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Rating Action:

MOODY'S ASSIGNS Baa1 RATING TO MOTHER FRANCES HOSPITAL REGIONAL HEALTH CARE CENTER'S (TX) $51.7 MILLION OF SERIES 2011A FIXED RATE REVENUE BONDS; OUTLOOK REMAINS STABLE

04 Oct 2011

MOTHER FRANCES HOSPITAL REGIONAL HEALTH CARE CENTER HAS A TOTAL OF $218.7 MILLION OF RATED DEBT TO BE OUTSTANDING

New York, October 04, 2011 -- Moody's Rating

Issue: Series 2011 Hospital Revenue Bonds; Rating: Baa1; Sale Amount: $51,740,000; Expected Sale Date: 10/21/2011; Rating Description: Healthcare Revenue Bonds

Opinion

Moody's Investors Service has assigned a Baa1 long-term rating to Mother Frances Hospital Regional Health Care Center's (MFH) $51.7 million of Series 2011A fixed rate revenue bonds to be issued by the Tyler Health Facilities Development Corporation.. At this time we are affirming the Baa1 rating assigned to $166.9 million of rated parity debt to remain outstanding (see RATED DEBT section in this report). The outlook remains stable

Trinity Mother Frances Health System (the System) is the sole owner of Mother Frances Hospital Regional Health Care Center, currently the sole member of the Obligated Group. MFH represents 106% of System total assets (due to intercompany receivables from affiliated organizations eliminated in consolidation), 76% of System operating revenues, and 130% of system operating cash flow (as calculated from the audited financial statements). Moody's analysis reflects a review of the entire system. The System also consists of Trinity Clinic, two critical access hospitals, equity interests in two specialty hospitals, and other health related entities. Trinity Clinic (Clinic) is the largest entity outside of MFH, and is a 297 member multi-specialty physician group. Trinity Clinic represents 16% of System total assets, 17% of System operating revenues, and -27% of System operating cash flow.

SUMMARY RATING RATIONALE

The Baa1 rating and stable outlook are attributable to this integrated system's stable and leading market position with strong physician integration that has lead to overall good volume trends and sizable growth in operating revenues. The operating cash flow margin is below the Baa1 median, but cash flow generation and non-recurring upper payment limit funding have contributed to a 23% growth in liquidity to improve cash on hand. Nonetheless, days cash of 102 and cash-to-debt of 74% remain below Baa1 medians of 130 days and 83%. Capital spending increases materially in fiscal year (FY) 2012 with the start of two sizable capital projects (heart hospital and information technology upgrades), and expected to be supported by philanthropy, bond funds, liquidity and higher cash flow generation resulting from full implementation of various strategic initiatives. We expect cash on hand to remain modest with the higher capital spending in the short-term, but to improve thereafter with better operations.

STRENGTHS

Sizeable health system with solidly leading 47.5% market share (management provided) in competitive primary service area of Smith County with good demographics; next leading provider holds a smaller market share of about 32%

Integrated delivery system with flagship hospital, two critical access hospitals with ownership interests in a LTACH and a rehabilitation hospital, and large 297-practitioner multi-specialty group that lends to successful volume growth and contract negotiations

Favorable growth in operating revenues, averaging 7.5% per annum over the past four years with fairly stable operating cash flow generation in FY 2011 (down 3.4%) after sizable improvement in FY 2010, yet operating cash flow margin remains moderate at 7.4% in FY 2011 (investment returns and potentially non-recurring upper payment limit (UPL) funding reclassified to non-operating); expenses include non-recurring consulting fees that depress cash flow

Management is budgeting for sizable improvement in operating cash flow in FY 2012 with full implementation of revenue enhancement and cost control initiatives following engagement by outside consultant, with operating cash flow margin projected to exceed 9% (no UPL monies included)

Sizable 23% growth in liquidity in FY 2011 improves both cash on hand and cash-to-debt measures, with projected cash flow expected to support capital and debt service payments in FY 2012; conservative debt load with 81% in a fixed rate mode and cash covering puttable debt 432%

CHALLENGES

Competitive operating environment with pressures stemming from a large nearby system and entrepreneurial physicians demonstrated through one local physician-owned specialty hospital

Despite improvement, System cash of 102 days is below the Baa1 median of 118 days and pro forma cash-to-debt of 80% mirrors the Baa1 median of 81%

Debt issuance to support sizable capital plans for fiscal years 2012-2014 increases debt load 19.5% with the current bond financing and will stymie liquidity growth in the near term

Under-funded church designated pension plan that is only 78% funded at fiscal yearend (FYE) 2011 with a $31.5 million underfunded liability; plan frozen to reduce future growth in cash flow funding and expenses

Debt service is front loaded with puttable debt of $40 million backed by a letter of credit expiring January 2014 that would negatively impact current liquidity balance if not extended or refinanced when due

Outlook

The stable outlook reflects our belief that operational improvements made in recent years will continue, enabling the system to again generate good operating cash flow margins and debt service coverage measures. We further believe that this operational improvement will allow the System to generate favorable cash flow and absorb the proposed new debt and complete its major capital projects successfully while maintaining adequate debt service coverage and improve liquidity over the long term.

WHAT COULD MOVE THE RATING UP

Growth in market share; sizable improvement in balance sheet metrics, including material increase in liquidity; continued improvement in operations and profitability with eventual stabilization

WHAT COULD MOVE THE RATING DOWN

Decline in absolute liquidity and/or days' cash on hand; reversal of improvements in operating performance; increase in debt load without commensurate increase in cash flow

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was Not-for-Profit Hospitals and Health Systems published in January 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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Kay Sifferman
VP - Senior Credit Officer
Public Finance Group
Moody's FIS Domestic Sales Office - Dallas TX
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Dallas, TX 75201
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Deepa Patel
Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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MOODY'S ASSIGNS Baa1 RATING TO MOTHER FRANCES HOSPITAL REGIONAL HEALTH CARE CENTER'S (TX) $51.7 MILLION OF SERIES 2011A FIXED RATE REVENUE BONDS; OUTLOOK REMAINS STABLE
No Related Data.
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