Fitch Affirms Mid-Florida Medical Services 'BBB'; Outlook Stable

Business Wire, May 21, 2008

NEW YORK -- Fitch affirms the underlying 'BBB' rating on approximately $72 million Polk County Industrial Development Authority series 2005 and 2006 revenue bonds (Winter Haven Hospital). The Rating Outlook is Stable.

The 'BBB' rating reflects Mid-Florida Medical Services' (MFMS) leading market share position, solid debt service coverage, improved operating performance and adequate liquidity. In its primary service area of Eastern Polk County, MFMS maintained a leading market share position of 55% in 2007, followed by Heart of Florida Medical Center (24%). In fiscal year (FY) 2006, MFMS maximum annual debt service (MADS) coverage from EBITDA was solid at 3.4 times (x), consistent with Fitch's 'BBB' median of 3x, and improved to 4.1x through six months ended March 31, 2008. Other key debt burden indicators are favorable, including MADS as a percent of revenue of 2% in FY2007. Liquidity, particularly as related to debt burden, is adequate with a FY2007 cushion ratio and cash to debt at 11.7x and 83.5%, respectively, compared to Fitch 'BBB' category medians of 9.2x and 83.5%. Operating results improved in FY2007 despite the loss of several key physicians that resulted in lower volume levels at the hospital. The hospital has been successful in recruiting several high-volume specialty physicians that should result in higher volume levels going forward. Operating EBITDA improved to 4.2% in FY2007 and to 5.8% through the six-month interim period in FY2008. Excess margins have been positive since FY2002.

Fitch's main credit concerns include MFMS' high level of exposure to governmental payors, high bad-debt levels, and reliance on large physician groups. In FY2007, Medicare and Medicaid represented 55% and 8% of gross revenues, respectively. MFMS' provision for bad debt as a percent of revenue was high at 13.4% in FY2007, gradually increasing from 6.5% in FY2001. Management attributes the increase to a rise in self-pay patients and continued cost shifting from third party payors. Two multi-specialty groups of approximately 45 physicians each primarily admit to MFMS and account for nearly 50% of its active physicians and 60% of admissions. Fitch views this level of reliance as an inherent risk. Although average age of plant is high (13.9 years at FY2006), MFMS has been significantly investing in capital over the last three fiscal years as evidenced by capital spending that exceeded 188% of depreciation expense, including a significant improvement to the exterior of the main facility and an expansion of the main hospital campus.

The Rating Outlook is Stable. With the 2006 debt issuance, MFMS projected its operating margin to increase from 1%-2.9% from fiscal 2006 to 2010. Despite the negative operating margin in FY 2006 and 2007, Fitch believes that MFMS can still reach levels of performance consistent with the above projections going forward. Completion of current heavy construction which entails total reconfiguration of entries into Winter Haven Hospital (to be finished in Fall of 2008), further buildup of the MFMS' new heart program, and geographical isolation of the primary service area and Winter Haven Hospital from competition should contribute to stable operations.

Located in Winter Haven, Florida, MFMS operates a 466-licensed bed hospital (Winter Haven Hospital), a 61-licensed bed hospital (Regency Medical Center), and several family health centers located throughout eastern Polk County. In FY2007, MFMS had total operating revenue of approximately $251 million. MFMS covenants to provide only annual audited financial statements via the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs), which is viewed negatively by Fitch.

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