Fitch Affirms BRCH Corporation at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed its 'BBB-' ratings on the following bonds issued by Palm Beach County Health Facilities Authority (FL), for the benefit of BRCH Corporation and Affiliates (BRCH):

--$87,600,000 outstanding hospital revenue and refunding bonds, series 2001;

--$24,900,000 outstanding hospital improvement revenue bonds, series 1999A.

Fitch has removed the ratings from Rating Watch Negative and assigned a Stable Rating Outlook.

RATING RATIONALE:

--The Stable Outlook reflects the sizable turnaround plan implemented by FTI Healthcare, which has improved profitability significantly over the past 18 months and has halted the cash burn that began in fiscal 2008 to support operations. Operating EBITDA (including restructuring fees) has moved from negative $35.6 million (negative 11.2% operating EBITDA margin) in fiscal 2008 to $12.1 million (6.1%) through the seven months of fiscal 2010 ended Jan. 31, 2010.

--BRCH maintains a dominant market share in a favorable primary service area, which is characterized by strong socio-economic indicators, a solid commercial payor base, and minimal Medicaid exposure.

--BRCH benefits from excellent community and philanthropic support. Since fiscal 2007, BRCH has collected over $40 million in donations.

--BRCH's liquidity position has declined significantly since fiscal 2007, as $126 million of unrestricted funds have been spent to support sizable operating losses over the past four fiscal years. As of Jan. 31, 2010, BRCH held unrestricted cash and investments totalling $74.5 million, equating to 88.6 days cash on hand, 4.7 times (x) cushion ratio, and 65% cash to debt.

--The service area is fairly competitive with two Tenet Healthcare Corp. (rated 'B-' by Fitch) facilities located to the north and west, as well as facilities controlled by Broward Health and Bethesda Health System to the south and north, respectively.

Key Rating Drivers:

--Continued improvement in operating profitability to levels generally in line with investment grade credits, which should at a minimum maintain the current balance sheet position.

--Improving volumes, which have been declining over the past few years, through strategic growth initiatives in cardiac, cancer, women's health and primary care service lines.

SECURITY:

--Debt payments are secured by a general obligation of the Corporation. The bonds are not secured by any mortgage on or security interest in any revenues, property or assets of the Hospital. The Corporation is the sole member of the obligated group and the Hospital and the Foundation are named as designated affiliates under the master trust indenture.

CREDIT SUMMARY:

The Stable Outlook is supported by BRCH's sizable turnaround plan which has already demonstrated noticeable improvement to the earnings profile and has halted the use of unrestricted cash and investments to support operations. FTI Healthcare took over management responsibilities effective Oct. 1, 2008 at which point it began implementing a comprehensive turnaround plan focused on improving EBITDA through service line improvements, improved physician relationships, revenue cycle enhancements, and significant cost containment. The CEO who was provided by FTI signed on as the full-time CEO of BRCH effective Feb. 1, 2010, which Fitch views favorably. Additionally, a new CFO has been recruited and should begin in her new role starting in April 2010; the remaining FTI executives will stay on for the near term in order to ensure a smooth transition.

A key service line that has shown steady growth is the heart program, which has also gained recognition, ranking first in the state in cardiac surgery and third in the state for overall cardiac services. Management has also driven an extensive turnaround of the cancer program, which benefits from a brand new 98,000 square foot, free-standing, state-of-the-art cancer center that was opened in November 2008. The oncology group had historically been quite unprofitable, losing $5.4 million and $10.4 million in fiscal 2009 and 2008, respectively. However, through the seven-month interim period ended Jan. 31, 2010, operating income was $1.7 million, due to physician contract renegotiations, support staff reductions, and revenue cycle improvements. Management has also begun the development of a primary care network, Boca Care, which currently employs six primary care physicians and plans to expand to up to 30 physicians over the next three to four years. Nursing has also seen a notable improvements; vacancy rates are down considerably and agency staffing has been reduced nearly 40% since fiscal 2008.

