October 7, 2013 / 9:04 PM / 4 years ago

RPT-Fitch affirms East Texas Medical Center's revs at 'BBB'

CHICAGO, October 07 (Fitch) Fitch Ratings has affirmed the 'BBB' rating on the 
following revenue bonds issued on behalf of East Texas Medical Center (ETMC):

--$35.8 million Wood County Central Hospital District hospital revenue bonds, 
series 2011;

--$265.9 million Tyler Health Facilities Development Corporation hospital 
revenue bonds, series 2007A.

The Rating Outlook is revised to Negative from Stable.

SECURITY 

The bonds are secured by a pledge of gross revenues of the obligated group, a 
first mortgage lien on certain property and debt service reserve funds on the 
series 2007 and 2011 bonds.

KEY RATING DRIVERS

REVENUE COMPRESSION A CONCERN: The Outlook revision to Negative reflects Fitch's
concern with ETMC's unexpected decline in profitability through the 10 months 
ended Aug 31st and the challenge ETMC may face in getting back to positive 
operating performance in 2014. Through the 10-month interim period ended Aug. 
31, 2013, ETMC posted a $10.4 million loss from operations which translates to a
negative 1.3% operating margin and 7.4% operating EBITDA margin.  In fiscal 
2012, ETMC posted operating and operating EBITDA margins of 1.3% and 9.6%, 
respectively.  

LIQUIDITY REMAINS LIGHT: ETMC's liquidity metrics remain light for the rating 
level, but moderating capital needs in 2014 and beyond should allow for balance 
sheet replenishment so long as it meets its operating cash flow targets. ETMC 
had $208.8 million in unrestricted cash at Aug. 31, 2013, equal to 84.7 days of 
cash on hand (DCOH) and 50.1% cash to debt. ETMC is budgeting for more moderate 
capital expenditures of $45 million in fiscal 2014, and Fitch expects total 
unrestricted cash to improve slightly as cash flow is projected to exceed 
spending.

COVERAGE REMAINS ADEQUATE: ETMC's coverage and leverage metrics continue to 
reflect a manageable debt burden, though erosion in profitability has negatively
impacted metrics. While coverage of maximum annual debt service (MADS) by EBITDA
slipped to 1.8x and debt to EBITDA increased to 5.2x, against Fitch's 'BBB' 
category medians of 3.1x and 3.8x, respectively, Fitch expects ETMC to finish 
fiscal 2013 with slightly improved coverage, and ETMC is projecting 2.3x 
coverage for fiscal 2014.

MARKET CHALLENGES PERSIST:  Inpatient volume declines (for the third straight 
year), increased competition within Smith County, and ongoing reimbursement 
pressures from all payors will continue to challenge ETMC's operating 
performance in 2014. As a result, Fitch believes ETMC will need to rely on 
expense reductions and operating efficiencies rather than revenue growth to 
reach its fiscal 2014 targets.

RATING SENSITIVITIES

CASH FLOW IMPROVEMENT: ETMC expects to improve its operating margin in fiscal 
2014 to approximately 1.5% via a robust expense management effort and reduced 
capital spending needs. While Fitch expects ETMC to improve profitability in 
2014, negative rating pressure is likely if current operating losses continue 
over the next 12-24 months.

CREDIT PROFILE

ETMC is an integrated health system servicing the east and northeastern regions 
of Texas. The system consists of 15 acute care affiliates and several other 
entities with approximately 1,000 staffed acute care beds. Total revenues were 
$942.1 million in fiscal 2012. ETMC covenants to provide bondholders with annual
audited financial information to the Municipal Securities Rulemaking Board's 
EMMA system within 150 days of fiscal year end and quarterly financial 
statements within 45 days of fiscal quarter end.

REVENUE PRESSURES PERSIST

The Outlook revision to Negative reflects Fitch's concern with ETMC's negative 
trend in profitability, coupled with the challenges it faces in improving its 
performance. ETMC expects to finish fiscal 2013 with a slight operating loss of 
over $5 million, which is well below expectations. The largest factors in this 
years' performance have been ongoing clinical volume declines, reimbursement 
pressures from both commercial and government payors, as well as continued 
competition for patient volumes within Tyler and Smith County.

MARKET CHALLENGES

While the competitive landscape is unchanged, competition remains robust for the
clinical volumes within Smith County, ETMC's largest contributing county. While 
Fitch notes that ETMC has recently aligned some key physicians in cardiology and
orthopedics which should bolster volumes and help preserve market share, it will
continue to be challenged by reimbursement pressures from its commercial and 
government payors.

Contact:

Primary Analyst

Emily E. Wadhwani

Associate Director

+1-312-368-3347

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

Secondary Analyst

Kathleen Proux

Analyst

+1-312-368-3348

Committee Chairperson

James LeBuhn

Senior Director

+1-312-368-2059

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: 
elizabeth.fogerty@fitchratings.com.

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

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