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Fitch Affirms Greater Fairbanks Community Hospital Foundation Bonds at 'A'; Outlook Stable

Posted on: Thursday, 9 November 2006, 18:01 CST

Fitch Ratings has affirmed the underlying 'A' rating on the approximately $120 million of outstanding hospital revenue bonds issued on behalf of Greater Fairbanks Community Hospital Foundation (the Foundation), Alaska. (Outstanding bonds are listed at the end of this release.) The Rating Outlook is Stable.

The rating is supported by Fairbanks Memorial Hospital's (FMH) dominant market position, solid relationship with Banner Health (rated 'AA-' by Fitch), terms of the operating lease between Banner and the Foundation, strong balance sheet of the Foundation, and good debt service coverage. FMH is designated as a Sole Community Provider for the Fairbanks North Star Borough, a large geographic area in Alaska's interior region that covers approximately 250,000 square miles with a population of more than 99,000. The closest competing hospital is located in Anchorage, over 350 miles from Fairbanks.

The obligated group is the Foundation, which owns Fairbanks Memorial Hospital, a 152-bed acute care hospital; Denali Center, a 90-bed skilled nursing facility; and Fairbanks Cancer Treatment Center, all of which are located on the same campus in Fairbanks.

The Foundation has a strong cash position, and has benefited from strong historical fundraising and the support of the community. Banner Health leases the assets of the Foundation and pays basic and supplemental rent to the Foundation through a 20-year lease which is set to expire in 2013. Basic rent alone, based on the fair market value of facilities and equipment, covered maximum annual debt service (MADS) by 1.2 times (x) in 2005 and is projected to rise to 2.11x by 2010. Basic and supplemental rents cover pro forma MADS historically by more than 2x.

Primary concerns include the ability of either party to terminate the lease with a one-year notice, labor risks, and a high exposure to Medicaid reimbursement. The remaining 7-year term of the lease agreement between Banner and the Foundation creates the potential for non-renewal and uncertainty over FMH's operations before the bonds reach maturity. Inpatient census has declined over the last two years due to changes in the physician mix and a slight increase in outmigration, but is expected to return to historical levels beginning 2007. Of added concern is the potential increased competition from two ambulatory surgery centers whose certificates of need are awaiting State approval. If approved, these centers are likely to take away from FMH's patient base, thereby reducing FMH's patient revenues.

Fitch believes the region's somewhat limited economy and FMH's relatively isolated location present physician and nurse recruitment challenges. The region is influenced by a sizeable military presence which affects population and employment growth. Fitch believes a reduction in the region's military operations could have a negative impact on hospital utilization and staffing. Wealth indicators are below the state, contributing to an above-average Medicaid patient base. Medicaid represented 13.6% of FMH's payor mix in 2005, which exposes FMH to cost containment at the State level.

Combined, FMH and Denali Center revenues totaled $168.6 million in 2005. The Foundation covenants to provide annual and quarterly disclosure to bondholders, including the financial statements of the Foundation, FMH, and the Denali Center, which is viewed positively. Fitch views disclosure of annual and quarterly statements to the NRMSIRs as best practice.

Outstanding debt:

-- $60 million Alaska Industrial Development & Export Authority (AK) (Greater Fairbanks Community Hospital Foundation Project) indexed put bonds ser 2004A (insured: Financial Security Assurance Inc.)

-- $60 million Alaska Industrial Development & Export Authority (AK) (Greater Fairbanks Community Hospital Foundation Project) indexed put bonds ser 2004B (insured: Financial Security Assurance Inc.)

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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