Market Overview

Fitch Affirms Beatrice Community Hospital (NE) Revs at 'BBB-'; Outlook Stable

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the 'BBB-' rating on the Hospital Authority No. 1 Gage County, Nebraska bonds, issued on behalf of Beatrice Community Hospital (BCH):

--$30 million health care facilities revenue bonds, series 2010B.

BCH also has $15 million in series 2010A bank qualified bonds placed with Wells Fargo which are not rated by Fitch.

The Rating Outlook is Stable.

SECURITY

The series 2010 bonds are secured by a pledge of gross revenues, a mortgage lien and a debt service reserve fund.

KEY RATING DRIVERS

CRITICAL ACCESS DESIGNATION: The 'BBB-' rating is based primarily on BCH's critical access hospital (CAH) designation, which helps to mitigate both the hospital's increased operating costs in its now completed (February 2012) replacement hospital, and the risks inherent to small rural facilities.

STABLE MARKET POSITION: Its rural location affords BCH with stable and leading market share of 39% within Gage County and 27% across the entire service area. The competitive landscape is limited, and BCH benefits from a collaborative relationship with referral centers and physician groups in Lincoln.

SMALL REVENUE BASE: BCH's small revenue base makes it particularly vulnerable to changes in operating profile, such as physician complement, payor reimbursement, and patient volumes. This risk is somewhat mitigated by BCH's track record of successful medical staff recruitment and retention and consistently favorable payor contracts.

RELIANCE ON MEDICAL STAFF: While BCH remains very dependent upon its top admitting physicians for substantially all its admissions, successful recruitment and retention in 2011 and interim 2012 help offset that risk. Through interim 2012 BCH has increased its total active and total employed medical staff to 21 and 14 from 17 and 11, respectively, in fiscal 2010.

SIGNIFICANT DEBT BURDEN: BCH's rating reflects an immense debt burden, which Fitch expects will moderate over time. Leverage metrics remained high through the Dec. 31, 2011 interim period with debt to EBITDA of 6.3 times (x) and debt to capitalization of 54.4%, against Fitch's 'BBB' category medians of 4.0x and 48.4%, respectively. BCH has no further debt planned, and has limited capital needs going forward.

WHAT COULD TRIGGER A RATING ACTION

FAILURE TO IMPROVE PROFITABILITY: Should BCH not realize the benefits of its new facility, namely increased operating cash flow that results in incremental balance sheet improvement and an overall moderation of its leverage, it could place negative pressure on the rating.

POTENTIAL LEGISLATIVE CHANGES: Material changes to Medicare's CAH program that result in a reduction in reimbursement could have a negative impact on BCH's revenue base and financial profile.

CREDIT PROFILE

BCH's rating is supported in large part by its CAH status, which provides it with enhanced cost-based Medicare reimbursement. In particular, the increased expenses associated with BCH's replacement facility (opened in February 2012) will be partially offset by increased reimbursement. Due to BCH's dependence on the enhanced Medicare revenues it receives via its CAH designation, material changes to that program could negatively impact its revenue base and overall credit profile.

As a result of this designation, BCH continues to generate the healthy operating cash flow necessary to generate debt service coverage. Through the three-month interim period ended Dec. 31, 2011 BCH produced a 14.9% operating EBITDA margin which covered maximum annual debt service (MADS) at 1.9x. BCH is budgeting for $7.9 million (15.7% margin) in operating EBITDA in fiscal 2012, which would generate MADS coverage of 2.1x, short of Fitch's 'BBB' category median of 2.3x.

The risks associated with BCH's small revenue base are mitigated somewhat by its track record of steady market share and successful physician recruitment and retention. Successful recruitment of two pediatricians in 2010 and an orthopedic surgeon in late 2011 resulted in related increases in ambulatory clinic volumes and surgical cases through December 2011. Fitch expects the new facility will further enable BCH to attract and keep sufficient medical staff to support incremental volume growth.

BCH's debt burden is sizeable, allowing for little to no room for operating volatility at the current rating level. BCH has no plans for additional debt, and its capital needs are expected to be minimal, equaling $1.8 million in capital plans for fiscal 2012. Over time, BCH's debt burden should moderate from continued growth in operating EBITDA.

Unrestricted liquidity equaled approximately $13 million at Dec. 31, 2011, equating to 127.8 days of cash on hand and 29.1% cash to debt. Management indicated a commitment to improving liquidity over the medium to long term; however, liquidity will likely remain stable through fiscal 2012 as a result of first-quarter capital spending and three quarters of increased costs in the new facility.

The Stable Outlook is based in large part on Fitch's expectation that BCH will generate improved operating cash flow in the new facility in fiscal 2012 and beyond, with incremental balance sheet growth and moderation in leverage to levels more reflective of the rating category. Failure to do so would likely pressure the rating.

BCH is located in Beatrice, Nebraska approximately 40 miles south of Lincoln, Nebraska. BCH is a critical access hospital operating 25 acute-care beds. Other entities include two HUD housing projects and a congregate living facility. Total revenues were $40.5 million in audited fiscal 2011. BCH covenants to provide audited annual financial statements 150 days after the year-end close to bondholders via the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system (EMMA). BCH also provides voluntary quarterly disclosure to bondholders via EMMA. Disclosure to Fitch has been timely and thorough.

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.

This action was informed by the sources of information identified in Fitch's 'Revenue-Supported Rating Criteria'.

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated Jun. 20, 2011;

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

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Associate Director
Fitch, Inc.
+1-312-368-3347
70 W. Madison Street, Chicago IL 60602
or
Secondary Analyst
Eva Thein
Senior Director
+1-212-908-0674
or
Committee Chairperson
Jeff Schaub
Managing Director
+1-212-908-0680
or
Media Relations:
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com

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