July 2 - Fitch Ratings has affirmed the ‘BBB+’ rating on the following outstanding bonds issued on behalf of Mary Washington Healthcare, VA (MWHC): --$69.8 million Industrial Development Authority of the City of Fredericksburg, VA hospital facilities revenue refunding bonds (MediCorp Health System Obligated Group), series 2007; --$125 million Industrial Development Authority of Stafford County, VA revenue bonds (MediCorp Health System Obligated Group), series 2006; --$65 million Industrial Development Authority of the City of Fredericksburg, VA revenue bonds (MediCorp Health System Obligated Group), series 2002B. The Rating Outlook is Stable. SECURITY The bonds are secured by gross revenues of the MWHC obligated group which accounted for 85% and the consolidated system revenues and 97% of the system assets in fiscal 2011 (Dec. 31 year end). KEY RATING DRIVERS WEAK OPERATING RESULTS PERSIST: Operating profitability for the fiscal year ended Dec. 31, 2011 and the three months interim period ended March 31, 2012 continue to show weakness due to a significant decline in revenue related mainly to the loss of sole community provider funds. In addition, MWHC experienced softer volumes, loss of Medicare capital pass-through at Stafford Hospital and exclusion from the Anthem network for the first month of this fiscal year. Operating margin was reported at 0.1% in 2011 and the first quarter of 2012 ended with a 0.3% negative operating margin. LIGHT LIQUIDITY: Liquidity remains light at the lower end of the ‘BBB’ rating category with unrestricted cash and investments at March 31, 2012 of $145.4 million, equating to 92.4 days cash on hand (DCOH), cushion ratio of 6.3x and cash equal to 49% of long term debt. LEADING MARKET SHARE: The two hospitals have maintained their leading market share of 63.3% in the demographically favorable eight county primary services area (PSA) located approximately half way between Richmond, VA and Washington, D.C., despite the opening of a new facility by a competitor (HCA) seven miles from MWH in 2010, and the Stafford Hospital (Stafford) census is steadily building up. COVERAGE IN LINE WITH CATEGORY: Coverage of maximum annual debt service (MADS) by EBITDA of 2.3x in fiscal 2011 was in line with the ‘BBB’ category median. WHAT COULD TRIGGER A RATING ACTION Failure to improve the weak operating performance or a further decline in liquidity would likely result in negative rating pressure. CREDIT PROFILE The loss of sole provider status at Mary Washington Hospital (Mary Washington) effective April 1, 2011 reduced revenues by approximately $25 million annually. Additionally, the slower than anticipated fill up of Stafford, as well as softening volumes with admissions declining by 8.9% in 2011, strained financial performance as management continued their efforts to right size the organization. Exacerbating the situation was the loss of Medicare capital pass-through at Stafford, with a negative $2 million annual impact. As a result, patient revenues declined by 6.6% last year. Fiscal 2011 ended with thin operating income of $0.9 million, equal to operating and operating EBITDA margins of 0.1% and 7.9%, as compared to the ‘BBB’ category medians of 1.7% and 8.5%, respectively. The $0.4 million loss from operations for the first quarter of 2012 was partially caused by the one-month exclusion from the Anthem network, as the system negotiated a new contract with the insurer, and a very light flu season. Admissions for the first quarter were 5.5% lower compared to the prior year. A positive development is the slow, but steady build-up of census at Stafford, with average daily census in 2011 at 40, up from 23 in 2009. Management has implemented a number of cost cutting measures and has further plans to manage labor costs, primarily through improved productivity and attrition. A number of initiatives based on expansion of tertiary services at Mary Washington, such as vascular and thoracic services, neurosurgery and comprehensive oncology, aided by narrowly targeted physician recruitment, is expected to be accretive to profitability. Plans for a medical office building at the Stafford campus will facilitate physician recruitment from the northern market. MWHC’s fiscal 2012 operating income budget is $3 million, which Fitch expects MWHC to achieve. MWHC executed a $30 million direct bank financing with BB&T bank in July 2011, which was not rated by Fitch. The loan has a five-year term and with interest rate at 78% of one-month LIBOR plus 175 basis points. Additional covenants include a 1.25x rate covenant, a 75 DCOH liquidity covenant and require MWHC to meet certain operating income targets. The proceeds were used to reimburse the system for prior capital expenditures. Unrestricted cash and investments were at $162.6 million at 2011 year end, flat with the prior year and equal to 107.6 DCOH, but declined to $146.4 million at the end of the first quarter of 2012. Coverage of MADS by EBITDA remains acceptable for the rating category at 2.3x and MADS at 3.7% of revenues is somewhat elevated from the 2011 borrowing but still manageable. The Stable Outlook is based on Fitch’s expectation that the organization will be able to leverage Mary Washington’s tertiary capabilities and gradually build up Stafford’s census, while at the same time implementing further cost cutting measures, in order to stabilize operations. The failure to improve profitability or a further decline in liquidity would likely result in negative rating pressure. MWHC is the parent of a group of health care related organizations including Mary Washington Hospital, a 442-licensed bed acute care hospital located in Fredericksburg, VA, and Stafford Hospital Center, a 100-bed acute care hospital located in Stafford, VA. Revenues for the system totaled approximately $661 million in 2011. MWHC covenants to provide audited annual financial statements and quarterly disclosure to bondholders.