Fitch Rates Holy Redeemer Health Sys, Pennsylvania $89.4MM Bonds 'BBB-'; Downgrades Outstanding

Business Wire, Oct 28, 2005

NEW YORK -- Fitch Ratings assigns an underlying 'BBB-' rating on $29.4 million Montgomery County Higher Education and Health Authority revenue bonds (Holy Redeemer Health System) series 2005A and $60.0 million Montgomery County Higher Education and Health Authority variable-rate revenue bonds (Holy Redeemer Health System) series 2005B. The series 2005A bonds are expected to be insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch. The series 2005B bonds will be issued as auction-rate securities and are expected to be swapped to a fixed rate at a later date. In addition, Fitch downgrades its rating to 'BBB-' from 'BBB' on the outstanding $93.2 million Montgomery County Higher Education and Health Authority revenue bonds (Holy Redeemer Health System) series 1997A. The Rating Outlook remains Negative.

Bond proceeds will be used to refund a portion of the series 1997 bonds ($56.1 million); fund various projects including an expansion of the emergency department, renovation of operating rooms, and investment in information systems ($25 million); fund a debt service reserve and pay costs of issuance. The bonds are expected to be sold the week of Nov. 14 via negotiation by Bear Stearns and Co.

The rating downgrade to 'BBB-' from 'BBB' is largely due to Holy Redeemer Health System's (HRHS) continued losses from operations and increasing debt burden. Through the 12 months ended June 30, 2005 (draft audit), HRHS posted a negative 1.4% operating margin ($3.1 million loss), improving from negative 3.8% ($9.6 million loss) in fiscal 2004 but marking a third consecutive year of operating losses. The fiscal 2004 loss was driven by an $8 million shortfall in Medicare outlier payments. HRHS's operating loss in fiscal 2005 was reduced in part because of controlled expenses, including contract nurses and an overall reduction in staffing. However, medical/surgical discharges declined slightly to 14,066 in fiscal 2005 from 14,183 in fiscal 2003. Outpatient volume also declined over this period, which reflects competition from physicians. As of June 30, 2005, HRHS' cash-to-debt position decreased to 75.4% from 98.1% on a pro forma basis, falling below Fitch's 'BBB' median of 82.1%. In addition, pro forma debt to EBITDA in fiscal 2005 increased to a high 6.7 times (x). Although HRHS had a 0.5% excess margin ($1.3 million net gain) in fiscal 2005, pro forma maximum annual coverage (including guaranteed debt) from EBITDA was low at 1.4 times (x). Additional credit concerns include HRHS' very competitive service area. In fiscal 2004, HRHS maintained a 12.6% market share position in its primary service area that accounts for 50% of admissions, behind Jefferson Health System (23.7%; revenue bonds rated 'AA-' by Fitch) and Catholic Health East (13.3%, revenue bonds rated 'A ' by Fitch), and slightly ahead of Abington Memorial Hospital (11.6%, revenue bonds rated 'A-' by Fitch). The fragmented nature of HRHS' marketplace limits its leverage with two large managed care payors, Independence Blue Cross (42.5% of net hospital revenue) and Aetna (13.2% of net hospital revenue).

Credit strengths include HRHS' solid liquidity position, diversified service lines, and favorable service area characteristics. At June 30, 2005, HRHS had 151.7 days cash on hand, an increase from 114 days at fiscal year end 2003. Days in accounts receivable were also low at 49.2 days as of June 30, 2005. HRHS remains unprofitable on its acute care services ($6.5 million operating loss in fiscal 2005), which is somewhat offset by its profitable long-term care services ($3.5 million operating gain in fiscal 2005). In addition, HRHS offers extensive home care services in Pennsylvania and New Jersey, which have been profitable in recent years ($796,000 in fiscal 2005). From 2003-2005, occupancy levels at each of HRHS' three long-term care facilities have remained above 97%. The recent acquisition of the Visiting Nurse Association of Southern New Jersey creates a contiguous four-county area, which should enhance operating efficiencies. Home health volume has declined slightly as HRHS has exited certain unprofitable home health services, including psychiatry. The service area has strong wealth indicators, reflected in its low Medicaid load at 4.2% of gross revenues. Nevertheless, the primary service area population is projected to decline slightly, which may limit utilization growth.

The Rating Outlook is Negative. HRHS' obligated group budget for fiscal 2006 calls for a $4.2 million loss, which includes a $6.0 million loss at the hospital partially offset by its profitable long-term care and home care services. Given HRHS' increasing debt burden and expected operating losses, Fitch believes that HRHS' financial flexibility is limited. Fitch believes that improvement of the hospital's operating performance is critical to improving profitability. HRHS' recently expanded cardiovascular center and its emergency department renovation, expected to be completed in fiscal 2007, should support volume growth. Increased operating losses over the medium term may lead to additional downward rating pressure.