August 28, 2008

Fitch Rates Martha Jefferson Hospital 2008 Revs ‘A+'; Outlook Stable

Fitch Ratings has assigned an underlying 'A+' rating to the expected issuance of approximately $160 million hospital revenue bonds for Martha Jefferson Hospital (MJH) to be issued through the Economic Development Authority of Albemarle County. In addition, Fitch affirms the 'A+' rating on MJH's outstanding debt. MJH is the largest subsidiary of Martha Jefferson Health Services Corporation (MJHSC), which also includes two foundations and a medical practice management company. The Rating Outlook is Stable.

Proceeds of the series 2008 issuance will be used to fund construction of MJHSC's new replacement hospital. The new facility will be constructed in close proximity to MJH's Outpatient Care Center (constructed in 2003), approximately two miles east of its current inpatient campus. Bond proceeds will be used to fund the majority of the $275 million, 176-bed replacement hospital, with a mix of cash-flow, equity, and philanthropy expected to fund the remaining costs.

Construction of the new hospital is expected to be completed in 2012 at which time all of its inpatient services will be moved from MJH's current facility. While bondholders are subject to the inherent risks of large construction projects, Fitch believes management's engagement of nationally recognized architects, contractors and consultants with relevant experience helps to mitigate the risks inherent to a project of this size and scope. Moreover, Fitch views favorably management's preparation and thoroughness demonstrated in the planning process for the replacement project.

Rationale supporting the 'A+' rating is rooted in the hospital's excellent financial profile, solid market position, favorable service area characteristics, and good management team. Located in Charlottesville, VA, MJH has a solid reputation for quality care and occupies a distinctive niche as the only community hospital in its market. Since fiscal 2003, MJH has maintained a consistent 33% market share, which is second to the University of Virginia Medical Center's 47% market position. Charlottesville has excellent economic and demographic indicators highlighted by a low unemployment rate, above average wealth indicators compared to state and national averages, and its reputation as a top retirement destination in the U.S.

In fiscal 2007, MJHSC earned $13.1 million dollars in income from operations, which translated into a 17.0% operating EBITDA margin, 9.3% excess margin, and 19.0% EBITDA margin, all of which exceed Fitch's 2007 'A' category medians of 9.8%, 5.6%, and 12.1%, respectively. Furthermore, through the June 30, 2008 interim period, MJHSC posted pro forma maximum annual debt service (MADS) coverage of 3.7 times (x) taking into account new MADS of approximately $14.6 million. MJHSC's balance sheet is robust as demonstrated by 438 days cash on hand, a historical cushion ratio of 31.7x, and cash to debt of 266% through June 30, 2008.

Credit concerns include construction risks inherent in building a replacement hospital, which consist of cost overruns and construction delays. Additionally, the presence of a strong competitor (UVA Medical Center) in MJH's service area underscores the importance that MJH must continue to expand its physician alignment strategy.

The Rating Outlook is Stable. While Fitch expects deterioration of net operating margin due to depreciation of hard assets at the new facility, operating EBIDTA margins are expected to remain consistent with the 'A' category median. Moreover, MJHSC expects to maintain days cash on hand and cushion ratios at or above the 'A' category median over the medium term.

MJHSC operates a 176-licensed bed acute care hospital in Charlottesville, VA. Total revenue for MJHSC was $186.7 million in 2007. The Corporation covenants to disclose unaudited quarterly and annual audited financial statements to the Nationally Recognized Securities Information Repositories. Quarterly disclosure has been timely and includes a balance sheet, income statement, and utilization statistics.

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