Fitch Affirms East Alabama Medical Center's, Alabama, $22.6MM Bonds at 'A'

Business Wire, Feb 11, 2005

NEW YORK -- Fitch Ratings has affirmed the 'A' underlying rating on approximately $22.6 million East Alabama Health Care Authority health care facilities revenue and tax anticipation bonds (East Alabama Medical Center), series 1998A. The bonds are insured by MBIA Insurance Corp., whose insurer financial strength is rated 'AAA' by Fitch. The Rating Outlook is Stable.

Other East Alabama Medical Center debt on parity with the series 1998A bonds but not rated by Fitch include the following:

-- $48 million revenue and tax anticipation bonds, series 2002A;

-- $78.3 million revenue and tax anticipation bonds, series 2003A.

The 'A' rating affirmation is supported by East Alabama Medical Center's (EAMC) historical operating profitability, dominant market position, strong liquidity relative to expenses, and low days in accounts receivable. In fiscal 2004 (unaudited), EAMC posted a 2.7% operating margin ($5.3 million), and remained strong through three months ended Dec. 31, 2004 with a 1.6% margin ($794,000). EAMC's solid operating profitability has been driven by very profitable reimbursement from Blue Cross, solid revenue growth due to the maturing of several service lines including long-term care, and enhanced revenue from a special hospital tax on property in Lee County.

At Dec. 31, 2004, EAMC had 203.5 days cash on hand, decreasing from 240.8 days at fiscal year-end 2003 but remaining above Fitch's 'A' median of 170.9 days. As the only hospital located in its primary service area of Lee County, EAMC had a dominant market share of 87% in 2003. EAMC's revenue cycle management is very favorable, which is reflected in an exceptionally low 20 days in accounts receivable at Dec. 31, 2004.

Primary credit concerns are EAMC's increased debt burden and reliance on governmental payors. In December 2003, EAMC issued $78.3 million of debt to refund its outstanding series 1994 bonds ($30.4 million), finance various capital projects ($40.6 million), fund a debt service reserve, and pay costs of issuance. A hospital expansion project, expected to begin in summer 2005, will add 40 medical-surgical beds and shift EAMC's bed mix to all private. Although the project has been delayed, management does not anticipate any material cost overruns. In addition, with bond proceeds EAMC has purchased a 75-bed nursing home and will construct a parking deck.

EAMC's increased debt burden is demonstrated by its cash-to-debt position of 69.6% at Dec. 31, 2004, a decline from 94.7% at Sept. 30, 2003. Furthermore, maximum annual debt service as a percent of revenue was high in 2004 at 4.6%. Despite the increased debt burden, Fitch believes that the expansion project will enhance EAMC's reputation as a regional referral center and support operating profitability. In 2004, EAMC derived 48.8% and 9% of its gross revenues from Medicare and Medicaid, respectively. Currently, EAMC profits from both Medicare and Medicaid, but its significant reliance on these governmental payors creates uncertainty in future revenue streams.

The Stable Rating Outlook reflects Fitch's belief that EAMC's current level of operating profitability will continue over the medium term. However, Fitch believes that significant capital spending over the medium term will hinder growth of EAMC's liquidity position.

East Alabama Medical Center includes a 292-operated-bed public hospital and several long-term care facilities. The hospital is situated in Opelika, AL, approximately 60 miles east of Montgomery, AL, 110 miles southeast of Birmingham, AL, and 100 miles southwest of Atlanta. Total operating revenues in fiscal 2004 were $194.2 million. EAMC covenants to provide annual financial statements and quarterly disclosure to bondholders, which includes a balance sheet, statement of operations, and utilization statistics. However, EAMC's quarterly disclosure does not include a statement of cash flows and management discussion and analysis. Fitch notes that EAMC provides its quarterly disclosure at 'www.dac-ey.com'.