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Rating Update:

MOODY'S AFFIRMS HEALTH FIRST'S (FL) A3 LONG-TERM BOND RATING; OUTLOOK IS STABLE

02 Nov 2010

HEALTH FIRST HAS A TOTAL OF $332.3 MILLION OF LONG-TERM BONDS OUTSTANDING

Brevard County Health Fac. Auth., FL
Health Care-Hospital
FL

Opinion

NEW YORK, Nov 2, 2010 -- Moody's Investors Service has affirmed the A3 long-term bond rating assigned to Health First's (HF) $332.3 million of outstanding bonds issued by the Brevard County Health Facility Authority (see RATED DEBT section at end of report). The outlook is stable.

LEGAL SECURITY: Joint and several revenue pledge of the obligated group (Health First, Holmes Regional Medical Center and Cape Canaveral Hospital). Holmes Regional cannot exit the obligated group as long as the Series 2005 and 2009 bonds are outstanding; mortgage and security interest in Holmes Regional campus. A debt service reserve fund was funded for the 2009 bonds. Viera Hospital will join the obligated group upon completion of construction (estimated to be completed April, 2011). Substitution of notes permitted with consent of majority bondholders. There is also a cross default provision in the Compass Loan agreement that pull in events of default under the Master Trust Indenture. All outstanding debt is parity debt.

INTEREST RATE DERIVATIVES: Interest rate swap associated with the 2009A Compass Bank loan. The swap has a notional amount of $70 million. Health First pays 5.14% and receives 65% of 1-month LIBOR plus 231 basis points. As of May 2010, the swap had a negative mark-to-market value of $4.5 million. The counterparty is Compass Bank.

STRENGTHS

*Leading market position in Brevard County supported by three acute care hospitals- with combined staffed-bed complement of 756 beds with one new hospital under construction; system's flagship facility in Melbourne maintains a full array of tertiary services

*Integrated delivery system with a wholly-owned health plan with 59,000 members and over $382 million in premium revenues in fiscal year (FY) 2009 that provides diversification of revenue streams for the system

*Location in a high growth area of Florida with strong demographic and population growth indicators, although not immune from the current recession and real estate pressures

*Strong operating performance and cash flow generation in FY 2009, and continued through the first six months of FY 2010

*Improvement in liquidity measures, with unrestricted cash and investments as of nine months FY 2010 totaling $324.6 million (138.2 days cash on hand)

CHALLENGES

*The system is leveraged due to the large increase in debt during FY 2009, as evidenced by 64.1% cash-to-debt, 50.3% debt-to-operating revenues, and 4.84 times debt-to-cash flow as of fiscal year end (FYE) 2009

*Purchase of local competitor, Wuesthoff Regional Medical Center, by a for-profit hospital company, could result in additional competitive risk for Health First; anti-trust litigation initiated by Wuesthoff in 2007 will continue to be pursued by the former not-for-profit hospital's foundation

*Erratic volume trends due to the economic recession and a shift from inpatient admissions to outpatient observation stays; although we note favorably that Health First's health plan benefits as a result of reduced utilization balancing some of the risk associated with declining volume trends

*Start-up costs associated with the opening of the new Viera Hospital in the spring of 2011, will likely result in a slight decline in operating performance for FY 2011 - management has budgeted $30 million in operating income for the year, a decline from an anticipated $32 million in operating income for FY 2010

RECENT DEVELOPMENTS/RESULTS

Health First is located in Brevard County, Florida (County General Obligation rating of A1 by Moody's) and operates three hospitals and a wholly-owned health plan. The system consists of the 514-bed flagship Holmes Regional Medical Center (HRMC) flagship, located in Melbourne, 150-bed Cape Canaveral Hospital (CCH), and 152-bed Palm Bay Hospital (PBH). Construction is currently underway on a third hospital (Viera Hospital) which will house 100 beds, with ability to expand to 350 beds if needed. The new hospital will be located 10 miles northwest of Melbourne in one of the fastest growing communities in Brevard County. Management reports that the Viera hospital is expected to open in April 2011, and is currently on time and on budget with original projections. In addition to its three hospitals, the system includes Health First Health Plan (HFHP), the largest insurer in the county with 59,000 covered lives and the only provider of the HMO Medicare product in Brevard County. In FY 2009 the health plan generated $382 mm of revenues (39% of total system revenues).

Health First maintains leading market share in its primary service area (61% as reported by management), with 291-bed Wuesthoff Medical Center - Rockledge (WMCR) as its primary competitor located. In 2002 Wuesthoff Health Systems (WHS) , the parent company of WMCR opened Wuesthoff Medical Center - Melbourne (WMCM) a 115-bed hospital located in West Melbourne which has impacted volumes for Health First. WHS was recently purchased by for-profit hospital system Health Management Associates (HMA), effective October 1, 2010. Health First had been in litigation with WHS since May 2007,when WHS filed a suit alleging antitrust violations. The former foundation of WHS, which was spun off due to its charitable status following the sale of WHS to HMA, has indicated that it intends to continue litigation against Health First.

During FY 2009, inpatient volumes declined by 7.5% from the prior year, but observation stays increased by 28.5% during the same time period, resulting in combined inpatient admissions plus observation stays growing by 7.4%. Through nine months of FY 2010, inpatient admissions and observation stays both increased by 1.6% over the prior year same period. Outpatient surgeries declined by a material 13.1%, largely due to a weakened economy as well as the dissolution of a large physician surgeon group in Health First's service area.

