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Announcement:

Moody's affirms Mother Frances Hospital Regional Health Care Center's (TX) Baa1 unenhanced bond rating; Outlook remains stable

01 Oct 2012

Affirmation affects approximately $160.9 million of currently outstanding bonds

New York, October 01, 2012 --

Moody's Investors Service has affirmed the Baa1 long-term unenhanced bond rating assigned to Mother Frances Hospital Regional Health Care Center's (MFH) $160.9 million of currently outstanding bonds issued by the Tyler Health Facilities Development Corporation. The outlook remains stable.

MFH plans to refinance its Series 1992 (fixed rate) and Series 1997 (variable rate) bonds with Series 2012 private placement bonds. The Series 2012 bonds will not be rated by Moody's. Upon refinancing, it is anticipated that the rating on the Series 1992 and Series 1997 bonds will be withdrawn.

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 (all information based upon 2011 audited financial statements) 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 273 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 growth in operating revenues across the past five years. The operating cash flow margin of 8.4% in fiscal year (FY) 2012 is above the Baa1 median of 7.9%. Nonetheless, days cash of 107 and cash-to-debt of 84% are below the Baa1 medians of 133 days 92%. Capital spending increased materially in fiscal year (FY) 2012 with the start of two sizable capital projects (heart hospital and information technology upgrades) and will continue to be high in FY 2013, although a portion of FY 2013's capital spend will be supported by philanthropy. We expect cash on hand to remain modest with the higher capital spending in the short-term, but to improve thereafter with better operations and reduced capital spending.

STRENGTHS

*Sizeable health system ($697 million revenue base) with solidly leading 56.5% market share (2011, management provided) in competitive primary service area of Smith County with good demographics; next leading provider holds a smaller market share of about 31.2%; stable market share of 28.7% in total service area against leading competitor at 29.3%

*Integrated delivery system with flagship hospital, two critical access hospitals with ownership interests in a LTACH and a rehabilitation hospital, and large 273 physician multi-specialty group (plus mid-levels for total of 352) that lends to successful volume growth and contract negotiations

*Favorable growth in operating revenues, averaging 7.1% per annum over the past five years with growth in operating cash flow in FY 2012 (FY 2011 excludes non-recurring supplemental payments of $15.2 million) yet operating cash flow margin remains moderate at 8.7% in FY 2012

*Liquidity continued to grow in FY 2012 (8.8% over fiscal yearend 2011), improving cash on hand to 107 days, with conservative investment portfolio invested 75% in cash and cash equivalents (US government and US government guaranteed securities); conservative pro forma debt load with 90% in a fixed rate mode and no demand debt as variable rate bonds under private placement with term corresponding to maturity of bonds in 2022

*Reduction in collateral posting risk with termination of $37.5 million in notional value on the basis swap in FY 2012 and upcoming scheduled full termination of the $22.3 million in notional value on the fixed-to-floating swap with the upcoming refinancing of the Series 1992 bonds

*Continued use of outside consultants to drive further revenue enhancement and cost control initiatives

CHALLENGES

*Operating cash flow margin of 8.4% in FY 2012 did not meet budgeted expectations for growth to exceed 9% (exclusive of UPL funds), and margins are projected to soften in FY 2013 with costs associated with the opening of the new heart hospital in December and implementation of EPIC

*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 107 days is below the Baa1 median of 133 days and cash-to-debt of 84% is below the Baa1 median of 92%; planned reductions in contributions to the frozen defined benefit pension plan (a church plan) to conservative liquidity in the short-term could result in larger contributions in the future should the underfunded status of the plan (56% at FYE 2012 per management) not improve

*Sizable capital plans continue in FY 2013 for strategic expansion (completion of the heart hospital) and information technology (implementation of EPIC) and will stymie liquidity growth

*Some softening of growth in utilization metrics in FY 2012 with management's expectations for growth in FY 2013 with the opening of the heart hospital and growth in the medical staff

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 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 Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the 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.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Kay M Sifferman
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
600 North Pearl Street
Suite 2165
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:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Mother Frances Hospital Regional Health Care Center's (TX) Baa1 unenhanced bond rating; Outlook remains stable
No Related Data.
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