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Fitch Affirms Mennonite General Hospital (Puerto Rico) Bonds at ‘BB-’; Outlook Stable

October 31, 2008

Fitch Ratings has affirmed the rating on approximately $39.9 million of Puerto Rico Industrial, Tourist, Educational, Medical, and Environmental Control Facilities Financing Authority’s hospital revenue bonds (Mennonite General Hospital Project), series 1996A and 1997. The Rating Outlook is Stable.

The affirmation is supported by Mennonite General Hospital’s (MGH) consistent operating performance, solid utilization trends, good debt service coverage, and dominant market position. MGH ended fiscal 2008 with income from operations of $3.19 million (2.5% operating margin and 9.7% operating EBITDA margin), equating to a fourth consecutive year of positive operating earnings after five years of operating losses. These trends have largely been driven by a substantial increase in patient volumes. MGH has seen patient days increase year over year since fiscal 2005, for a total increase of 15% over that period. In particular, MGH saw patient days increase over 9,000 days in fiscal 2008 from fiscal 2007 due to the addition of 37 beds in June 2007. Further, as a result of the improved operating performance, debt service coverage by earnings before interest, taxes, depreciation, and amortization has been 2.1 times (x) over the last two fiscal years. MGH also benefits from having the only two acute care hospitals in its primary service area (Cayey and Aibonito municipalities), and there are no major competing private ambulatory service facilities.

Primary credit concerns for MGH include weak liquidity, high days in accounts receivable, and a high reliance on top ten admitting physicians. For fiscal 2008, unrestricted cash measured approximately $10.8 million, translating to 34 days cash on hand and cash to debt of 22%. However, MGH has funded several capital projects with cash and has seen capital expenditures as a percentage of depreciation expense equal 130% for fiscal 2008 and 222% for fiscal 2007. This compares favorably to Fitch’s below investment grade median of 76%. Due to local Puerto Rican laws, collection from insurance companies is far slower than that of the United States and in combination with the Medicare Advantages program, days in accounts receivable is at a high 99 days. Lastly, MGH has had a historically high reliance on their top ten admitting physicians, exposing MGH to reductions in volumes due to physician departures. In fiscal 2008, the top ten admitters comprised 67% of admissions at the Aibonito Hospital and 53% at the Cayey Hospital.

The Stable Outlook is based on Fitch’s belief that MGH will continue to have positive operating performance and the hospitals will be able to sustain the utilization trends we have seen over the last few years. Additionally, consistent operating performance should help to increase liquidity measures.

Mennonite General Hospital is a two hospital system in Puerto Rico comprised of the 150-bed hospital in Aibonito, and 157-bed hospital in Cayey. Total revenues for the fiscal year ending March 31, 2008 was approximately $128 million. MGH covenants to provide annual disclosure of financial statements and utilization statistics and has been excellent in terms of timeliness.

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.




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