Fitch Rates $96.2MM Maryland Health and Higher Ed Fin Auth Bonds 'A'

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings assigns an 'A' rating to approximately $96,200,000 million series 2011 Maryland Health and Higher Education Financing Authority revenue bonds issued on behalf of MedStar Health Inc. (MedStar), and affirms at 'A' the rating on the following series:

--$159,000,000 Maryland Health and Higher Education Facilities Authority (Medlantic/Helix) revenue bonds, series 1998A;

--$103,300,000 Maryland Health and Higher Education Facilities Authority (Medlantic/Helix) revenue bonds, series 1998B;

--$273,700,000 District of Columbia (Medlantic/Helix) multi-modal revenue bonds, series 1998A, 1998B, 1998C;

--$136,900,000 Maryland Health and Higher Education Facilities Authority (Medstar Health) revenue refunding bonds, series 2004;

--$145,000,000 Maryland Health and Higher Educational Facilities Authority (MedStar Health) revenue bonds, series 2007.

Fitch Ratings has withdrawn the 'A' rating on Maryland Health & Higher Educational Facilities Authority (MD) (MedStar Health, Inc.) revenue bonds series 2010 as the bonds were not sold.

The Rating Outlook is Stable.

Key Rating Drivers

Significant Market Presence: The system has a strong market presence in the Baltimore-Washington D.C. corridor which includes a large ambulatory network, a significant and increasing level of physician alignment and a reputation for clinical excellence. Medstar has extended its reach into southern Maryland with the addition of St. Mary's Hospital.

Solid and Consistent Profitability: While operating metrics are slightly lower than the 'A' category medians, MedStar has maintained a solid and consistent level of profitability, with operating margins averaging 1.7% and operating EBITDA margins 6.4% over the last four years, while growing the system organically through new services, an expanding ambulatory network and affiliation with physicians, all requiring significant investment in the enterprise.

Conservative Capital Structures: Balance sheet ratios are below the 'A' category medians but MedStar benefits from a conservative debt structure and moderate debt burden, with stability at the rating level allowing for some level of issuance of additional debt over the next two to three years.

Experienced Management Team: MedStar is led by an experienced management team with a focus on system integration with a regional approach to deployment of assets across the system.

New Issue Details:

The fixed-rate series 2011 bond issue is expected to refinance: (1) $29.4 million of debt associated with St. Mary's (series 2002 and 2009), (2) $47.1 million line of credit used to pay off debt incurred in connection with the Montgomery General Hospital acquisition and capital projects, and (3) approximately $20 million of the callable portion of the Maryland series 1998A and 1998B fixed-rate bonds. The series 1998A and 1998B refinancing is interest rate sensitive and was initially intended to be issued earlier this year, but issuance was postponed. If interest rates at the time of pricing are favorable, Medstar may decide to refinance a larger part of the callable series 1998A and 1998B bonds. Maximum annual debt service (MADS), which was provided by the underwriters, is $70.3 million and occurs in 2013. The series 2011 bonds will have a June 2042 final maturity and amortization structured to wrap around the system's existing debt, resulting in a relatively minor increase in MADS to $70.3 million from $66.8 million. A debt service reserve fund will not be funded in connection with the 2011 series. The refinancing will have the benefit of increasing the percentage of the system's fixed-rate debt to approximately 76% from 70%.

Security

The bonds will be issued on parity with outstanding debt issued under the Master Trust Indenture (MTI) dated Dec. 1, 1998, as amended and supplemented. MedStar is the sole member of the obligated group and each subsidiary is an affiliate. While the affiliates are not members of the obligated group, all material system affiliates, which include all of the system hospitals and related parking facilities, with exception of St. Mary's Hospital and Montgomery General Hospital, have entered into guaranty agreements that jointly and severally guarantee payment of debt service under the MTI. St. Mary's Hospital and Montgomery General Hospital would become guarantors with the closing of the proposed 2011 transaction. The bonds are secured by pledges of gross revenues of the system hospitals and are further secured by mortgages on the system hospitals and parking facilities.

Credit Overview

The 'A' rating reflects MedStar's large and diversified revenue base, sustained profitability and its significant presence with a leading market share position and strong clinical reputation in its service area which includes two major urban markets - Baltimore (MD) and Washington D.C. Fitch also notes the strength of its leadership, which has systematically transformed MedStar into a truly integrated healthcare system that should position the organization favorably for expected changes in healthcare delivery. The construction of a new patient tower at Franklin Square Hospital, a $175 million project, was completed on time and on budget in November 2010, providing 291 private patient rooms in a state of the art facility adjacent to the existing facility. The low level of liquidity relative to expenses compared to Fitch's 'A' medians remains a concern given the need to continue to invest in the enterprise, but is mitigated by the system's conservative debt structure, good coverage of debt and modest debt burden.

