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Rating Update:

MOODY'S DOWNGRADES TO Ba1 FROM Baa3 HOPKINS COUNTY HOSPITAL DISTRICT'S (TX) RATING; OUTLOOK IS REVISED TO NEGATIVE FROM STABLE AT THE LOWER RATING LEVEL

21 Sep 2010

HOPKINS COUNTY HOSPITAL DISTRICT HAS A TOTAL OF $23 MILLION OF RATED LONG-TERM BONDS OUTSTANDING

Health Care-Hospital
TX

Opinion

NEW YORK, Sep 21, 2010 -- Moody's Investors Service has downgraded to Ba1 from Baa3 the rating assigned to Hopkins County Hospital District's (HCHD) $22.7 million of Series 2008 fixed rate hospital revenue bonds outstanding. The outlook has been revised to negative from stable. The downgrade in the rating and the revision in the outlook to negative are attributable to a sizable decline in operating performance in fiscal year (FY) 2009 and continued operating losses in year-to-date FY 2010 performance with declines in admissions and other volume measures, along with stagnant liquidity that has resulted in declining days cash on hand as the expense base has grown. Furthermore, tax revenues are projected to be negatively impacted by anticipated declines in assessed property values, with maintenance or growth in tax revenues requiring an increase in the tax rate. We note, however, that an increase in the tax rate will minimize the ability for further increases in the rate as HCHD would be nearing its maximum allowable tax rate. The small size of the organization (revenue base and medical staff) keeps the hospital vulnerable to minor operating changes that would not materially impact a larger organization.

HCHD owns and operates Hopkins County Memorial Hospital (HCMH), a 54-staffed bed acute care hospital located in Sulphur Springs, TX.

LEGAL SECURITY: The bonds are secured by Pledged Revenues, as defined in the bond documents, of HCHD and a debt service reserve fund. Tax revenues are not pledged to the bonds. Bond covenants include a liquidity pledge of not less than 60 days cash on hand and a rate covenant of not less than 115%; consultant required if covenants missed; event of default if rate covenant less than 115% for two consecutive years or if liquidity less than 60 days one year after consultant's report issued.

INTEREST RATE DERIVATIVES: none

CHALLENGES

*Small active medical staff of just over 30 physicians drives small admission, revenue and asset bases that create vulnerability to physician or service interruptions

*Significant volume declines with admissions declining 3% in 2009 and 10% through the interim period of 2010 compared to the same period of the prior year

*Operating deficits in FY 2009 and interim nine months FY 2010 (-1.8% and -4.3%, respectively) that have substantially reduced operating cash flow margin (7.2% and 3.0%, respectively) and weakened Moody's-adjusted maximum annual debt (MADS) service coverage to 1.7 times in FY 2009; we note minimal booking of supplemental payments (disproportionate share and upper payment limit) year-to-date due to delayed receipt for the year

*Absolute unrestricted liquidity modest at $20 million contributes to low 58% cash-to-debt ratio at FYE 2009

STRENGTHS

*The only hospital in Hopkins County, with the nearest competitor of size located 32 miles to the west in Greenville; HCHD is coterminous Hopkins County, with A1 General Obligated Limited Tax rated county debt

*Completion of major capital projects on time and slightly below budget, and removes need for critical capital spending in the near term, enabling HCHD the ability to preserve liquidity

*Cash on hand remains good at 144 days at fiscal yearend (FYE) 2009 despite a two year decline, and is invested largely in highly liquid cash, government securities and money market funds

*Ability to increase tax rate to $0.25 per $100 of assessed value, a 53% increase over the current tax rate of $0.1637 per $100 of assessed value, though subject to rollback provisions

*Debt is all in a fixed rate mode, and principal payments are delayed on the Series 2008 bonds until 2015 which assists in growing liquidity in the near-term

RECENT DEVELOPMENTS/RESULTS

HCHD experienced a material decline in operating performance in FY 2009 after record performance in FY 2008. Operating income (including tax revenues, interest expense, capitalized interest, and adjustment in FY 2008 for non-cash unusual accrual) declined to a deficit of $1.0 million (-1.8% margin) in FY 2009 after the hospital recorded a record profit of $5.6 million (12.4% margin) in FY 2008.

