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Fitch Rates Valley Baptist Health System's, Texas, $94MM Ser 2007 Revs 'BBB'; Outlook Stable

Posted on: Friday, 27 July 2007, 15:04 CDT

Fitch Ratings has assigned a 'BBB' rating to the proposed $94 million of Brownsville Health Facilities Development Corporation (Valley Baptist Medical Center- Brownsville Project) series 2007 hospital revenue bonds. In addition, Fitch assigned a 'BBB' underlying rating to Valley Baptist Health System's (VBHS) $56.5 million of outstanding series 1992 (A and B) bonds. The Rating Outlook is Stable.

The series 2007 issue is expected to be structured as index floating-rate bonds which will be converted to a synthetic fixed rate. Bond proceeds will be used to retire roughly $77 million of bank line of credit draws related to the acquisition of the 243 licensed-bed Valley Baptist Hospital-Brownsville in 2004, fund approximately $8 million of renovations at the Brownville campus, fund a debt service reserve account and associated costs of issuance. The 2007 bonds are scheduled to price the week of August 6th through negotiation by Merrill Lynch.

The 'BBB' rating is supported by VBHS' sizable market share in the Rio Grande Valley service area, solid proforma debt service coverage, strong population growth in the service area and management's emphasis on improving operational efficiencies. VBHS's total service area encompasses 17 zip codes in Cameron and Willacy counties with a total population of more than 400,000 residents. The combined market share of VBHS' two facilities in 2006 was 59% as compared to a 27% market for the next closest competitor, HCA-owned Valley Regional Hospital (243 licensed-beds) in Brownsville. However, among the 5-zip codes constituting Brownsville VBHS' market share lead narrows to 48.5% versus Valley Health at 45.1%. Using proforma MADS of $11.7 million, VBHS' historical proforma debt service coverage in fiscal 2006 and 2005 of 3.5 times (x) and 4.6x , respectively, exceeds Fitch 2006 'BBB' median of 3.2x.

Population growth in the Rio Grande Valley since 2000 has been among the fastest in the United States. Since 2000, the population of Brownsville (GO bonds rated 'A+' by Fitch) and Harlingen (GO bonds rated 'A+' by Fitch) has grown 20% and 13%, respectively, and has been driven by increased manufacturing and distribution of maquiladoras produced goods. Lastly, management has made Six Sigma its top strategic initiative in order to maximize performance and patient satisfaction throughout the health system. Management credits the Six Sigma method with Valley Baptist Hospital-Harlingen's #1 national ranking in the treatment of heart failure by the Centers for Medicare & Medicaid Services (CMS) in the recent pay-for performance demonstration project. More than 340 Valley Baptist employees have been trained in Six Sigma methodologies including 27 physicians.

Fitch's primary credit concern revolves around the dilutive effect from the possible draw down from a $100 million bank credit facility, the high percentage of Medicaid and self pay payors and VBHS' dependence on Disproportionate Share (DSH) funding to generate operating profitability. Although proceeds from the series 2007 bonds will be used to pay off $77 million outstanding under an existing line of credit agreement, VBHS will maintain a $100 million credit facility by renewing its line of credit agreement with JP Morgan Chase concurrently with the series 2007 financing. While management has stated that it does have any current plans to draw on the line, it views the credit facility as a source of capital for strategic investment opportunities. Material draws under the line of credit to fund long term strategic acquisitions could negatively affect the rating on the series 2007 bonds. VBHS' operating profitability suffers from a growing percentage of Medicaid and self pay patients. In fiscal 2006, Medicaid and self pay payors accounted for a high 30.3% and 13% of gross revenues, respectively, as compared to 25.6% and 7.9% in fiscal 2003. Lastly, VBHS received annual (DSH) payments of $14.4 million, $13.4 million and $7.5 million in fiscal 2006, 2005 and 2004, respectively. In addition, the system recognized into income accrued DSH receipts of $13.7 million and $34.5 million in fiscal 2005 and 2004. Without the benefit of annual DSH payments VBHS would have had negative bottom line results in fiscal 2004 and 2006. VBHS' DSH payment in fiscal 2007 is $12.2 million.

The Stable Rating Outlook reflects Fitch's expectation that VBHS' share of Medicaid and DSH payments will be adequately maintained and that line of credit draws will be modest. Fitch believes continued process improvement resulting in more efficient care delivery will dampen the effects of VBHS' weak payor mix.

VBHS is an integrated health system serving the Rio Grande Valley which includes a 602 licensed-bed hospital in Harlingen, TX and a 243 licensed-bed hospital in Brownsville, TX. Total revenues were $491.5 million in fiscal 2006. VBHS will covenant to provide bondholders with annual audited financial statements within 150 days of each fiscal year-end and quarterly financial information within 60 days of each fiscal quarter-end.

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.

Source: Business Wire

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