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Fitch Rates Olmsted Medical Center (Minnesota) 2008 Rev Bonds 'BBB-'

Posted on: Wednesday, 5 November 2008, 12:00 CST

Fitch Ratings assigns a rating of 'BBB-' to approximately $25.5 million City of Rochester, MN health care facilities revenue bonds (Olmsted Medical Center (OMC) Project), series 2008. The Rating Outlook is Stable.

Additionally, Fitch assigns a 'BBB-' rating to approximately $14 million of outstanding health care facilities revenue bonds issued on behalf of OMC. The outstanding bonds' respective par amounts (as of July 31, 2008) are as follows:

--$5,155,000 Olmstead County, MN, series 1998;

--$725,000 Pine Island, MN, series 2001;

--$5,905,000 Chatfield, MN, series 2004;

--$2,263,472 Chatfield, MN, series 2004.

The proceeds of the series 2008 bonds will be primarily used to construct a new clinic in the northwest section of Rochester, Minnesota. The series 2008 bonds will be issued as unenhanced, fixed rate bonds and are expected to price by the end of calendar 2008.

The 'BBB-' rating is supported by OMC's status as an important community provider of primary and secondary care services in the Rochester, MN area and its successful hospital-clinic model, which has netted historically strong profitability and debt service coverage. Fitch views the hospital-clinic model favorably as it generally provides for greater integration across the continuum of care resulting in consistent patient volumes and enables management to implement quality and other initiatives more seamlessly and often more successfully.

The other inpatient acute health provider in the area is Mayo Clinic. Although the Mayo Clinic does provide primary care services in the area, its main focus is on tertiary and quaternary services, and its history with OMC has been congenial and supportive to date. Using a third-party study, OMC estimates that of the residents in the service area not covered by the Mayo Clinic employee health plan, 55% prefer to seek primary care at OMC compared to 40% preferring the Mayo Clinic. OMC's profitability metrics compare well with Fitch's 'BBB' category medians with operating margins and operating EBITDA margins averaging 4% and 8% in fiscal years 2005 to 2007 compared to the medians of 1.1% and 8.3%, respectively. Through the first nine months (Sept. 30, 2008) of fiscal 2009, OMC's operating margin is 6.9%.

Credit concerns include OMC's small size (small revenue base, concentration among top admitters, limited scope of services) and weak liquidity. OMC's limited size and scope of services results in a relatively small revenue base ($120.5 million in fiscal 2007) and a concentration of patient volume among top ten admitting physicians (59.1% of admission are generated by top ten physicians). Further, its small size coupled with its focus as a primary care provider makes it more susceptible to potential competitive challenges, physician departures, or adverse changes in governmental or private reimbursement for primary care services. OMC's $26 million of unrestricted cash and investment as of Sept. 30, 2008 equates to 85.9 days cash on hand (DCOH) compared to Fitch's 'BBB' category median of 123.5 days.

The Stable Rating Outlook takes into account Fitch's belief that OMC's clinic model and focus on primary care will continue to result in strong utilization leading to sustained financial performance in line with historical results. Further, Fitch believes OMC's collaborative relationship with Mayo Clinic will continue, thus mitigating a substantial competitive threat.

OMC is a hospital-clinic health care provider in Rochester, MN employing 112 physicians. The facilities include a 61-licensed bed hospital, an 88,000 square foot medical office building housing most of the physician offices and administrative functions, two FastCare clinics, ten branch clinics throughout southeast Minnesota, and a wellness center. OMC covenants to provide continuing disclosure on an annual basis, no later than 120 days after the end of fiscal year. Annual and quarterly disclosure is posted to nationally recognized municipal securities information repositories and includes audited financial statements and utilization statistics.

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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