2008-11-09 04:18:01 -
- Fitch Ratings has upgraded the rating on approximately $63.3 million of North Carolina Medical Care Commission hospital revenue bonds (Southeastern Regional Medical Center), series 1999 and 2002 to 'A' from 'A-'. The Rating Outlook is revised to Stable from Positive.
The upgrade is based on Southeastern Regional Medical Center's (SERMC) strong market position, essentiality of services, excellent liquidity
measures, solid management team, and close affiliation with Duke University Medical Center. Through the first quarter of fiscal 2008, SERMC held a dominant market position of 63% and has consistently maintained this market share over the last three fiscal years (ended Sept. 30, 2007). Further, SERMC acts as an essential services provider in the region as illustrated by the 71,328 emergency room visits recorded in fiscal 2007, a 16% increase over the last five fiscal years. Through the 11 months ended Aug. 31, 2008, SERMC had approximately $130 million in unrestricted cash and investments, equating to 248 days cash on hand, 167% cash-to-debt, and a cushion ratio of 19 times (x). These ratios compare favorably to Fitch's 'A' category medians of 197 days, 121%, and 15.3x, respectively. Management has been proactive in its service area, acquiring three medical groups, adding a new heart center, establishing a hospitalist program, and starting a nursing program on its campus as part of UNC-Pembroke. SERMC also benefits from a close relationship with Duke University Medical Center, which manages the newly built heart center, employs the cardiology group, and also provides SERMC's neurologist and oncologist. Additionally, SERMC is in the process of building a 10,000 square foot 'Duke Multi-specialty Clinic' to house the Duke staff and provide outpatient services.
Primary credit concerns for SERMC include a loss of 10 primary care physicians, decreased debt service coverage, and a high governmental payor mix. In fiscal 2007, 10 primary care physicians left the hospital citing lifestyle changes and the desire to practice only outpatient services. However, management has recruited 10 additional hospitalists (13 total) in order to stabilize admissions. As of Aug. 31, 2008, SERMC's maximum annual debt service coverage by earnings before interest, taxes, depreciation, and amortization was 2.5x, including an estimated $2 million in additional Medicaid disproportionate share hospital state matching funds, which are excluded from the financial statements until the audit is completed. This debt service coverage is down from 3.6x in fiscal 2007 and can largely be attributed to a $1.7 million loss in non-operating income as a result of the current market conditions. Finally, SERMC is vulnerable to changes in legislative reimbursement cutbacks due to its high exposure to governmental payors, with Medicare and Medicaid representing 43% and 28% of gross revenues through the interim period and 42% and 27% in fiscal 2007, respectively.
The Stable Rating Outlook reflects Fitch's belief that SERMC will continue to be the region's essential services provider and the non-operating loss is an event of a one-time nature.
Southeastern Regional Medical Center is a 337-bed acute care hospital located in Lumberton, NC. For the 11 months ended Aug. 31, 2008, SERMC had total revenues of approximately $187 million. It should be noted that Fitch was not asked to rate the $20 million series 2005 variable-rate demand bonds.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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
Jim Mitchell, 813-222-1395 (Tampa)
Jonathan Mandel, 212-908-0230 (New York)
Cindy Stoller, 212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com 
