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TEXT - Fitch revises Maryland's Upper Chesapeake Health System rating outlook
November 14, 2012 / 7:48 PM / 5 years ago

TEXT - Fitch revises Maryland's Upper Chesapeake Health System rating outlook

Nov 14 - Fitch Ratings has affirmed the 'BBB+' rating on the following
Maryland Health and Higher Educational Facilities Authority outstanding revenue
bonds issued on behalf of Upper Chesapeake Health System (UCHS):

--Approximately $55.3 million, series 2008C;
--Approximately $58.1 million, series 2011C (direct placement with Wells Fargo).

UCHS also has outstanding $50 million, series 2011A bonds directly placed with 
JP Morgan and $58.1 million, series 2011B bonds directly placed with BB&T; both 
series are not rated by Fitch but are factored into Fitch's analysis. 

The Rating Outlook is revised to Positive from Stable.

 

SECURITY 

Debt payments are secured by a pledge of the gross revenues of the obligated 
group. 

KEY RATING DRIVERS

CONTINUED STRONG OPERATING PERFORMANCE: The Outlook revision to Positive 
reflects UCHS' consistent improvement in operating performance over the past 
four years and through the nine-months ended Sept. 30, 2012.  All profitability 
metrics exceed the 'BBB' category medians.   

BENEFITS FROM AFFILIATION: UCHS benefits from its strategic affiliation with 
University of Maryland Medical System (UMMS) (rated 'A'; Stable Outlook by 
Fitch), which has provided a cash infusion as well as an enhancement of clinical
services provided at UCHS.

LEADING MARKET SHARE POSITION: UCHS maintains 55.7% market share in its primary 
service area as of fiscal 2012 compared to 7% for its closest competitor, 
Franklin Square Medical Center (part of MedStar Health, Inc., rated 'A'; Stable 
Outlook by Fitch).  

MIXED LIQUIDITY: At Sept. 30, 2012, UCHS had solid liquidity against expenses of
142.9 days compared to the 'BBB' category median of 138.9 days.  Cushion ratio 
of 8.5x and cash to debt of 61.7% during the same time period are somewhat below
their respective 'BBB' category medians of 9.4x and 69.6%.  

HIGH DEBT BURDEN BUT STRONG DEBT SERVICE COVERAGE: Maximum annual debt service 
(MADS) represents a relatively high 4.0% of revenues for fiscal 2011 (Dec. 31 
year-end) compared to the 'BBB' category median of 3.3%, but because of good 
operating profitability, debt service coverage was solid at 3.5x during the same
time period. 

WHAT COULD TRIGGER A RATING ACTION

SUSTAINED OPERATING PERFORMANCE: Upward rating movement may be likely over the 
near term if strong operating performance and continued solid debt service 
coverage is sustained. 

CREDIT PROFILE

The Outlook Revision to Positive reflects UCHS' consistent improvement in 
operating performance over the last four years, with operating metrics that all 
exceed 'BBB' category medians.  The strong cash flow generation has led to 
improved maximum annual debt service (MADS) coverage over the same time period. 
The 'BBB+' rating affirmation reflects the benefits of UCHS' strategic 
affiliation with UMMS, consistently solid financial performance and a leading 
market position. The primary concern is UCHS' high debt burden. 

UCHS and Baltimore-based UMMS signed an affiliation agreement in June 2009. UMMS
is a nine-hospital network anchored around the University of Maryland Medical 
Center and is closely affiliated with the University of Maryland Medical School.
UMMS has provided two installments of $26.7 million equity contributions to UCHS
as part of the affiliation agreement and now has a 49% ownership stake in UCHS, 
which includes the right to appoint two members to UCHS' Board of Directors. A 
full merger depends on the timing of building a replacement facility for one of 
UCHS's hospitals, Harford Memorial Hospital, which would be financed by UMMS. 
There is no definitive date for the merger, but there has been progress in the 
plans for the replacement facility.  A certificate of need application for the 
new hospital is expected to be filed within the next 12-18 months and the 
replacement facility is expected to cost approximately $150 million.   

