Fitch Affirms Dickinson County Healthcare System (Michigan) at 'BBB-'; Outlook Stable

2008-11-15 01:56:04 -

Fitch Ratings has affirmed the 'BBB-' rating on approximately $28.6 million Dickinson County Healthcare System (DCHS), County of Dickinson, State of Michigan, hospital revenue and refunding bonds, series 1999. The Rating Outlook is Stable.
The 'BBB-' rating affirmation is supported by DCHS' consistent operating performance, dominant market share and sole community provider status, and relatively new plant. DCHS has a dominant market share of approximately 62% in its primary service area and is designated a sole community provider as its closest competitor is approximately 30 miles away. As of Sept. 30, 2008 (unaudited), DCHS recorded an operating EBITDA margin 8.9%, which was slightly down from fiscal 2007's 9.3% margin. Nonetheless, the September 2008 operating EBITDA margin exceeds Fitch's 'BBB' category median of 8.3%. Management expects operating profitability for fiscal year-end 2008 will be consistent with September 2008's interim results, which would mark the fourth consecutive year DCHS has had breakeven or positive operating profitability. In fiscal 2007, DCHS had a low average age of plant of 6.6 years, which compares favorably with Fitch's 'BBB' category median of 10.1 years.
Credit concerns include DCHS' light liquidity, losses associated with employed physicians, moderate debt burden, and smaller size and location in a low growth area. At Sept. 30, 2008, DCHS' liquidity position declined to approximately $13 million from $16.8 million in fiscal 2007. Management attributes the approximate $3 million decrease to glitches associated with the organization's information technology (IT) platform conversion as well as the use of a new service bureau for billing. Management indicated that reducing the level of accounts receivable is a top priority for DCHS. Additionally, DCHS had a moderate debt burden for the same time period with MADS as a percentage of revenue of 4.4%, which compared unfavorably to Fitch's 'BBB' category median of 3.3%. Through September 2008, DCHS employed 12 physicians, which resulted in an approximate $1.2 million loss. DCHS relies on its employed physician strategy as a means to secure primary care referrals and staff its emergency department.
The Stable Outlook reflects Fitch's belief that DCHS will generate bottom line profitability that is consistent with historical figures. Although liquidity is depressed over the interim period, Fitch expects DCHS' balance sheet position to return to fiscal 2007 levels over the medium term. Management's ability to bring receivables to historical levels is critical for DCHS to maintain its current rating.
DCHS is a 96-bed hospital providing primary and secondary services located in Iron Mountain, in Michigan's Upper Peninsula. Total revenues in 2007 were $74.4 million. DCHS covenants to provide annual disclosure to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Disclosure to Fitch has been timely and extremely thorough and has occurred quarterly. Additionally, the disclosure provided by DCHS is one of the best for any obligor in Fitch's nonprofit healthcare portfolio. The disclosures include a detailed management discussion and analysis, balance sheet, income statement, statement of cash flows, and utilization statistics; all of which have comprehensive comparative analyses.
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

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Anthony Houston, 312-368-3180 (Chicago)

Cindy Stoller, 212-908-0526 (Media Relations, New York)

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