FY 2009 marked a strong year of operating performance for Health First. Revenues increased by 5.4%, and expenses were controlled with 4.9% growth over the prior fiscal year. The growth in revenues and expense controls resulted in $34.4 million in operating income (3.5% margin) for FY 2009, a 29% increase in profitability over the $26.6 million (2.9% margin) generated in FY 2008. FY 2009 operating cash flow was $95.8 million (9.8% margin), an increase over the $87.1 million (9.4% margin) of operating cash flow generated in FY 2008. Despite the improvement in financial operations, debt service coverage measures did not show improvement due to the issuance of the Series 2009B bonds and the Series 2009A private placement. As a result, debt-to-cash flow for FY 2009 grew to 4.84 times, up from 3.79 times the prior year, Moody's adjusted MADS coverage declined to 2.85 times, down from 3.68 times the prior year, and debt-to-revenues increased to 50.3%, up from 36.4% in FY 2008.

Through nine months of FY 2010, Health First showed improvement in financial performance over the prior year same period. Although operating revenues declined by 2.2%, operating expenses were cut substantially and were reduced by an even greater 3.7%. Part of the decline in operating revenues was due to the elimination of one of Health First's health plan products that had a high medical loss ratio. The plan was replaced with another plan that generates less revenue, but has a lower loss ratio. In addition, Health First saw a decline in Medicare revenue because of change in the wage index. However, despite limited patient volume growth and declines in revenue, Health First successfully cut expenses in order to achieve operating profitability of $28.5 million(4.0% margin) through nine months of FY 2010, an improvement over the $25.9 million (3.6% margin) in operating income for nine months of FY 2009. Operating cash flow through nine months of FY 2010 was $78.0 million (11.0% margin), compared to $70.3 million 9.7% margin) in nine months of FY 2009. Management's expectations for full FY 2010 operating performance anticipates $32-$33 million in operating income. The FY 2011 budget projects $30 million in operating income, with the expected decline due to the start-up costs associate with the new Viera hospital opening in FY 2011.

Health First's cash position has improved, with unrestricted cash and investments totaling $314.7 million (128.5 days cash on hand) as of FYE 2009, up from $258.7 million (110.9 days cash on hand) at FYE 2008. Cash levels show further improvement as of nine months FY 2010, with $324.6 million in unrestricted cash and investments (138.2 days cash on hand). However, we note that construction funds for the Viera Hospital are close to depletion, and Health First expects to make roughly a $70 million equity contribution to finish construction of the hospital. Cash is invested conservatively, with 60.7% held as cash and cash equivalents, 10.2% held as equity investments, 2.4% invested in fixed income, and 26.7% invested in other securities. 95% of Health First's investment portfolio can be liquidated in one month or less. Routine capital for FY 2010 will total $22 million, which is in addition to the capital spent for the Viera Hospital.

Finally, the Chief Executive Officer of Health First has announced his retirement for December 2011, and management reports that a search firm has been engaged to locate his replacement.

Outlook

The stable outlook reflects our belief that Health First will sustain the improvement in financial performance achieved in FY 2009 and year-to-date FY 2010

What could change the rating--UP

Substantially higher cash flow, translated to improved liquidity measures; successful opening and operations of Viera Hospital

What could change the rating--DOWN

Sizable increase in leverage without commensurate increase in cash flow and liquidity, continued decline in operating performance, or decline in liquidity measures

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for Health First, Inc. and Subsidiaries

-First number reflects audit year ended September 30, 2009

-Second number reflects management provided, unaudited interim financials for nine months of FY 2010 annualized

-Investment returns normalized at 6% unless otherwise noted

*Inpatient admissions: 34,346; 26,553 (as of June 30, 2010)

*Total operating revenues: $974.9 million; $943.9 million

*Moody's-adjusted net revenue available for debt service: $116.0 million; $126.4 million

*Total debt outstanding: $490.8 million; $492.1 million

*Maximum annual debt service (MADS): $40.8 million; $40.8 million

*MADS Coverage with reported investment income: 2.31 times; 2.54 times

*Moody's-adjusted MADS Coverage with normalized investment income: 2.85 times; 3.10 times

*Debt-to-cash flow: 4.84 times; 4.49 times

*Days cash on hand: 128.5 days; 138.2 days

*Cash-to-debt: 64.1%; 66.1%

*Operating margin: 3.5%; 4.0%

*Operating cash flow margin: 9.8%; 11.0%

RATED DEBT (debt outstanding as of September 30, 2010)

-Series 2001 Hospital revenue Bonds (fixed rate): $71.4 million outstanding, insured by MBIA, A3 unenhanced rating

-Series 2005 Hospital Revenue Bonds (fixed rate): $175.0 million outstanding, rated A3

-Series 2009B Hospital Revenue Bonds (fixed rate): $85.9 million outstanding, rated A3

CONTACTS

Obligor: Mr. Robert Galloway, Chief Financial Officer, Health First, (321) 434-4363

The principal methodology used in rating Health First was Not-for-Profit Hospitals and Health Systems rating methodology published in January 2008. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

The last rating action with respect to Health First was on June 8, 2009 when the municipal finance scale rating of A3 and stable outlook were affirmed. That rating was subsequently recalibrated to a global scale rating on May 7, 2010.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Sarah A. Vennekotter
Analyst
Public Finance Group
Moody's Investors Service

Lisa Goldstein
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S AFFIRMS HEALTH FIRST'S (FL) A3 LONG-TERM BOND RATING; OUTLOOK IS STABLE
No Related Data.
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