FY 2008's exceptional performance resulted from revenue growth of 12.1% far exceeding expense growth of 2.6%. Revenues grew in FY 2008 despite decreases in certain volume measures, including an 11.5% decline in inpatient admissions, 8.6% decline in patient days, and 4.2% decline in emergency room visits. Additionally, total surgical volume was relatively flat (0.8% decline) yet newborn admissions grew 5.8%. Assisting revenue growth was (1) a $500,000 increase in supplemental payments (disproportionate share and upper payment limit); (2) a slight $170,000 increase in tax revenues; and (3) an increase in Medicare case mix index to 1.15 from 0.99, resulting in higher acuity and higher reimbursement. Expenses were held relatively flat with only a 2.7% increase in salaries and benefits and only minor increases and decreases in other expense categories. As a result of this strong performance, operating cash flow increased to $8.8 million for a very strong margin of 18.4%.

FY 2009's operating performance declined markedly, with expenses growing faster than revenues. Total revenue growth was strong at 11.9% despite growth in charity care ($440,000), a decline in supplemental payments ($660,000), and a decline in admissions. In FY 2009 admissions declined 3% continuing a multi-year decline to 3,693 in FY 2009 from 4,560 in FY 2006. Despite the decline in admissions, increases in inpatient surgeries, acuity (Medicare case mix index increased to 1.25 in FY 2009 from 1.15 in FY 2008), and outpatient volumes drove the increase in revenues.

Operating expenses, however, grew at a rate of 29%. Expenses increased largely due to (1) a $3.5 million increase in purchased/contracted services, which, per management, included about $650,000 of non-recurring legal and consulting fees and an amount for increased use in agency nurses; (2) $1.5 million of additional interest expense, which largely represents the increase in capitalized interest that Moody's reclassifies to operating expenses; (3) a $1.1 million increase in bad debt expense; and (4) a $1.0 million increase in supplies expense. Moody's notes that slight dollar changes can have a large percentage impact on a small hospital of this size. Operating cash flow also declined, to $3.9 million, but the operating cash flow margin remained acceptable at 7.2%.

For the first nine months of FY 2010, HCHD is reporting an operating loss of $1.6 million (-4.3% margin) and an operating cash flow margin of only 3.0% on unaudited results. Management reports that only about $400,000 of supplemental payments have been booked to-date in the interim period, and expects to book an additional $1.7 million in the fourth quarter should final notice of pending payment be received. Management, however, will not book the revenue until notice from the state is received. Admissions declined nearly 10% in the interim period year-over-year, with inpatient surgeries declining slightly. These trends were partly mitigated by increases in outpatient surgeries and outpatient visits. Based on annualized interim results, Moodys-adjusted peak debt service coverage is very weak below 1 times coverage. HCHD must report peak debt service below 1.15 times for two consecutive years below breach of the rate covenant.

To address the downturn in operating performance, management has taken steps to (1) renegotiate certain contracts, (2) control salary and benefit expenses with personnel reductions and changes in benefits, and (3) control other expenses. HCHD is continuing to work on physician recruitment, and is evaluating additional growth in the medical staff which could include additional physician employment. We note that while revenues could grow from such strategies, so would the expense base which, independent of other changes, would negatively affect certain ratios including margins and days cash on hand.

As a District Hospital, HCHD has established a ability to levy taxes to support operations. Approximately 5% of operating revenues are derived from ad valorem taxes. The ad valorem tax rate has been stable at $0.1637 per $100 of assessed value across the past eight years but has generated an increasing amount of tax revenues as property values have increased. The District has the option to increase the tax rate up to a maximum of $0.25 per $100 of assessed value without further vote, but the rate increase is subject to rollback should the community obtain sufficient signatures to place the rollback on a ballot, and subsequently be passed by vote. Based upon current operating performance and projected decreases in assessed values, management has stated its intention to evaluate the option to increase the existing tax rate to cover expenses. Moody's notes that there is not much room between the existing tax rate and the maximum tax rate as the current tax rate is already 42% of the maximum available.

Unrestricted cash and investments declined in FY 2008 by $7 million to $19.1 million with a planned contribution to the project. As a result, cash on hand declined to 191 days from 249 days the year before. Liquidity increased slightly in FY 2009 to $20.3 million, but cash on hand declined a high 25% to 144 days with a sizable increase in operating expenses. As of June 30, 2010, unrestricted cash and investments increased $1 million and days cash remained stable. Management is projecting to spend only $500,000 for capital in the fourth quarter of the year, preserving liquidity. The capital budget for FY 2011 is $2.0 million.

