Fitch Rates Salem Hospital's (Oregon) $184MM Bonds 'A+'; Outlook Stable

2008-09-17 23:29:01 -

- Fitch has assigned an 'A+' rating to the approximately $183.7 million of Hospital Facility Authority of the City of Salem, Oregon revenue bonds (Salem Hospital Project) Series 2008A-C. In addition, Fitch has affirmed the 'A+' rating on approximately $123.0 million series 2006A outstanding revenue bonds. The Rating Outlook is Stable.

In response to the remarketing failure of its auction rate bonds (series 2004A-B and series 2006B), Salem Hospital (Salem), under a credit agreement with several lenders, purchased all of its aforementioned bonds in April, 2008. The series 2008 bond proceeds will refinance the $161.5 million in outstanding debt under the taxable non-revolving credit agreement, and reimburse Salem close to $16.5 million for prior capital expenditure. The 2008A bonds will be issued in unenhanced fixed rate mode, while the 2008B-C will be issued in variable rate mode backed by a letter of credit. Fitch expects to assign a short term rating on the series 2008B and C VRDBs based on the letters of credit on a date closer to settlement. The series 2008A bonds are expected to price via negotiation during the week of Sept. 22.

The 'A+' rating reflects Salem's dominant market position, growing primary and secondary service areas, good operating profitability and favorable reimbursement environment. Salem's market share in the primary service area (encompassing the cities of Salem and Keizer) remains dominant at 75.3%. Its market share in the secondary service area is also solid at 17.6%. The population in the overall service area totals approximately 378,575 residents and has grown by 7.0% from 2000-2007. Salem is the state capital and as such, governmental agencies represent the largest employer. This is viewed positively, as Fitch believes this provides greater employment stability in the service area.

While Salem continues to exhibit good operating margins and liquidity indicators, operating and financial results in 2007 were affected by increased governmental payor mix and higher than budgeted labor costs. Governmental payors (Medicaid and Medicare) accounted for 57.2% of gross revenues, up from 55.4% in the prior year, which in turn suppressed net patient revenue growth by $10.0 million. The increase in labor costs were attributed to the installation of Salem's Clinical Information System -- a new hospital wide patient care and electronic medical record system that integrated application for medical providers, ancillary services, financial services, and administration. In fiscal 2007, Salem posted a 6.9% operating EBITDA margin, down from 10.7% in the prior year. Through the interim period ended June 30, 2008, Salem's operating EBITDA margin improved to 12.8%. The improved profitability in the interim period has been driven by increasing utilization, and cost management. Salem's liquidity relative to expenses remain strong with days-cash-on-hand of 284.3 at June 30, 2008. Pro-forma maximum annual debt service (MADS) of $19.7 million causes MADS as a percentage of revenue to remain above-average at 4.9% at fiscal year-end 2007. Proforma MADS coverage is good at 3.4x through the interim period.

Salem Hospital is a 412-staffed-bed hospital located in Salem, OR, approximately 45 miles south of Portland. Fitch analyzed the financial statements of Pacific Health Horizons, the entire consolidated organization, which includes Salem Hospital, West Valley Hospital (WVH), Salem Hospital Foundation, and West Valley Hospital Foundation. Salem made up 97% of total revenue and 98% of total assets of the consolidated system in fiscal 2007. Salem only covenants to provide annual audited financial statements to the nationally recognized municipal securities information repositories (NRMSIRs).

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