds.

KEY RATING DRIVERS

AFFILIATION AGREEMENT REACHED: The removal of the Negative Watch follows the district's completion of an affiliation agreement with EvergreenHealth, a public hospital district based in Kirkland, Washington. The affiliation with EvergreenHealth became effective in December 2012 and is intended to help stabilize district operations and provide short-term cash-flow relief.

SEVERE FINANCIAL CHALLENGES REMAIN: The Negative Outlook reflects the district's continued financial deterioration as a result of declining utilization, growing losses and poor liquidity. Fitch believes such weaknesses leave the district vulnerable to insolvency over the near-to-medium term.

FISCAL IMPROVEMENTS DELAYED: Uncertainty related to the district's ongoing operations has contributed to the loss of clinical staff and senior management turnover, impeding efforts to stabilize the district's finances. Management proposes to ask district voters to authorize a new operating levy in April 2013, but the prospects for approval are unclear.

STRONG TAX BASE; LIMITED BENEFIT: Given the weak financial position, the benefits of the district's GO pledge and the strength of its underlying tax base are diminished. The current rating more closely reflects the district's financial operations.

WHAT COULD TRIGGER A RATING ACTION

CONTINUED FINANCIAL DETERIORATION: The district's inability to stabilize its finances could result in insolvency and further rating downgrades.

CREDIT PROFILE:

Snohomish County Public Hospital District No. 1 is located in eastern Snohomish County, Washington, about 30 miles northeast of Seattle on the outskirts of the Puget Sound region. The district owns and operates Valley General Hospital, the only acute care facility in the district, and the Valley General Chemical Dependency Treatment Center.

AFFILIATION AGREEMENT REACHED

Following several years of efforts to forge new partnerships, the district executed an affiliation agreement with EvergreenHealth, a public hospital district based in Kirkland, Washington, in December 2012. The agreement provides for a multi-year partnership that is intended to increase utilization and revenues for both entities, and help stabilize the district's finances. In addition, EvergreenHealth will pre-pay the district approximately $1 million for four years of sub-lease expenses under the agreement, reducing immediate cash-flow pressures. Fitch believes that these arrangements reduce the district's risk of insolvency in the short term, but its longer-term prospects remain uncertain.

SEVERE FINANCIAL CHALLENGES REMAIN

Audited results for fiscal 2011 and interim financials for fiscal 2012 show continued deterioration in the district's financial position, with net assets down 68% (to $3.7 million) since the end of fiscal 2010. Operating losses also continue to grow and liquidity has fallen to 13 days of cash on hand as of September 2012. The district's financial position reflects growing weakness and threatens its long-term viability.

The district expects to ask voters to authorize a new operating levy in April 2013 which could add raise approximately $2.4 million in annual revenue if approved. Passage of this measure would improve the district's finances but significant challenges remain given operating losses that reached $4.5 million in fiscal 2011.

STRONG UNDERLYING TAX BASE OF LIMITED BENEFIT

The district's underlying tax base is large and diverse, and property tax receipts have been stable. However, given the district's weak financial position, the strong underlying tax base and GO pledge is of limited benefit due to the potential disruption of debt service payments in an insolvency situation.

Direct and overlapping debt levels for the district are moderate at approximately $4,000 per capita and 2.9% of assessed value. Amortization is slow as a result of the district's 2009 issuance of additional GO debt, with 27% of outstanding principal due for payment within 10 years. Debt service requirements for the district are small relative to the size of its operations, and accounted for approximately 3% of expenditures in fiscal 2011.

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 Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and the National Association of Realtors.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings
Primary Analyst:
Stephen Walsh, +1-415-732-7573
Director
Fitch, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst:
Michael Borgani, +1-415-732-5620
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Stephen Walsh, +1-415-732-7573
Director
Fitch, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst:
Michael Borgani, +1-415-732-5620
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com