UCHS has demonstrated its ability to consistently improve its operating 
profitability given the constraints of Maryland's rate-setting environment where
the reimbursement for essentially all Medicare and Medicaid inpatient services 
is determined by the Health Services Cost Review Commission under an agreement 
with the Centers for Medicare and Medicaid Services. UCHS' consistently solid 
cash generation can be attributed to cost control initiatives, which have saved 
about $3-4 million annually, the shift from inpatient to observation stays, 
which result in better reimbursement, and strategic benefits from its 
relationship with UMMS. In fiscal 2011, UCHS generated $22.6 million in 
operating income on total revenues of $324.9 million.  The 7% operating margin 
in fiscal 2011 exceeded fiscal 2010 performance and is well above the 'BBB' 
category median of 1.9%.  Operating EBITDA of $41.3 million in fiscal 2011 
equated to a 12.7% operating EBITDA margin, which exceeds the prior year's 10.8%
and 'BBB' category median of 8.3%.  Operating performance through the 
nine-months ended Sept. 30, 2012 remains strong with a 6.4% operating margin and
12.8% operating EBITDA margin. Fitch expects sustained strong operating 
performance as UCHS is expecting to open a new, 80,000 square foot comprehensive
cancer center in the fall of 2013, which should result in additional revenue 
growth.  The $60 million cancer center will be affiliated with the UMMS Marlene 
and Steward Greenebaum Cancer Center and provide medical and surgical oncology 
services, radiation therapy, chemotherapy, a breast center and clinical trials.

UCHS maintains a leading 55.7% (Upper Chesapeake Medical Center and Harford 
Memorial Hospital combined) inpatient market share position in its primary 
service area, which is slightly down from 57.1% in 2011 but well above the 
closest competitor, Franklin Square Hospital, which has just 7% of the inpatient
market share.  The slight decline in market share can be attributed to the shift
to observation stays over the last few years, which are not captured in the 
inpatient market share data.   

UCHS' liquidity position is mixed. As of Sept. 30, 2012, UCHS' unrestricted cash
and investments totaled $113.6 million, which equated to 142.9 days cash on hand
and 8.5x cushion ratio; both are in line with the respective 'BBB' category 
medians of 138.9 days and 9.4x. Cash to debt of 69.6% is weaker than its 
respective 'BBB' category median of 82.7%. UCHS is spending down some of the 
equity contribution it received from its affiliation with UMMS, resulting in 
liquidity metrics in fiscal 2011 and through the nine-months ended Sept. 30, 
2012 slightly lower than fiscal 2010 results, but still stable.  Fitch expects 
liquidity metrics to remain stable through construction of the cancer center. 

In 2011 UCHS issued $50 million in new money to partially fund the construction 
of the cancer center.  Also, to eliminate near-term renewal and put risk, UCHS 
refunded its series 2008B&C bonds with BB&T (series 2011B) and Wells Fargo 
(series 2011C).  Total outstanding debt is $221.5 million and is about 48% fixed
rate and 52% underlying variable rate.  Because of the solid cash generation, 
MADS coverage by EBITDA is very good at 3.9x at Sept. 30, 2012.  The high debt 
burden is still a primary credit concern with MADS of $12.9 million equating to 
a high but improved 3.7% at Sept. 30, 2012 compared to the 'BBB' category median
of 3.3%. Although this is somewhat elevated, UCHS' exposure to variable-rate 
debt renewal and put risk is significantly reduced with the conversion of its 
2008B&C's to direct placements. BB&T will hold the series 2011B bonds for 10 
years, and Wells Fargo will hold the series 2011C bonds for six years. The 
series 2011A bonds placed with JPMorgan is structured as a draw down loan and $x
million has been drawn to date.  The financial covenants for the direct 
placements are a little higher than MTI requirements with 1.25x debt service 
coverage (1.10x in the MTI) and 75 days cash on hand (65 days in the MTI). 

The Positive Outlook reflects Fitch's expectation that UCHS will continue to 
produce strong operating results, which has been a reflection of its successful 
relationship with UMMS.  

UCHS operates 311 staffed beds at two hospitals in Bel Air and Havre de Grace, 
Maryland, located about 30 and 55 miles northeast of Baltimore, respectively. In
2011, UCHS had $319.6 million in total operating revenue. UCHS covenants to 
disclose annual financial statements to EMMA within 150 days of year end in 
addition to quarterly disclosure within 90 days of the end of each quarter. 
UCHS' quarterly statistics consist of a balance sheet, income statement, and 
utilization statistics for each hospital but does not include the statement of 
cash flows.

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