Fitch Affirms Gainesville Hospital District, TX's $22.2MM LTGOs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the following Gainesville Hospital District, Texas (district) dba North Texas Medical Center (NTMC) bonds:

--$22.2 million, limited tax general obligation (LTGO) refunding bonds, series 2007 at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a limited ad valorem tax levied against all taxable property within the district. The district's property tax rate is limited to a maximum rate of $0.75 per $100 TAV for all purposes, provided that no more than $0.65 per $100 TAV of such tax may be levied for debt service.

KEY RATING DRIVERS

AMPLE TAX MARGIN: Significant taxing margin remains to cover the district's outstanding debt service, despite a modest tax increase in 2013. Revenue raised under the limited ad valorem tax is dedicated solely to indigent care and debt service. The district does not anticipate issuing any additional debt secured by the limited tax at this time.

STABLE TAX BASE: Growth in the district's tax base resumed in 2013 following a modest decline related to the recent economic recession. Officials expect continued growth in the tax base going forward.

SOUND ECONOMY AND DEMOGRAPHICS: The tax base exhibits consistently low unemployment and mixed income levels. Agribusiness, energy, and manufacturing form the basis of the district's economy, while a nearby casino provides additional employment opportunities.

MANAGEMENT ADDRESSING WEAKENED FINANCIAL PROFILE: NTMC has registered several years of declining net patient service revenue and liquidity, primarily due to declining volumes, increased contractual allowances and decreased supplemental government funding. However, supplemental government funding appears to have stabilized and management is in the process of implementing strategic initiatives to improve profitability, the impact of which should appear near- to mid-term.

COMPETITIVE OPERATING ENVIRONMENT: NTMC maintains the largest market share and faces limited competition within the primary service area (PSA). However, outmigration is significant with a majority of admissions originating from the PSA going to Dallas-Fort Worth and Denton County hospitals.

HIGH OVERALL DEBT LEVELS: NTMC has weak liquidity relative to its elevated debt burden, and amortization is average.

RATING SENSITIVITY

CONTINUED WEAKENING OF FINANCIAL OPERATIONS: Sustained operating losses and further deterioration of liquidity could weaken the financial flexibility of the district and put downward pressure on the rating.

CREDIT PROFILE

The district, population 26,000, comprises the eastern two-thirds of Cooke County (the county) and is located approximately 70 miles north of Dallas and five miles south of the Texas-Oklahoma border.

The district owns and operates NTMC, a 48-bed acute care hospital located in Gainesville. The district levies an ad valorem tax on real property located within the boundaries of the district, and tax revenue is limited for the payment for bond debt service and indigent care.

CONSIDERABLE TAXING MARGIN REMAINS

The district's current levy of $0.1085 per $100 of TAV accounts for just 13% of the maximum tax rate of $0.75 per $100 TAV that the district can levy. The tax rate was increased modestly in fiscal 2013, but no additional increases are currently anticipated. Additional debt issuance secured by the district's limited tax levy is also not anticipated at this time.

ELEVATED DEBT LEVELS

The district's outstanding debt carries a GOLT pledge and is not payable from any of the operating revenues of NTMC. The district's overall debt is a high 4.4% of market value or $6,458 per capita, and no future debt issuances are planned. Amortization is midrange, with about 43% maturing in 10 years. NTMC's debt relative to other hospital credits remains elevated as measured by the maximum annual debt service at 4.9% of total revenues in fiscal 2013.

STABLE, NARROW ECONOMY

The district includes the city of Gainesville (the city), which serves as the county seat and the principal commercial center. Oil and gas manufacturing underpin the economy, and agriculture and livestock production anchor the employment base. District officials report that the airplane seat manufacturer Zodiac Aeorospace, the city's largest employer, is seeking to add another 200 positions to its current 1,800 employees. Other major city employers are smaller, each with fewer than 450 employees. The area's largest employer, just over the Oklahoma border, is the Winstar Casino (3,000 employees).

The district's fiscal 2013 tax base grew a solid 6.5% after a mild decline followed by a modest recovery subsequent to the recession. The county's unemployment rate, 4.1% in October 2013 vs. 6% for the state and 7% for the nation, has consistently trended favorably in comparison to state and national rates. Area wealth and income levels are mixed.

MANAGEMENT ADDRESSING DECLINING HOSPITAL OPERATING RESULTS

Net patient revenue declined in fiscals 2011 and 2012, driven by decreasing volumes, an audit adjustment to contractual allowances, and reduced funding from the federal government. Unaudited results for fiscal 2013 show continued decreases in patient revenues that were more than offset by decreases in charity care and contractual adjustments as well as increased government supplemental funding. For fiscal 2014, the district has budgeted an increase in net revenues driven by net patient revenues and stabilized supplemental government funding, as well as a slight increase in operating expenses.

Liquidity metrics decreased each year since fiscal 2010 and declined significantly in fiscal 2013 due to the sale of investments for capital and operating purposes. Liquidity is weak relative to debt, with fiscal 2013 results showing unrestricted cash over maximum annual debt service at 4.4 times and a cash to debt ratio of 34.7%. Continued erosion of unrestricted liquidity could result in downward rating pressure.

In order to offset NTMC's losses, hospital management has taken steps to improve revenue collection by outsourcing accounts receivable, upgrading their IT systems with a more robust system which is expected to improve efficiencies and revenue cycle initiatives, and hiring specialists to decrease patient outmigration to Dallas-Fort Worth and Denton County hospitals. These initiatives should help to stabilize operations in the near to mid term.

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

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, 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813095

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Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-212-908-0507
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Adam Kates
Director
+1-312-368-3180
or
Chris Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-212-908-0507
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Adam Kates
Director
+1-312-368-3180
or
Chris Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com