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Rating Action:

Moody's assigns A2 long-term rating to Holland Community Hospital's (MI) $37 million of Series 2013A revenue bonds; A2 parity ratings affirmed; Outlook remains stable

Global Credit Research - 23 Jan 2013

Approximate $58 million of rated debt to be outstanding

New York, January 23, 2013 -- Moody's Rating

Issue: Fixed Rate Healthcare Revenue Bonds Series 2013A; Rating: A2; Sale Amount: $37,015,000; Expected Sale Date: 02-05-2013; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned an A2 long-term rating to Holland Community Hospital's (Holland) $37.0 million of Series 2013A fixed rate bonds to be issued through the Michigan Finance Authority. At the same time, we are affirming the A2 long-term ratings on approximately $42.2 million of outstanding revenue certificates. The outlook remains stable.

SUMMARY RATING RATIONALE

The assignment and affirmation of the A2 bond rating and stable outlook reflect Holland's strong market position in a demographically favorable service area, good pro forma debt service coverage, good operating performance that is showing improvement, and maintenance of strong absolute unrestricted cash and investments (though balance sheet ratios are below prior year levels). While operating cash flow margins have softened over the last several years as the hospital invests in a physician employment strategy, margins are improving in fiscal year (FY) 2013 and remain adequate for the A2 rating level. Unrestricted cash and investments moves up and down with the market, however remains above average for rating category and supports Holland's physician employment strategy. These attributes are offset by the hospital's small size making it vulnerable to volume fluctuation and physician departures, and the consolidating competition in the service area.

STRENGTHS

*Leading market position with 60% market share in its primary service area (PSA) in Ottawa County (Aaa general obligation rating) with strong population growth and an improving unemployment rate that is well below the state and national rates; the hospital's market share has remained consistent despite the acquisition of Zeeland Community Hospital by Aa3 rated Spectrum Health

*Track record of good financial performance, with modest improvement over the last three years with operating cash flow margins of 9.8%, 9.9% and 10.0% in FY 2011, FY 2012 and through eight months of FY 2013, respectively; this follows a multi-year trend of double digit operating cash flow margins for over ten years ranging between 11.5% and 15.3%; current performance is in line with the A2 median operating cash flow of 10.6%

*Strong growth in outpatient surgery volumes (12.5%) and outpatient visits (17.0%) in FY 2012 compared to FY 2011 after the acquisition of a physician owned ambulatory surgery center in the primary service area and the expansion of the hospital's employed physician group; through eight months of FY 2013, growth continues, although at a more modest pace

*Good pro forma debt measures for the rating category in FY 2012 and including series 2013A bonds with Moody's adjusted debt-to-cash flow of 3.1 times, debt-to-operating revenue of 41%, and adjusted maximum annual debt service (MADS) coverage of 5.8 times

*Strong balance sheet position, with 322 days cash on hand at November 30, 2012 compares favorably to the A2 median of 212 days; pro forma cash-to-debt remains strong at 201% compared to the A2 median of 143%

*Physician alignment strategy implemented over the last three years is expected to grow volume and market share; furthermore, partnerships with employers and other providers are expected to minimize the effects of consolidating competition in the area

CHALLENGES

*Smaller sized hospital system for the rating category with $195 million operating revenue in FY 2012 and approximately 7,500 admissions relative to the A2-rated medians ($520 million operating revenue base and 19,321 admissions)

*Some competition in the service area from smaller providers in Ottawa County and larger providers in Grand Rapids; while Spectrum Health (Spectrum) acquired Zeeland Community Hospital a year ago, Holland has continued to maintain its market share and a good working relationship with Spectrum who partners with Holland for cardiology and a specialty nursery

*Soft inpatient volume growth in recent years due to shifts to and from observation stays and a physician departure ultimately put pressure on revenue growth while healthcare is still a fee for service business

*Higher risk investment allocation with a high percentage of unrestricted cash and investments allocated to equities (50%) and monthly liquidity as a percentage of total unrestricted cash and investments at 65% compared to the A2 median of 96%; monthly liquidity to demand debt, however, is strong at 278% (Moody's includes bank qualified loans in demand debt)

OUTLOOK

The stable outlook reflects our belief that Holland's financial performance, while still not as strong as historical levels, is showing improvement and pro forma debt measures are good for the rating level. Furthermore, Holland's strong balance sheet position gives some cushion while the hospital invests in its physician alignment strategy.

WHAT COULD MAKE THE RATING GO UP

Sustained growth in patient volumes contributing to material growth in revenue base; sustained improvement in financial performance; maintenance of elevated debt and balance sheet ratios

WHAT COULD MAKE THE RATING GO DOWN

Decline in patient volumes leading to material market share loss; modest operating performance leading to softer debt ratios; significant weakening of balance sheet ratios; material increase in debt load without commensurate increase in cash flow generation

RATING METHODOLOGY

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
Associate 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

Mark Pascaris
Vice President - Senior 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 assigns A2 long-term rating to Holland Community Hospital's (MI) $37 million of Series 2013A revenue bonds; A2 parity ratings affirmed; Outlook remains stable
No Related Data.
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