There has also been a substantial focus on revenue cycle improvements. Net collectible revenue per adjusted admission improved $874 per adjusted admission in fiscal 2009 and has improved an additional $202 per adjusted admission in fiscal 2010. Additionally, days in accounts receivable has declined from over 70 days in fiscal 2007 to 36.3 days at fiscal year end and currently stands at about 44 days. Management has also achieved sizable savings in several key areas including staffing costs and the supply chain where they standardized vendors for services in the cardiac department, waste management, and perioperative services, among others. Full-time equivalents have declined 245 since fiscal 2008 through greater oversight in staffing needs, a small workforce reduction, and reduced use of temporary staffing.

As a result of these initiatives, operating income has improved from fiscal 2007 and 2008 losses of $41.6 million (negative 13.1% operating margin) and $61.1 million (negative 19.2%), respectively, to a loss of $4.5 million (negative 2.3%) through the seven months of fiscal 2010. Further, operating EBITDA (including restructuring fees) has moved from negative $35.6 million (negative 11.2% operating EBITDA margin) in fiscal 2008 to $12.1 million (6.1%) through the interim period. It is management's expectation that fiscal 2010 will be breakeven to slightly positive depending on the current volume trends, which Fitch believes is achievable given the recent performance. Furthermore, the positive operating EBITDA results have halted the cash burn needed to support operations and should stabilize the balance sheet at the current level for the near term.

Additional credit strengths are BRCH's market position in a favorable service area and significant community support. BRCH's holds a primary service area market share of over 70% in an affluent and educated market. Boca Raton is one of the wealthiest areas of Florida and the country and as a result BRCH maintains a stable commercial payor base of approximately 37% and minimal Medicaid base of 1%-2%. However, one drawback of the service area is the seasonal nature of the residents and tourist seasons, which peak between November and March. As a result of the affluent population, community support has been tremendous, donating over $40 million in the last three years alone, and also donating more than 1,200 hours of volunteer time.

Key credit concerns include BRCH's weak liquidity position, low debt service coverage, and competitive secondary service area. BRCH had used approximately $126 million of unrestricted cash and investments to help offset the operating losses over the past several years. Additionally, in fiscal 2010, management redeemed $19.2 million of taxable VRDBs, paid off a $10 million line of credit, and paid $3.7 million in third party payor liabilities. Unrestricted cash and investments declined from a peak of approximately $225.9 million in fiscal 2007 to roughly $74.5 million as of Jan. 31, 2010. These funds translate to 88.6 days cash on hand, 4.7x cushion ratio, and 65% cash to debt which are weaker than the 'BBB' category medians of 114 days, 8.1x. Cash to debt is better than the median of 62.6%. Cash projections provided by management show fiscal year end unrestricted funds of approximately $77 million, demonstrating that BRCH has reached the low point in its liquidity decline and should, at a minimum, remain stable over the near term. It should also be noted that Fitch views the investment allocation as somewhat aggressive given the 52% allocation to hedge funds, absolute return funds, and private equity which carry lock-up periods ranging from 60 days to several years. However, BRCH does not have exposure to put debt which reduces the need for immediate liquidity access.

Given the large operating losses and elevated leverage position, maximum annual debt service coverage (MADS; including capital leases averaging $4.9 million over the next five years) has been weak at negative 1.6x in fiscal 2008, although much improved to 1.5x in fiscal 2009. Through the interim period coverage is 1.5x which is well below the 'BBB' median of 2.5x. MADS coverage of bonded debt only was 2.6x in fiscal 2009 and 2.5x through the interim period. BRCH's secondary service area is fairly competitive with facilities controlled by Tenet, Broward Health, and Bethesda Health System in and around south Palm Beach County.

Additionally, there are a large amount of stand-alone clinics/urgent care centers and given the affluence of many of the residents, BRCH has to compete with the option of these residents returning to their primary home area for care at leading institutions in the Northeast or Midwest.

Located in Boca Raton, FL, BRCH is an acute care hospital with 380 staffed beds. In fiscal 2009, BRCH reported total revenues of approximately $354 million. BRCH covenants to provide annual audited financials and quarterly disclosure, which includes management discussion and analysis, utilization statistics, an income statement, a balance sheet, and cash flow statement.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:

--'Nonprofit Hospitals and Health Systems Rating Criteria', (Dec. 29, 2009);

--'Revenue-Supported Rating Criteria', (Dec. 29, 2009).

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

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