HCHD issued bonds for the first time in 2008, and issued additional private placement debt in 2009 to support the $36.5 million in capital projects, including constructing an adjacent patient tower to expand the number of private patient rooms and renovate the existing patient rooms, greatly expand the emergency department, renovate the laboratory and admissions areas of the hospital, and upgrade the central plant. The projects are now complete and were within budget. Outstanding debt now stands at $34.7 million, generating a high debt-to-revenue ratio of 65% and low cash-to-debt ratio of 58%. The bonds are all fixed rate, with principal payments on the Series 2008 bonds beginning in 2015 and principal payments on the Series 2009 bonds beginning in 2011. Management has no plans at this time for additional debt.

Outlook

The revision in the outlook to negative from stable is attributable to the sizable decline in operating performance in fiscal year (FY) 2009 and continued operating losses in year-to-date FY 2010 performance with declines in inpatient volumes and other measures, along with stagnant liquidity that has resulted in a decline in days cash on hand as expenses grew. Additional concerns center around declining property values which negatively impact tax revenues and, while the tax rate could be raised, we note that an increase will minimize the ability for further increase in the rate as the District would be nearing its maximum allowable tax rate.

What could change the rating--UP

Growth in inpatient volumes and revenue base to mitigate the risks associated with its small size; substantial reduction in long-term debt while maintaining and growing liquidity balance; return to historical levels of operating cash flow generation

What could change the rating--DOWN

Loss of tax revenues to support operations; marked decline in unrestricted liquidity; continuation of unfavorable operating performance that negatively impacts cash flow and debt service coverage; additional debt beyond current capital structure

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for Hopkins County Hospital District d.b.a. Hopkins County Memorial Hospital

-First number reflects audit year ended September 30, 2008

-Second number reflects audit year ended September 30, 2009

-Third number reflects annualized nine month performance as of June 30, 2010 (note that only partial recognition of supplemental payments is included ($400,000 through nine months, then annualized) of management's anticipated $2.1 million earned for the year)

-Total operating revenues increased by tax revenues; bad debt expense added back to total operating revenues and total operating expenses; interest expense included in total operating expenses

-One-time $2.8 million accrual in FY 2008 removed from expenses

-Investment returns normalized at 5%

-Interest expense "grossed up" to include capitalized interest of $260,000 in FY 2008 and $1.8 million in FY 2009

*Inpatient admissions: 3,807; 3,693; 2,542 (nine months only)

*Total operating revenues: $45.0 million; $53.5 million; $48.7 million (includes only $700,000 of supplemental payments)

*Moody's-adjusted net revenue available for debt service: $9.9 million; $4.9 million; $1.7 million

*Total debt outstanding: $25.6 million; $34.7 million; $34.7 million

*Maximum annual debt service (MADS): $2.9 million; $3.8 million; $3.8 million

*MADS Coverage with reported investment income: 3.47 times; 1.21 times; 0.24 times

*Moody's-adjusted MADS Coverage with normalized investment income: 3.41 times; 1.29 times; 0.46 times

*Debt-to-cash flow: 2.69 times; 11.60 times; 21.24 times

*Days cash on hand: 191 days; 144 days; 147 days

*Cash-to-debt: 75%; 58%; 56%

*Operating margin: 12.4%; -1.8%; -6.2%

*Operating cash flow margin: 19.6%; 7.2%; 1.2%

RATED DEBT (debt outstanding as of June, 2010)

-Series 2008 fixed rate revenue bonds ($22.7 million outstanding), rated Baa3

-Series 2009 fixed rate revenue bonds ($9.6 million outstanding), privately placed and not rated

CONTACTS

Obligor: Donna Wallace, Chief Operating Officer/Chief Financial Officer, HCHD (903) 439-4052

Financial Advisor: Chris Janning, First Southwest (214) 953-4042

The last rating action with respect to HCHD was on April 21, 2008, when a municipal finance scale rating of Baa3 was initial given with a stable outlook. That rating was subsequently recalibrated to Baa3 on May 7, 2010.

The principal methodology used in rating Hopkins County Hospital District was Not-For-Profit Hospitals and Health System 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.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information and confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer 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

Kay Sifferman
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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MOODY'S DOWNGRADES TO Ba1 FROM Baa3 HOPKINS COUNTY HOSPITAL DISTRICT'S (TX) RATING; OUTLOOK IS REVISED TO NEGATIVE FROM STABLE AT THE LOWER RATING LEVEL
No Related Data.
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