October 17, 2008

Fitch Affirms Idaho Elks Rehabilitation Hospital at ‘BBB+'; Outlook Stable

Fitch Ratings has affirmed the 'BBB+' rating on approximately $11.8 million Idaho Health Facilities Authority hospital revenue bonds (Idaho Elks Rehabilitation Hospital (Idaho Elks)), series 1998 currently outstanding. The Rating Outlook is Stable.

The 'BBB+' rating reflects Idaho Elks' strong liquidity position, historical operating profitability, moderate debt burden, and dominant market share of rehabilitation services in the service area. At May 31, 2008 (draft audit), Idaho Elks had approximately $22.8 million of unrestricted cash and investments, which translates into 358 days cash on hand, a cushion ratio of 19.4 times (x), and cash to debt of 193.4%. Fitch views Idaho Elks' balance sheet as a primary credit strength which compares favorably with Fitch's 'BBB' category medians. Over the past five fiscal years, Idaho Elks has averaged a 1.4% operating margin, 11% operating EBITDA margin, and 10.9% excess margin, that demonstrates the organization's historical operating profitability. Maximum annual debt service (MADS) coverage through May 31, 2008 was a solid 3.9x. Fitch views Idaho Elks' niche as a specialty rehabilitation provider favorably. Idaho Elks maintains approximately 65% market share as the only freestanding rehabilitation provider in the primary service area and the remainder is captured by St. Alphonsus Regional Medical Center (SARMC).

The credit concerns include Idaho Elks' recent operating losses, continued implementation of the Medicare 60% rule, a high concentration of governmental payors, and small revenue base. Through three months ended Aug. 31, 2008, Idaho Elks reported a loss of $334,000 in operating income (negative 5.9% operating margin). Management attributes the operating loss solely to the loss of stroke and neurology patient referrals from St. Luke's Regional Medical Center (St. Luke's). However, management indicated that neurology volumes are beginning to return to Idaho Elks as St. Luke's continues to replace its former neurology group and recruit more neurology physicians. Additional credit concerns include management's ability to implement the 60% rule, which requires Idaho Elks to demonstrate that at least 60% of Medicare patients receive care for certain medical conditions. Medicare reimbursement will be reduced if the 60% threshold is not met. The concern is exacerbated by Idaho Elks' historical reliance on Medicare payors and the organization's relatively small revenue base.

The Stable Rating Outlook reflects Fitch's belief that Idaho Elks will return to operating profitability over the medium term. Management believes neurology patient volumes are beginning to increase and will continue to do so with more patient referrals from both acute care facilities in the service area, St. Luke's and SARMC. However, if patient volumes fail to return to historical levels coupled with continued operating losses, downward rating pressure may occur.

Idaho Elks Rehabilitation Hospital is a 71-licensed bed comprehensive rehabilitation facility located in Boise, Idaho. Total revenues through fiscal 2008 (draft audit) were approximately $26 million. Idaho Elks does not covenant to provide annual audited financial statements to bondholders, which is viewed negatively by Fitch. However, management has expressed to Fitch it does provide disclosure to bondholders upon request. Disclosure to Fitch has been adequate on a quarterly basis and includes a balance sheet and income statement.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.