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Fitch Affirms Shannon Health System (Texas), Hospital Revs at 'BBB'; Stable Outlook

Posted on: Monday, 29 October 2007, 15:00 CDT

Fitch Ratings affirms the 'BBB' rating on $23.2 million outstanding Tom Green County Health Facilities Development Corp. (Shannon Health System), Texas, hospital revenue bonds, series 2001. The Rating Outlook is Stable.

The rating affirmation is based on Shannon Medical Center's (Shannon) leading market position, increasing liquidity position, manageable debt service coverage and low debt burden. Operating in San Angelo, Texas, which is in Tom Green County, Shannon had a 57% market share in its primary service area in fiscal year (FY) 2006. Since the rating was assigned in 2001, Shannon has consistently maintained a market share near 60%. Shannon's sole primary service area competitor, San Angelo Community Medical Center, had a market share of approximately 39% in FY2006. As of the fiscal year ending Sept. 30, 2006, liquidity measures are trending positive as Shannon's $59.2 million in unrestricted cash represents 96.4 days cash on hand, up from 88.4 days in 2005. Through nine months ending June 30, 2007, unaudited figures show Shannon's cash position to be at 119.9 days. Similarly, cash to debt is 164.2% in FY2006 compared to 148.2% in 2005, which measures favorably against Fitch's 'BBB' category median of 74.1%. Maximum annual debt service coverage (MADS) increased to 3.1 times (x) of through the interim period ending June 30, 2007 from FY2006's mark of 2.5x. For the period from FY2002 through FY2006, Shannon Health System's MADS has averaged 2.8x compared to the Fitch 'BBB' category median of 3.0x.

Credit concerns include Shannon's recent decline in operations and utilization, unfavorable payor mix, weak service area and physician concentration. In fiscal year 2005, Shannon lost its top-admitting doctor who accounted for 10% of total admissions. Subsequently in FY2006, the system recorded an operating loss of approximately $1.5 million resulting in a negative 0.6% operating margin, 0.6% excess margin and 5.6% EBITDA margin, all below Fitch's 'BBB' medians of 2.2%, 3.8% and 10.4%, respectively. In addition, the physician departure dropped FY2006's admissions to 11,513 from 12,461 in 2005. The West Texas service area of San Angelo has both relatively stagnant population growth and below-average wealth indicators, reflected in a high 10.7% Medicaid payor percentage. Also, Fitch considers credit risks to be Shannon's physician recruitment challenges, concentration of discharges among a relatively small medical staff and Shannon Health System's reliance on a single multi-specialty physician group, which leaves the hospital vulnerable to physician defections and highlights the importance of effective recruitment and alignment efforts.

Headquartered in San Angelo, Texas, Shannon is a full-service health care delivery system operating a 411-licensed bed hospital and has a growing insurance plan (Legacy Health Plan) with 10,000 covered lives. The obligated group excludes the health plan and Shannon Clinic, and accounted for 84% of the system's assets and 61% of revenues in fiscal 2006. Shannon Health System's total revenues in fiscal 2006 were approximately $261 million.

Shannon covenants to provide quarterly disclosure to bondholders and Fitch. Annual financial statement disclosure is to be made within 150 days of year-end and quarterly disclosure within 60 days of quarter-end. Cain Brothers was the underwriter of the series 2001 bonds.

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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