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Rating Update:

MOODY'S AFFIRMS ST. ANTHONY REGIONAL HOSPITAL'S (IA) Baa3 BOND RATING; OUTLOOK REMAINS STABLE

10 Dec 2010

AFFIRMATION AFFECTS A TOTAL OF $20.4 MILLION OF BONDS OUTSTANDING

Carroll (City of) IA
Health Care-Hospital
IA

Opinion

NEW YORK, Dec 10, 2010 -- Moody's Investors Service has affirmed the Baa3 long-term bond ratings assigned St. Anthony Regional Hospital's (IA) $20.4 million of outstanding bonds issued by the City of Carroll or Carroll County (see RATED DEBT section at end of report). The rating outlook is stable.

LEGAL SECURITY: Series 2006, 2003, and 2001 Bonds are secured by a pledge of all revenues and receivables of St. Anthony Hospital and Nursing Home. No mortgage pledge. 1.50 times rate covenant. Springing debt service reserve fund that is funded if the rate covenant drops below 1.50 times.

INTEREST RATE DERIVATIVES: None

RATING RATIONALE: The Baa3 debt rating with a stable rating outlook on St. Anthony Regional Hospital's (St. Anthony) outstanding debt reflects an improved absolute cash position, increases in inpatient admissions during the first quarter of fiscal year (FY) 2011, and strong market position in the primary service area following a more challenging financial performance FY 2010.

STRENGTHS

*Dominant market position with over 68% market share in Carroll County, Iowa with limited competition

*14% increase in unrestricted cash and investments and improved balance sheet measures as of fiscal year end (FYE) 2010 with 253.4 days cash on hand and 162.5% cash to debt, improved from 222.3 days and 130.7% cash to debt at the end of FY 2009

*All fixed rate debt and above average debt measures for the Baa3-rating category with FY 2010 maximum annual debt service (MADS) coverage at an estimated 3.3 times and low debt to cash flow at 2.7 times

*Location in Carroll County, IA with a low unemployment rate of 4.2%, well below the national and state averages, and a diversified economy; St. Anthony is the fourth largest employer

CHALLENGES

*Five consecutive years of softening financial performance with an operating margin of -1.2% and operating cash flow margin of 11.2% in FY 2010 compared to an operating margin of 2.0% and operating cash flow margin of 13.1% in FY 2009; we do note the consistent years of double digit operating cash flow margin that supports the Baa3 rating

*Decline in operating revenue in FY 2010 following a 3.6% decline in inpatient admissions

*Inpatient admissions are down 3.6% in FY 2010 from the prior year driven by the ice storm in January 2010 which caused Carroll to lose power for five days, as well as a slower flu season. We note that combined inpatient admissions and observation stays are down only 2.2% and inpatient admissions are up over 3% through the first quarter of 2011 over the prior year period

*Small admissions and revenue base that is susceptible to variability in financial performance

RECENT DEVELOPMENTS/RESULTS

In FY 2010, St. Anthony reported a fifth consecutive year of softening financial performance with an operating loss of $606 thousand (-1.2% margin) compared to operating income of $1.1 million (2.0% margin) in FY 2009. Despite the operating loss, FY 2010 represents an eight year trend of double digit operating cash flow margin with an 11.2% margin ($6.0 million in cash flow), however we note a decline from FY 2009's 13.1% margin ($7.1 million) and the high in FY 2005 of 14.0% ($6.4 million).

However, total revenues for this small sized provider ($53.2 million in total revenues) declined for the first time in FY 2010. Management contributes this decline to a shift in payor mix to Medicaid and self-pay, patients deferring medical treatment due to high deducible health plans and the unknown future of healthcare reform, and lower volumes. The hospital saw a decline in inpatient admissions (-3.6%) and outpatients visits (-6.7%) due to a slower flu season and an ice storm during the third quarter of FY 2010 that caused loss of power in the primary service area (PSA) for five days and closure of the hospital clinics. However, two years after the new outpatient surgical center opened outpatient surgical volumes continue to improve, although, 2% growth in FY 2010 is a slower increase than in past years. A second orthopedic surgeon has recently been added to St. Anthony's medical staff and will help to drive further surgical volume in FY 2011. Management held off further decline in financial performance by freezing wages and eliminating the employer match to the defined contribution plan resulting in $2.4 million in savings to the bottom line. These expense saving initiatives mark a second year of expense reductions and produced a decline in expense growth for FY 2010.

