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Fitch Rates Boone Hospital Center $100MM Revs 'A'; Outlook Stable

Business Wire, May 12, 2008

NEW YORK -- Fitch Ratings assigns a rating of 'A' to approximately $100 million Boone County, Missouri hospital revenue bonds, series 2008 issued on behalf of Boone Hospital Center (BHC). In addition, Fitch assigns an 'A' rating to BHC's approximately $6 million series 2004 and $20 million series 2002 outstanding parity debt. Series 2008 bond proceeds will be used to fund construction of a new patient bed tower, parking structure, and pay costs of issuance. The Rating Outlook is Stable.

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The rationale for assigning the 'A' rating is based on BHC's long-term affiliation with BJC Healthcare (BJC) in St. Louis, ongoing community support from the Boone County Board of Trustees (Trustees), consistent operating profitability, and favorable service area characteristics. BHC is owned by the Boone County Hospital Board of Trustees, which leases the hospital to CH Allied Services Inc. (an affiliate of BJC). The current lease agreement runs through Dec. 31, 2015 and has been renewed once and amended once since the initial agreement was made with one of BJC's legacy members back in 1988. Through this lease agreement, BJC receives a management fee of 2.5%-3.0% of total hospital revenues for its provision of managerial oversight and strategic guidance. Additionally, commencing in fiscal 2009, the Trustees and BJC agreed to each take 25% of BHC's annual increase in cash and cash equivalents. The remaining 50% remains with BHC. This is a change from the past lease agreements that split the increase in cash 50%-50% between the Trustees and BJC. This demonstrates a commitment of both BJC and the Trustees to grow the cash reserves of BHC independent of either entity. Additionally, the Trustees receive up to $10 million per year from BJC to cover the anticipated debt service on the 2008 bonds and capital allocations. Although there is some risk that the lease will not be renewed past 2015, Fitch believes this will not have a dilutive effect on BHC's ability to service the debt on behalf of the Trustees, as the annual debt service decreases in 2015 to $7.26 million from $9.99 million.

Key rating drivers include BHC's robust historical operating performance as illustrated by its positive operating indicators that exceed Fitch's 'A' rating category medians. When consolidating both BHC and the Trustees audits, the combined entity earned approximately $20.3 million in income from operations in FY07, which translated into an 8.2% operating margin and bolstered a strong 17.7% EBITDA margin. Both operating measures compare favorably with Fitch's 'A' category medians of 3.2% and 12.1%, respectively. Located in Columbia, MO (general obligation bonds rated 'AA' by Fitch), BHC's service area is viewed favorably exhibiting solid population growth and above average wealth levels when compared to state and national averages.

Primary credit concerns include an increased debt burden associated with the expansion project, light liquidity relative to expenses, and a competitive marketplace. Upon issuance of the 2008 bonds, BHC's leverage, as indicated by its MADS as a percentage of revenue, increases to 4.0% in fiscal 2007, from 1.6%, which is above the Fitch 'A' category median of 3.1%. The combined unrestricted cash and investments of BHC and the Trustees totals approximately $77.4 million as of the 2007 fiscal year-end, which leads to liquidity indicators that are below Fitch's 'A' category medians. Specifically, BHC had 139.1 days cash on hand and a cushion ratio 7.7 times (x), which compare unfavorably to the 'A' category medians of 185.2 days and 15.4x, respectively. However, these concerns are mitigated by the amended lease arrangement, which allows the combined entity of the Trustees and BHC to retain 75% of BHC's annual increase in cash and cash equivalents, which should build the cash position of the combined entity, thus strengthening these ratios. Lastly, BHC operates in a competitive marketplace with the University of Missouri - Columbia (UM Healthcare) located nearby. UM Healthcare holds a 43.6% market share, which is slightly below BHC's 48.6%.

The Stable Outlook is predicated on Fitch's belief that BHC will continue to demonstrate good operating profitability through the construction period and will maintain its leading position in the market. Furthermore, Fitch believes the affiliation with BJC brings great strength to BHC.

BHC is a 388 licensed bed (349 operated beds) regional medical center owned by Boone County and the Board of Trustees of Boone County Hospital. BHC provides healthcare services to individuals across 26 mid-Missouri counties. In fiscal 2007, BHC had total operating revenues of approximately $250 million. BHC covenants to provide certain annual financial and utilization information to the NRMSIRs 180 days after the Trustees' fiscal year-end.

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.

Business Services Industry

Fitch Rates Boone Hospital Center $100MM Revs 'A'; Outlook Stable

Business Wire, May 12, 2008

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