2010-07-30 19:29:04 -

Fitch Ratings has downgraded approximately $7.055 million of Weirton Municipal Hospital Building Commission's hospital revenue bonds series 2001A to 'BB' from 'BB+'. The bonds were issued on behalf of Weirton Medical Center (WMC). Fitch does not rate approximately $14 million of series 2001B adjustable-rate demand hospital revenue bonds which are supported by a PNC Bank letter of credit, nor the $4.8 million series 2005A fixed-rate bonds. Fitch has also revised the Rating Outlook to Negative from Stable.

RATING RATIONALE.

--The downgrade and Negative Outlook are primarily based on continued operating losses of $4.2 million (negative 4.8% operating margin and negative 0.7% operating EBITDA margin) through the 11-month interim period ended May 31, 2010. Management anticipates improvements in fiscal 2011, although still expects

an operating loss.

--WMC failed to meet its debt service coverage covenant in the bank reimbursement agreement at June 30, 2009 and has failed to meet it each quarter subsequently. WMC was granted a waiver by the bank through March 2010 and is currently in negotiations to extend the waiver.

--Inpatient volumes, which had mild year over year declines between fiscal 2007 and 2009, have significantly deteriorated through the interim period, declining nearly 12% on a like-for-like basis (not including discontinued services) and 17% overall. However, certain outpatient services have seen modest increases.

--Approximately 54% of WMC's outstanding debt consists of VRDBs backed by a one-year letter of credit, which exposes them to put, renewal, and counterparty risk.

--WMC's liquidity is the primary credit strength. At May 31, 2010, unrestricted cash and investments measured $35.6 million, equating to 152 days cash on hand, 12 times (x) cushion ratio, and 138.5% cash to debt, all of which compare well to investment grade level credits.

WHAT MAY TRIGGER A DOWNGRADE?


--The Board of Directors has hired Quorum Health Resources (QHR) for a two-year engagement to implement a turnaround plan effective May 2010, which Fitch views favorably. QHR's inability to implement the turnaround plan and meet budgeted goals could lead to further negative action.
Crucial to this effort will be favorable managed care contract negotiations as current rates are insufficient to support profitability.

--Continued deterioration of inpatient volumes, such that they outpace management's ability to control costs.

--WMC's one-year letter of credit (LOC) on its variable-rate debt is not renewed, or WMC fails to continue to secure waivers for its ongoing debt service coverage covenant violations.

SECURITY.

--Debt payments are secured by a pledge of gross revenues and a debt service reserve fund. The series 2001 bonds are also secured by a first mortgage lien.

CREDIT SUMMARY.

The downgrade and Negative Outlook are largely based on WMC's continued operating losses and the expectation for further losses in the near term. Through the 11-month interim period, WMC posted an operating loss of $4.2 million (negative 4.8% operating margin and negative 0.7% operating EBITDA margin). This compares with an operating loss of $3.5 million in fiscal 2009 (negative 3.6% and positive 1%, respectively).
Fiscal 2010 will mark the ninth consecutive year that WMC has reported negative income from operations. The weaker results have occurred in spite of continued expense and wage reductions (staffing was reduced by 42 FTEs in January 2009 plus another 19 as of January 2010), and revenue cycle initiatives. Driving the operating loss is significantly lower inpatient volumes and poor reimbursement rates from managed care providers (coupled with poor coding on the hospital's side), which have resulted in an 8% decrease in total operating revenue year over year.

The board of directors brought in an interim CFO from QHR in November 2009 and then signed a two-year turnaround engagement effective May 1, 2010. Fitch views the engagement with QHR favorably. QHR operates 150 community hospitals across the country and has significant experience working with financially stressed hospitals similar to WMC. As part of the engagement, QHR has brought on a COO, interim CNO, and additional consultants in order to evaluate and revamp revenue cycle management, payor contracts, human resources, labor negotiations, and case management. In fiscal 2011, management is budgeting for an improvement in operating performance, although still an operating loss. Fiscal 2012 is expected to be breakeven at a minimum.

At the end of fiscal 2009, WMC was not in compliance with its debt service coverage covenant of 1.5x as defined in the bank reimbursement agreement associated with the series 2010B bonds. It received a waiver for the violation through March 2010. At the end of March, WMC was again not in compliance with the covenant and is seeking an additional waiver.

This ratio is tested quarterly and management noted that they will likely not be able to meet this requirement for at least several quarters.

Additional credit concerns include deteriorating inpatient volumes, WMC's variable rate debt exposure, poor service area characteristics, and high average age of plant. Inpatient admissions declined 1.8%, 0.8%, and 2.9% between fiscal years 2006-07, 2007-08, and 2008-09. Through the interim period, admissions declined drastically, falling 16.6% year over year or 11.7% not including inpatient psychiatry which was discontinued in the first quarter of 2010. Management attributed the decline to generally lower volumes across the area and certain operational issues.
However, certain outpatient services have seen increased demand year over year, including surgeries and physical therapy which are up 4.3% and 20.3%, respectively.

Approximately 54% of WMC's outstanding debt is in variable rate demand bonds backed by a one-year letter of credit (LOC) from WesBanco and United Bank which are wrapped by PNC Bank. This structure exposes WMC to renewal, put, and counterparty risk. The LOC expires in January 2011 and carries a yearly renewal option. Continuation of the banks support is key to maintaining the current rating level. Should the banks decide not to renew, WMC does have adequate liquidity to repay an accelerated amortization of the debt.

WMC's service area can be characterized by socioeconomic indicators generally worse than US averages, as well as high unemployment rates within the metropolitan statistical area, ranging from 12.4% to 13.4%.

These factors present significant challenges from a reimbursement standpoint as self-pay and Medicaid represents roughly 9% and 13% of gross revenues, respectively, while Medicare accounts for an additional 45%. Bad debt as a percentage of revenue is also high, hovering near 11%.

The primary credit strength for WMC is its liquidity position which provides a cushion while WMC works to turnaround operations and sufficiently covers put risk. Unrestricted cash and investments stood at $35.6 million at May 31, 2010, up from $32.6 million at June 30, 2009.

These funds equate to 152 days cash on hand, a 12x cushion ratio, and 138.5% cash to debt, all of which are characteristic of an investment grade credit. The liquidity cushion has historically helped to offset operating losses, although it has likely been maintained at such a high level as a result of a deferral of capital projects as demonstrated by the very high average age of plant. Also concerning is WMC's asset allocation which is held almost entirely in equities (69% within mutual funds and 28.5% in common stocks as of June 30, 2009).

WMC is a 238-bed acute care hospital located in Weirton, WV, approximately 35 miles west of downtown Pittsburgh. The hospital had total revenues of $97 million in fiscal 2009 and $86.6 million through the interim period. WMC covenants to provide annual and quarterly disclosure to bondholders; however, quarterly disclosure is not done through the NRMSIRS. Weirton is not party to any swap transactions.

Applicable criteria available at ' www.fitchratings.com : '.

--'Revenue-Supported Rating Criteria' (Dec. 29, 2009);

--'Nonprofit Hospitals and Health Systems Rating Criteria' (Dec. 29, 2009).

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

Related Research.

Revenue-Supported Rating Criteria

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

Nonprofit Hospitals and Health Systems Rating Criteria

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

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Fitch RatingsJonathan Mandel, +1-212-908-0230Gary Sokolow,
+1-212-908-9186Cindy Stoller, +1-212-908-0526 (Media Relations) cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com