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Rating Action:

Moody's affirms United Regional Health Care System's (TX) A2 bond rating; outlook revised to positive from stable

29 May 2013

Action affects approximately $92.5 million of rated debt outstanding

New York, May 29, 2013 --

Moody's Investors Service has affirmed United Regional Health Care System's (URHCS) A2 bond rating on $92.5 million of outstanding debt issued through the North Texas Health Facilities Development Corporation, TX. The outlook is revised to positive from stable.

SUMMARY RATING RATIONALE

The affirmation of the A2 rating and revision of the outlook to positive reflect URHCS' recent designation as a sole community provider with improved Medicare reimbursement, its distinct leading market position in its nine-county service area in North Texas surrounding Wichita Falls, successful completion of the two campus facility consolidation and integration, sustained strong financial performance while managing declines in Medicaid upper payment limit funding, growth in already very strong absolute unrestricted cash and investments, and maintenance of good debt service coverage. These favorable indictors are offset by URHCS' small size for the rating category, sluggish economic factors in Wichita Falls and potential challenges to Medicaid reimbursement.

STRENGTHS

*Leading market share of 82% (based on management provided data) as the only sizable acute care provider in its primary service area (PSA) of Wichita County, and leading market share of 47% in the nine-county secondary service area (SSA) with the closest sizable providers located over 100 miles away in the Dallas/Fort Worth metro area

*Sole community provider designation as of October 2012, allowing the hospital to receive higher Medicare reimbursement

*Multi-year track record of strong financial performance with double-digit operating cash flow margins averaging 14.7% over the last ten years; performance in fiscal year (FY) 2012 was above that average at 18.7%, softer than the prior year when the hospital reported a 23.0% operating cash flow margin (bad debt classified as a revenue deduction in both years for comparison purposes); margins in FY 2012 were negatively impacted by an $11 million decreases in Medicaid upper payment limit funding, however remained well above the A2 median operating cash flow margin of 10.6%

*Trend of strong cash flow generation leading to continued maintenance of already strong debt measures in FY 2012 including favorably low debt-to-cash flow of 1.5 times, high Moody's-adjusted maximum annual debt service (MADS) coverage of 7.1 times, and good debt-to-operating revenue of 33% compared to the A2 medians of 3.1 times, 4.9 times, and 41%, respectively

*Strong growth in unrestricted cash and investments to $270 million and 427 days cash on hand as of fiscal yearend (FYE) 2012 (December 31), increasing to $289 million and 458 days at March 31, 2012; increasing cash and declining debt balances driving improvement in cash-to-debt ratio to 292% at FYE 2012

*Major capital spending is in the past and no new debt plans; furthermore, consolidation and integration between the two hospitals is complete

CHALLENGES

*Location in the City of Wichita Falls, Texas, with flat population growth over the last decade, stalled recovery from the recession and slow employment growth; cuts to defense spending which are a part of the automatic cuts with sequestration and the long-term federal debt reduction program will not materially impact Sheppard Air Force Base (the largest employer in the area), however slow expansion at the base will limit job growth in the area (Moody's Analytics)

*Smaller sized hospital system for the rating category with $280 million operating revenue in FY 2012 and just over 15,000 admissions relative to the A2-rated medians ($518 million operating revenue base and 19,321 admissions)

*Recent changes in Medicaid reimbursement and an $11 million reduction in supplemental payments (Medicaid disproportionate share and upper payment limit funding) negatively impacted revenues in FY 2012; the hospital maintained strong operating performance despite the reduction is payments and annual budgets routinely exclude these payments as management does not want to depend on these funds

OUTLOOK

The positive outlook reflects our belief that with its distinctly leading market share and sole community provider status, URHCS will maintain its historical strong financial performance and balance sheet indicators will remain strong. A rating upgrade would be function of successfully maintaining margins with the current and future revenue pressures and the implementation of health reform

WHAT COULD MAKE THE RATING GO UP

Increases in utilization statistics leading to revenue base growth; maintenance of strong operating margins and favorable debt ratios; continued absolute cash flow growth leading to further strengthening of liquidity ratios

WHAT COULD MAKE THE RATING GO DOWN

Sustained decline in patient volumes leading to material market share loss; significant decline in operating performance leading to softer debt ratios; significant decline in liquidity; material increase in debt without commensurate increase in cash flow generation

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

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jennifer Ewing
Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Sarah A Vennekotter
Asst Vice President - 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 United Regional Health Care System's (TX) A2 bond rating; outlook revised to positive from stable
No Related Data.
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