Significant Market Presence

MedStar commands a leading 20.3% market share of the Baltimore-Washington D.C. region, compared to 12% for Johns Hopkins (rated 'AA-'; Stable Outlook by Fitch) and 11.8% for University of Maryland Health System(UMMS, rated 'A'; Stable Outlook), based on 2010 data. The system also has leading market share in several high-end services, including oncology (19.3%), cardiology (26.2%) and neurology (20.4%). MedStar has taken a multipronged approach to fortifying its market share. Initiatives include closer alignment with physicians, the acquisition of two community hospitals (Montgomery General Hospital (MGH) in 2008 and St. Mary's Hospital (SMH) in 2009) and expansion of the system's ambulatory presence. Both MGH and SMH have now been fully integrated into the system, which has provided help with physician recruitment and subspecialty support, and in turn benefits from tertiary referrals.

The addition of community hospitals in the effort to broaden market draw and increase tertiary volumes has been a strategy pursued by MedStar's competitors as well; both Johns Hopkins and UMMS have added community hospitals to their network in recent years. In order to secure its market share, the system has made a commitment to increase physician alignment and employs over 1,150 physicians, with an additional 950 under contract. These physicians together are responsible for generating approximately 70% of the system's inpatient revenues. The system has focused on expanding its already large ambulatory network and has 150 ambulatory sites throughout the region, and is planning a further expansion of the ambulatory coverage in the Washington D.C. area, where it now competes with the Johns Hopkins system.

Solid and Consistent Profitability

MedStar has generated a consistent level of profitability over the last four years, with operating margin averaging 1.7% and operating EBITDA margin averaging 6.4%. For the fiscal year ended June 30, 2011, MedStar reported operating income of $66.9 million (1.7% operating margin and 6.6% operating EBITDA margin). MedStar's operating metrics are slightly lower than Fitch's medians of 3% for the operating margin and 10% for the operating EBITDA margin, partially due to the system focus on investing in expansion of programs, physician recruitment and expansion of the ambulatory network. As a result, the system was able to increase revenues by 27% since 2007, without a significant addition of debt and has ample coverage of debt service of 4.6x (times), exceeding the category median of 3.7x.

Conservative Capital Structure

Medstar's debt burden is quite manageable with maximum annual debt service (MADS) representing a moderate 1.7% of revenues. Post 2011 issuance, Medstar will have a conservative 76% of its long-term indebtedness at a fixed rate of interest, an increase from the current 70%. Fitch considers the rating stable even when assuming some level of additional debt issuance over the next two to three years provided profitability is maintained at the current level. Management forecasts include placeholders for new debt issuance primarily focused on capital needs in the Washington D.C. region of $100 million in 2013 and $200 million in 2014 and 2015, but issuance is dependent on assessment of debt capacity at that time and no firm plans are in place.

Concurrent with planning for the 2011 transaction, MedStar renegotiated the extension of the existing line of credit, increasing the facility from $195 million to $250 million with a bank consortium, to November 2013. The system was also able to extend two of the letters of credit (LOCs) backing the variable District of Columbia series 1998A bonds, with four- and five-year terms to May 2014 (the third LOC already had a five-year term to May 2013).

Unrestricted cash and investment of $1.3 billion (reduced by cash kept on the balance sheet from a line of credit draw, equal to 127.5 days cash on hand (DCOH) at 2011 fiscal year end are weaker than the category median of 194.1 DCOH. Medstar's target for DCOH is between 105 and 110 days and will remain in that range reflecting the system's philosophy of reinvesting heavily in its programs and facilities. Cash to debt, including in long-term debt the $155 million draw on a line of credit, at 124.6% is slightly better than the category median, as is the cushion ratio of 17.9x.

MedStar is a large, integrated health care system composed of nine hospitals (eight acute care and one rehabilitation hospital) with a total of 3,236 licensed beds and several other health care-related organizations. MedStar had total operating revenues of $4 billion in fiscal 2011. MedStar covenants to provide annual and quarterly disclosure to bondholders. Quarterly disclosure is very good and includes a balance sheet, income statement, cash flow statement, utilization, and management discussion and analysis.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Revenue Supported Rating Criteria, this action was informed by information from Citi and J.P. Morgan as underwriters.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 20, 2011.

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

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