Even with the lower results in FY 2010, St. Anthony's debt ratios are consistently strong at the Baa3 rating level. In FY 2010, debt-to-cash flow measured 2.75 times and debt-to-operating revenue 38.8% compared to the Baa3 medians of 5.5 times and 35.7%. Maximum annual debt service (MADS) coverage measured 3.3 times in FY 2010 compared to the Baa3 median of 2.4 times. However, due to its small size and the changing healthcare environment, the hospital is vulnerable to uncontrollable changes as evidenced by the decline in volumes from the ice storm.

Through the first quarter of FY 2011, volumes have recovered with inpatient admissions up 3% and outpatient visits up 5%. St. Anthony is budgeted for modest improvement in FY 2011 over FY 2010, with an operating margin of 1.4% and an operating cash flow margin of 12.5%. St. Anthony has also entered into a five year lease-back agreement with the Veterans Administration (VA). The VA clinic is scheduled to open in February 2011 and management believes it will expand the service population and benefit ancillary services at the hospital.

At FYE 2010, absolute liquidity improved to $33.5 million (253.4 days cash on hand) as compared to $29.4 million (222.3 days cash on hand) at FYE 2009, a 14% increase. This increase was driven by favorable investment returns and lower capital spending. We view St. Anthony's investment policy of 60% in equities and 40% in fixed income and cash as a credit risk for a small provider, although we note that all debt is fixed rate, mitigating the risk of unexpected increases in interest rate or bank exposure. Capital spending in FY 2010 was $5.7 million, equal to depreciation; the age of plant is a below average 8.3 years. St. Anthony maintains a defined contribution pension plan for all employees and has budgeted to reinstate the employer match in FY 2011. Cash to debt improved to 162.5% at FYE 2010 as compared to 130.7% at FYE 2009, well above the Baa3 margin of 75.8%. No new debt anticipated.

We view St. Anthony's market share and location as credit positives. St. Anthony enjoys 68% of inpatient and 75% of outpatient market share in its PSA. However, two smaller neighboring hospitals are building replacement hospitals which could create greater competition in the future. Carroll County and the nearby counties have felt minimal effect of the continuing recession. Unemployment remains a low 4.2%, although high for the area which is usually 2.5% to 3% is well below the national average of 9.8%. According to management, employers in the area furloughed employees and cut back work hours, but the farming industry has remained strong. We also view the diversity among employers in the PSA as favorable, with the hospital being only the fourth largest employer.

Outlook

The stable outlook reflects our belief that the decline in financial performance during FY 2010 was due, in part, to the ice storm and should show improvement in FY 2011 and maintain double digit cash flow margins, a strong balance sheet, and favorable debt service coverage.

What could change the rating--UP

Material growth in inpatient and surgical volumes; improvement in financial performance; continued growth in absolute liquidity; no loss in market share

What could change the rating--DOWN

Inability to reverse current financial trends; decline in liquidity; increase in debt load without commensurate increase in cash flow

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for St. Anthony Regional Hospital and Nursing Home

-First number reflects audit year ended June 30, 2009

-Second number reflects audit year ended June 30, 2010

-Investment returns normalized at 6% unless otherwise noted

*Inpatient admissions: 2,924; 2,820

*Total operating revenues: $54.5 million; $53.2 million

*Moody's-adjusted net revenue available for debt service: $9.2 million; $8.6 million

*Total debt outstanding: $22.5 million; $20.6 million

*Maximum annual debt service (MADS): $2.6 million; $2.6 million

*MADS Coverage with reported investment income: 2.45 times; 3.08 times

*Moody's-adjusted MADS Coverage with normalized investment income: 3.56 times; 3.32 times

*Debt-to-cash flow: 2.71 times; 2.75 times

*Days cash on hand: 222.3 days; 253.4 days

*Cash-to-debt: 130.7%; 162.5%

*Operating margin: 2.0%; -1.2%

*Operating cash flow margin: 13.1%; 11.2%

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

-Series 2001: $5.2 million outstanding; Baa3

-Series 2003: $4.0 million outstanding; Baa3

-Series 2006A & B: $11.2 million outstanding; Baa3

CONTACTS

Mr. Edward H. Smith, Vice President and Chief Financial Officer, (712) 794-5246

The last rating action with respect to St. Anthony was on November 18, 2009, when a municipal finance scale rating of Baa3 was assigned and affirmed and the outlook was revised to stable from positive. That rating was subsequently recalibrated to Baa3 on May 7, 2010.

The principal methodology used in this rating was Not-for-Profit Hospitals and Health Systems published in January 2008.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

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

Jennifer Ewing
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 ST. ANTHONY REGIONAL HOSPITAL'S (IA) Baa3 BOND RATING; OUTLOOK REMAINS STABLE
No Related Data.
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