Fitch Affirms Beloit Memorial Hospital Series 2006 'A-'/Underlying; Outlook Stable

Business Wire, Jan 30, 2008

CHICAGO -- Fitch affirms the 'A-' underlying rating on Beloit Memorial Hospitals' (BMH) $41.1 million series 2006A bonds issued through the Illinois Finance Authority and $10.5 million series 2006B bonds issued through the Wisconsin Health and Educational Facilities Authority. The Rating Outlook is Stable.

Currently, Fitch rates the series 2006 bonds 'A /F1 '. The long-term 'A ' rating on the bonds is based on the financial guaranty insurance policy issued by Radian Asset Assurance while the short-term 'F1 ' rating is based on the liquidity support of a standby bond purchase agreement (SBPA) provided severally by M&I Marshall and Illsley Bank, National Association. BMH intends to secure a letter of credit on the series 2006 from J.P. Morgan Chase Bank, N.A. and remarket the bonds sometime in mid-February. Fitch will assign a long-term and short-term rating to the series 2006 bonds based on the credit strength of the letter-of-credit provider closer to closing.

The affirmation reflects BMH's improving profitability trend, solid coverage of maximum annual debt service (MADS), a dominant market position in its primary service area, and the benefits of Bum's close relationship with the Beloit Clinic. In the fiscal year-ended Dec. 31, 2006, BMH posted operating and excess margins of 5.4% and 7.1%, respectively. BMH's fiscal 2006 represent the second consecutive year of improved profitability. BMH's operating profitability through the 11-month interim period ended Nov. 30, dipped to 3.1% due to increased expenses associated with new NorthPointe Health and Wellness facility in opened in Roscoe, IL. The new facility was opened in Dec. 2007 on time and on budget. BMH's historical coverage of MADS which does not reflect anticipated revenues from the NorthPointe has been solid. In fiscal 2006, coverage of MADS of 4.1 times (x) compares favorably to Fitch's 'A' rated median of 4.0x. Moreover, BMH's debt burden as measured by MADS as a percentage of total 2006 revenues is a manageable at 3.1%.

Located approximately 75 miles northwest of Chicago, BMH's primary service area (PSA) totals roughly 61,000 residents and includes the towns of Beloit, South Beloit, Rockton and Roscoe.

In 2006, BMH captured 72% of the inpatient admissions in the PSA which is unchanged from Fitch's last review in January 2006. BMH's next closest competitor remains Mercy-Janesville Hospital at a distant 16% market share. Fitch believes that BMH has been able to protect its market share, in part, through development of a strong relationship with the Beloit Clinic and local physicians. The Beloit Clinic is a 55-physician multi-specialty clinic that admits almost exclusively to BMH. The Hospital and Clinic have collaborated on a number of mutually beneficial arrangements. The 21,000 square feet of physician clinic space at the new NorthPointe campus is occupied by Beloit Clinic physicians. In addition, BMH, the Beloit Clinic, and hospital-based physicians formed a physician-hospital organization in 1994 that represents approximately 90% of BMH's active medical staff in managed care negotiations.

Credit risks include service area demographics that are weaker than state and national averages, a moderately small revenue base and somewhat high percentage of Medicaid and self pay revenues. Although the local economy has shown some diversification recently into the service sector, Beloit's unemployment rate has consistently been above state averages. City income levels have generally been between 15%-30% lower than both state and national averages on a household and per capita basis. While revenue growth at BMH has been good in recent years, Fitch believes profitability is more susceptible to changes in payor mix and/or managed care negotiation due to its moderately small revenue base. While BMH Medicaid/self pay payor mix is manageable at 16.4%, a contraction in the service area's sizable manufacturing base could increase BMH's Medicaid / self pay load.

The Stable Rating Outlook reflects management's successful development of the NorthPointe Health and Wellness facility in Roscoe, IL. The Roscoe site should blunt any encroachment from Rockford healthcare providers while attracting a younger, more affluent patient referral source in the growth area along Illinois/ Wisconsin state line.

Located approximately 75 miles northwest of Chicago, Beloit Memorial Hospital is a 143 staffed bed (256 licensed) community hospital in Beloit, WI. The hospital had approximately $99 million in total operating revenue in fiscal 2006. BMH covenants to provide annual audited financial information including a balance sheet, income statement, statement of cash flows, and utilization data within a 150 days of each fiscal year end. Quarterly financial is disseminated within 60 days for the first three fiscal quarters and with 90 days of the fourth fiscal quarter.

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.