Fitch Ratings affirms Siskin's TN variable-rate demand bonds at 'A-'

Fitch Ratings takes the following rating action on Siskin Hospital for Physical Rehabilitation, Inc. (Siskin) as part of its continuous surveillance effort:

-- approximately $5.8 million Chattanooga Health, Educational, and Housing Facility Board, TN variable-rate demand bonds, series 1990A, affirmed at 'A-'.

The Rating Outlook is Stable.

RATING RATIONALE:

-- Very healthy cash balances. As of Nov. 30, 2009, Siskin had $38.9 million of unrestricted cash and investments equating to an exceptional 643 days operating expenses and 121% of long-term debt. Siskin also has the support of $7.6 million of endowment funds.

-- Favorable competitive position. Siskin continues to maintain an approximate 60% inpatient market share which is mainly attributable to its positive clinical reputation and strong affiliations with local hospitals.

-- Weakened, but improving operating profitability.

-- Positive settlement relating to an investigation of prior Medicare services and billing practices.

-- Credit risks remain Siskin's single specialty focus, small and declining business base, concentrated payor mix, and moderately high debt position.

KEY RATING DRIVERS:

-- Stabilizing operating performance.

-- Balance sheet strength.

CREDIT SUMMARY:

After averaging 1.27% and 11% from fiscal year (FY) 06 through FY08, the operating margin and operating EBITDA margin dropped to negative 4.9% and 7.2%, respectively, in FY09. Performance was negatively affected by falling volumes that dramatically reduced revenues. Volume declines were mainly from the impact of a softer economy as lower elective orthopedic procedures reduced rehabilitation services and less trauma cases meant fewer post-acute episodes. Regardless, the excess margin remained in positive territory from healthy investment income, amounting to 1.2% in FY09, but is down from historic levels above 6%. Coverage of maximum annual debt service (MADS) also suffered in FY09, falling to 1.8 times (x) in FY09, from 3.1x a year earlier. Nonetheless, operating earnings through the first five months of FY10 indicate a turnaround, with Siskin generating $726,000 of income for a 6.6% operating margin. The improvement is being driven by rebounding volumes as a result of a new managed care contract and growing outpatient business, especially from the area's leading senior living provider.

In September 2008, the Center for Medicare and Medicaid Services alleged that Siskin was overpaid by $10.7 million for certain services delivered under the Medicare program. However, after three levels of appeals, Siskin received a fully favorable decision buy an administrative laws judge that they do not owe any prior payments.

As a result of its single specialty focus and small revenue base ($25.2 million of total revenues in FY09), operating earnings are subject to greater volatility from reimbursement changes, volume reductions, and the clinical practice of treating rehabilitation patients. Moreover, acute admissions continue to decline, dropping to 1,311 in FY09 from 1,753 in FY07. The reductions can be attributed to economic pressures and the necessary adjustments to manage to the 60% rule (60% of all admissions must fall within 13 diagnostic related groups or reimbursement falls to much lower acute care hospital levels). Siskin continues to remain compliant with the 60% rule, resulting in enhanced Medicare reimbursement.

Medicare concentration remains a concern, representing a very high 71.8% of gross revenues in FY09. Siskin's debt position is moderately high, with 7.3% MADS as a percent of revenue and 45.4% debt to capital in FY09.

The Stable Outlook is based on Fitch's expectation that the turn around in the current fiscal year's operating performance is maintained, coupled with the maintenance of healthy liquidity balances.

Siskin is a 109-bed post-acute care hospital located in Chattanooga, TN. Siskin covenants to disclose only annual financial information to the Municipal Securities Rulemaking Board's EMMA system, which Fitch views negatively.