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Fitch Rates Washington County Health System, Inc. (Maryland) $260MM 2008 Bonds 'BBB'; Outlook Stable

Posted on: Wednesday, 9 January 2008, 15:00 CST

Fitch Ratings has assigned a 'BBB' rating to the Maryland Health and Educational Facilities Authority (Washington County Hospital System) $260.0 million revenue bonds, series 2008, to be issued on behalf of Washington County Health System Inc. (WCHSI). The Rating Outlook is Stable.

Bond proceeds will be used to finance the construction of a replacement hospital, finance capitalized interest expense during the construction period, fund a debt service reserve fund, and pay bond issuance expenses. As security for the bonds, bondholders will receive a pledge of gross receipts and a mortgage on the facilities. The series 2008 bonds are expected to be issued as traditional fixed-rate securities and sell through negotiation the second week of February.

The 'BBB' rating reflects the system's market dominance in the service area, stable profitability trends and improved liquidity trends. WCHSI is the largest healthcare provider in western Maryland and is the only provider in Washington County, owning 77% of the primary service area. Operating margins have been slim but stable over the past three years, averaging 1.1%, but excess margins in fiscal year 2006 and 2007 (year ending June 30), at 3.8% and 4.2%, respectively, are comparable to Fitch's 'BBB' rating median for excess margin of 3.8%. In fiscal year 2007, the system had $85.8 million in unrestricted cash and investments, which calculates to 121 days cash on hand. This compares favorably to Fitch's median of 120.3 days for the category.

Credit concerns include significant construction risk due to the size and nature of the project, and high debt burden. The system intends to build a new hospital to replace its existing facility at a projected cost of approximately $201 million. While management has some experience with projects of this size and magnitude, a project of this size may be subject to project delays in construction, cost overruns, and patient displacement which could have a negative effect on WCHSI's profitability. The addition of approximately $260 million of additional debt on WCHSI's balance sheet will increase the system's capitalization ratio from 10.5% in fiscal year 2007 to 59.3% in projected fiscal year 2008 which is higher than Fitch's 'BBB' medians for debt to cap ratio. Other debt ratios are also negatively affected throughout the forecast construction period.

The Stable Outlook reflects Fitch's belief that the new construction and operational improvement and efficiencies will improve the system's financial and operational performance over the near term.

Washington County Health System, Inc., consisting of Washington County Hospital, a 292 bed hospital operating in Hagerstown, MD, and several other affiliated corporations, provides medical, surgical, dental and other health care services in its primary service area of Washington and Frederick Counties, MD. The system had total revenue of approximately $292 million in fiscal year 2007.

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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