Fitch Affirms Beloit Memorial Hospital's Underlying Rating at 'A-'; Outlook is Stable

CHICAGO--()--Fitch Ratings affirms the 'A-' underlying rating on Beloit Memorial Hospitals' $9.5 million series 2006B bonds issued through the Wisconsin Health and Educational Facilities Authority and $40.8 million series 2006A bonds issued through the Illinois Finance Authority. The Rating Outlook is Stable.

Fitch rates the series 2006A and series 2006B bonds 'AA-/ F1+' based on a direct-pay letter of credit (LOC) from J.P. Morgan Chase Bank, N.A.

The affirmation reflects Beloit Memorial Hospital's (BMH) adequate profitability, solid coverage of maximum annual debt service (MADS), satisfactory liquidity, and dominant market position in its primary service area. Credit risks include service area demographics that are weaker than state and national averages, a moderately small revenue base, and somewhat high percentage of Medicaid and self pay revenues.

In the fiscal year-ended Dec. 31, 2008, BMH posted operating margin and operating EBITDA margin of 1.5% and 10.4%, respectively. This is down from 5.4% and 11%, respectively, just two years earlier. FY 2007's earnings were mostly affected by start-up and higher depreciation expenses associated with its new $50 million NorthPointe Health and Wellness facility. FY 2008's results were reduced from higher depreciation costs and a $1.6 million surge in interest expenses, as capitalized interest proceeds were exhausted in December 2007 and rates jumped due to the ratings pressure on the original credit enhancer on the series 2006 bonds. BMH's operating profitability through the eight-month interim period ended Aug. 31, 2009 improved to a 3.8% margin due to greatly enhanced Medicaid reimbursement and effective cost controls related to staffing. BMH's historical coverage of MADS is solid. In FY 2008, MADS coverage of 3.7 times (x) compares similarly to Fitch's 'A' rated median of 3.5x. Moreover, BMH's debt burden as measured by MADS as a percentage of total 2008 revenues is a manageable 2.6%. Liquidity is solid with $35 million of unrestricted cash and investments amounting to 124 days operating expenses and 70% of long-term debt in FY 2008. These levels jumped to $44 million or 155 days cash on hand and 91% of long-term debt at Aug. 31, 2009 due to the better earnings, improved accounts receivable collections, and investment gains. Regardless, BMH's capital structure is aggressive with nearly all of its $50 million of long-term debt in a floating rate mode with demand features. They also employ two interest rate swaps for the purpose of hedging its series 2006 bonds. Given the decreases in market interest rates, the swaps are valued at a negative $7.6 million as of Aug. 31, 2009. Fitch is moderately concerned given the fact that the LOCs providing support on Beloit's variable rate bonds expire in February 2010. Regardless, term out provisions in the event the LOCs are not renewed or replaced are not too onerous, with payments due in quarterly installments one year after an LOC draw for four additional years. In the event that BMH can not renew or extend its LOCs, Fitch will reassess the rating at that time.

Located approximately 75 miles northwest of Chicago, BMH's primary service area (PSA) totals roughly 61,000 residents and includes the towns of Beloit, South Beloit, Rockton and Roscoe (IL/WI). In 2008, BMH captured a leading 67.8% of the inpatient admissions in the PSA which is down from 71.6% in 2006. BMH's next closest competitor remains Mercy-Janesville Hospital at a distant 16.1% market share, but up from 14.7% in 2006. Despite the modest fall off, Fitch believes that BMH has been able to keep its market share strong, in part, through development of a good relationship with the Beloit Clinic and other local physicians. The Beloit Clinic is a 55-physician multi-specialty medical group that admits almost exclusively to BMH. The hospital and clinic have collaborated on a number of mutually beneficial arrangements. The 21,000 square feet of physician clinic space at the NorthPointe campus is occupied by Beloit Clinic physicians. In addition, BMH, the Beloit Clinic, and hospital-based physicians formed a physician-hospital organization in 1994 that represents approximately 90% of BMH's active medical staff in managed care negotiations. The initial success of the NorthPointe campus facility is evidenced by 50,065 outpatient procedures in FY 2008 and 36,848 during the first eight months of FY 2009. The facility's location also limits encroachment from Rockford, IL healthcare providers while attracting younger, more affluent patients in the growth area along Illinois/Wisconsin state line.

Although the local economy has shown some diversification into the service sector, Beloit's unemployment rate has consistently been above state averages. City income levels have generally been between 15%-30% lower than both state and national averages on a household and per capita basis. Moreover, Beloit's reliance on auto and auto-related manufacturing is causing a dramatic decrease in employment and unemployment rates. This is evidenced by the loss of about 3,000 jobs over the past seven months and a Rock County unemployment rate surge to 12.8% in July 2009, from a 9% average in 2008. While revenue growth has been good in recent years, Fitch believes BMH is more susceptible to changes in payor mix due to its moderate revenue base and increasing concentration to governmental reimbursement. Some revenue pressure is evident as BMH's Medicaid payor mix increased to 15% during the period ending June 30, 2009, from 12% in FY 2006. Nonetheless, Medicaid reimbursement has been bolstered by the State of Wisconsin's new provider assessment program that leverages federal monies through matching state dollars.

The Stable Outlook reflects Fitch's expectation that the improved operating performance and cash position will be maintained. Fitch will reassess the rating and outlook if BMH is unable to renew or replace its current LOCs or the terms and conditions substantially differ from its existing agreements.

Located approximately 75 miles northwest of Chicago, Beloit Memorial Hospital is a 100 staffed bed (256 licensed) community hospital in Beloit, WI. The hospital had approximately $121 million in total operating revenue in FY 2008. BMH covenants to provide annual audited financial information and utilization data within 150 days of each fiscal year end. Quarterly financial is disseminated within 60 days for the first three fiscal quarters and with 90 days of the fourth fiscal quarter.

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

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Contacts

Fitch Ratings
Jim LeBuhn, +1-312-368-2059 (Chicago)
Paul Rizzo, +1-212-908-0500 (New York)
Cindy Stoller, +1-212-908-0526 (Media Relations, New York)
cindy.stoller@fitchratings.com

Contacts

Fitch Ratings
Jim LeBuhn, +1-312-368-2059 (Chicago)
Paul Rizzo, +1-212-908-0500 (New York)
Cindy Stoller, +1-212-908-0526 (Media Relations, New York)
cindy.stoller@fitchratings.com