Fitch Rates Cullman Regional Medical Center (AL) Bonds 'BBB-'; Outlook Negative

2009-11-11 17:26:04 -

Fitch Ratings assigns the long-term rating of 'BBB-' to the expected $74.9 million series 2009-A bonds of The Health Care Authority of Cullman County to be issued for the benefit of Cullman Regional Medical Center (CRMC). Fitch also affirms the long-term rating of 'BBB-' for the outstanding The Medical Clinic Board of the City of Cullman revenue bonds series 2007

and the series 1993 bonds. The Rating Outlook remains Negative.

The unenhanced fixed rate 2009-A bonds are being issued to refund the series 1993-A bonds and the series 2007-A bonds. Total debt outstanding after this financing will be $78.7 million consisting of the series 2009-A bonds, a $3.5 million bank loan (used to fund the acquisition of Woodland Hospital) due in July 2012 and other debt. Bonds will be secured by a mortgage and gross revenue pledge of CRMC. A fully funded debt service reserve fund will be created, funded from bond proceeds, and a liquidity covenant has been added to the legal structure. Maximum annual debt service (MADS) is estimated at approximately $5.8 million, not including the $3.5 million note due in 2012. The hospital intends to use the proceeds of the sale of the Woodland property to pay off the bank loan. In conjunction with this financing, the hospital will also terminate an outstanding swap agreement. The estimated termination fee of $10 million will be funded from bond proceeds. The bonds are expected to price the week of Nov. 16th via negotiation.

The rating is supported by CRMC's dominant market position as the only provider in Cullman County between Birmingham and Huntsville, the hospital's strong focus on quality, and operational improvement in fiscal year 2009, continuing into 2010, which provides sufficient coverage of MADS on an historic pro forma basis of 1.4 times (x) in fiscal year (FY) 2009 increasing to 1.7x in the first quarter of 2010 (1Q'10). Also supporting the rating is CRMC's solid cash position. The system generated 109 days of cash on hand at the end of fiscal 2009, increasing slightly to 116 days of cash for the 1Q'10.

The Outlook remains Negative. CRMC's financial profile continues to be of concern. The hospital's historic profitability ratios have been erratic and consistently fall below the medians for the rating category.

In addition, both capitalization and debt ratios are weak due to multiyear investment losses, asset devaluation, and the issuance of $5 million of additional debt with this financing to finance swap termination costs.

CRMC's audited financial statements, based on GASB accounting standards, indicate total revenues of less than $100 million in fiscal 2009.

Cullman's relatively small revenue base and extremely limited debt capacity restricts management's ability to both recover from adverse events and expand services to meet the needs of the market.

Sustainability of operational improvement is a key rating concern for this credit. Fitch will be closely monitoring Cullman's future operating performance. Negative rating pressure will occur with any evidence of further deterioration in either liquidity or profitability ratios.

Cullman Regional Medical Center is an acute care general hospital with 115 beds in service, located in Cullman, AL which is 50 miles north of Birmingham. CRMC is designated as a Level III trauma center and the only provider of interventional cardiology services through an affiliation agreement with University of Alabama Medical System at Birmingham (UAB) between Birmingham and Huntsville. The hospital covenants to disclose quarterly unaudited (within 60 days) and annual audited financial statements (within 120 days) including management discussion and analysis by filing with Digital Assurance Certification, LLC. Fitch believes that CRMC disclosure practices are very good.

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Fitch Ratings, New YorkCindy Stoller, +1-212-908-0526 cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com Carolyn
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