Fitch Ratings affirms OMHS' Kentucky $502M revenue bonds 'BBB+'

Fitch Ratings assigns a 'BBB+' rating to the following City of Owensboro, Kentucky health system revenue bonds:

-- $502.3 million series 2010 City of Owensboro, Kentucky health system revenue bonds (Owensboro Medical Health System).

The bonds are expected to sell via negotiation the week of Jan. 18, 2010 and are expected to be issued as fixed-rate bonds. Bond proceeds will be used to finance the construction of a 447-bed replacement hospital opening in 2013, refund existing debt, terminate an existing SWAP, fund capitalized interest and a debt service reserve fund, and cover the costs of issuance. The Rating Outlook is Stable.

RATING RATIONALE:

-- The rating reflects the OMHS' substantial debt burden upon issuance of the series 2010 bonds with several pro-forma capital related and liquidity measures being weaker than Fitch's 'BBB' medians.
-- A lower rating is precluded due to OMHS' solid historical operating profitability and a dominant market share position of 91% in the primary service area.
-- Designation as a Sole Community Hospital, which provides enhanced Medicare revenue.

KEY RATING DRIVERS:

-- Successful completion of the replacement hospital project.
-- Continued operating performance through the construction period. Fitch expects that OMHS will maintain its profitability over the medium term and maintain its market position through the interim and after completion of the project.
-- Possible impact from any pending national healthcare reform and an expectation of a lower reimbursement environment going forward.

SECURITY:

The bonds are secured by pledged revenues and a mortgage lien.

CREDIT SUMMARY:

The 'BBB+' rating reflects OMHS' substantial pro-forma debt which is tempered by solid historical operating profitability and a dominant market share position. The series 2010 issuance will be used to fund a 447-bed replacement facility, to be located approximately 2.5 miles from the existing site. Anticipated completion of the new hospital is April 2013. Prior to the new debt issue, OMHS has maintained a very strong and consistent market position. Inpatient market share was 91.1% as of Sept. 1, 2009, and averaged over 90% for the previous three years. OMHS' liquidity measures compare favorably to Fitch medians, with unrestricted cash of 267.1 million equating to 298.9 days cash on hand (DCOH) as of Nov. 30, 2009, against the 'BBB' median of 114 DCOH. In addition, OMHS has consistently posted solid operating results, as demonstrated by an average operating margin of 2.6% from fiscal 2005- 2009, and improved profitability into the six-month interim period ending Nov. 30, 2009 with a strong 7.9% operating margin. Fitch expects that OMHS will demonstrate strong profitability through the construction period.

With the new debt issuance, capital-related ratios will demonstrate some stress. Maximum annual debt service (MADS) is measured at $44.1 million, including capital lease obligations. OMHS generated pro-forma cushion ratio and cash to pro-forma debt of 5.5% and 48%, respectively, at fiscal 2009. OMHS's pro-forma maximum annual debt service (MADS) as a percentage of revenue was 11.8% for fiscal 2009, which is significantly higher than the 'BBB' category median of 3.5%. Fitch also notes that pro-forma MADS coverage by EBITDA is light at 2.4 times (x) at Nov. 30, 2009 and 1.0x for fiscal 2009, and below the category median of 2.5x. In addition, as with any construction project there are risks associated with delays and cost overruns, which could negatively impact profitability. However, management has signed a guaranteed maximum price contract for the replacement hospital, which mitigates some of this risk.

The Stable Rating Outlook reflects Fitch's belief that OMHS' operating profitability will be sustained due to a leading market position, and via status as a Sole Community Hospital and Regional Referral Center, which provides for enhanced Medicare reimbursement. Management projects that profitability will continue through the construction period, with pro-forma operating margins averaging over 5% from fiscal years ending 2010-2013. Overall, OMHS' position as a Sole Community Hospital will help to generate stable revenues and solid profitability through the construction period, offsetting some risks associated with increased expenses as the new hospital comes on line in 2013.