Fitch Affirms Northeast Georgia Health System, Georgia Hosp Revs at ‘A’

Fitch Ratings has affirmed the underlying ‘A’ rating on approximately $241 million of outstanding bonds issued on behalf of Northeast Georgia Health System (NGHS). The outstanding bonds are listed at the end of the press release. In addition, Fitch has assigned an underlying ‘A+’ rating to The Hospital Authority of Hall County and the City of Gainesville (Northeast Georgia Health System, Inc.), GA $200 million series 2007A and $50 million series 2007B certificates. The ‘A+’ rating for the series 2007 bonds is based on the credit strengths of NGHS as well as those of Hall County given the added security provided by the county’s legal commitment to pay debt service if hospital revenues are insufficient. For more information on the series 2007 bonds, please refer to the press release ‘Fitch Rates The Hospital Authority of Hall County (Northeast Georgia Health System Inc.) $250MM Certificates ‘A+’; Stable Outlook’, dated January 10, 2007. The Rating Outlook is Stable.

Bond proceeds from the series 2007 bonds will be used to fund the construction of an 128-bed inpatient patient tower, a women’s and children’s center, reimburse NGHS in the amount of approximately $50 million for prior capital expenditures, and pay for costs of issuance. The bonds are scheduled to sell on February 7th via negotiation led by Citigroup.

The rating affirmation at ‘A’ is supported by NGHS’ strong liquidity relative to expenses and cash flow margins, dominant market position in Hall County, a rapidly expanding service area that has led to strong historical volume growth, and solid relationship with the county. In addition, management successfully implemented an aggressive turnaround plan during the last two years, resulting in much improved profitability levels. NGHS posted an operating gain of $41.2 million or operating margin of 8.8% (includes $20 million of one-time items) in fiscal 2006, exceeding the budgeted gain of $13 million and is a significant improvement over the last two years. NGHS’ operating margin is budgeted to moderate at 3.9% in fiscal 2007. However, NGHS’ recently completed Blue Cross negotiations with favorable terms reflect future stability in managed care revenue and growing importance of the system in the region.

Unrestricted cash and investments totaled $262 million as of Sept. 30, 2006, which translated into a strong 276 days cash on hand. Balance sheet indicators have in the past been supported by solid cash flow generation, averaging 13.4% for fiscal years 2002-2006. Further, NGHS maintains a dominant market share of 78.3% in Hall County, as well as a leading market share of around 36% for the total service area. The positive relationship between NGHS and Hall County is viewed favorably as highlighted by the additional security feature provided by the County’s tax millage with the 2007 financing.

Credit risks include NGHS’ increased leverage and debt burden with the series 2007 bond issuance, which will fund a portion of the system’s sizeable long-range capital improvement plan (CIP). Ongoing concerns include NGHS’ high percentage of governmental payors and bad debt expense. With the series 2007 financing, NGHS will more than double its outstanding debt to $485 million from $241 million as of Sept. 30, 2006. As a result, balance sheet indicators will be more leveraged with pro-forma cash to debt declining to 57.8% from 111.3%. In addition, NGHS’ already high debt burden will increase with pro-forma MADS at 5.7% and pro-forma debt to capitalization of 61.1%. Due to the robust population and economic growth of NGHS’ service area, the system’s future capital needs are significant with the CIP totaling $802 million for fiscal years 2007-2013. The plan calls for the construction of a new 100-bed hospital starting in 2010 in the rapidly growing South Hall County to replace its Lanier Park hospital campus.

The Rating Outlook is Stable. NGHS’ capital plans are significant over the medium term and will limit its financial flexibility given the heightened debt burden and diminished liquidity ratios (days cash on hand projected to decline to 150 days in 2009). Offsets include NGHS’ implementation of a successful turnaround plan and focus on leveraging its size in the region. This should result in sustained operating margins consistent with budgeted amounts for fiscal 2007. In addition, NGHS’ capital investments should bolster its already strong market position and enhance revenue growth over the long term.

NGHS is located in Gainesville, GA, approximately 53 miles northeast of Atlanta, and includes two campuses within the hospital system with a total of 464 staffed beds, two skilled nursing facilities, and a primary care network operating in nine surrounding counties. NGHS had total operating revenue of $470 million in FY 2006. NGHS covenants to provide annual and quarterly disclosure to bondholders, which is available on the nationally recognized municipal securities information repositories (NRMSIRs).

Fitch has affirmed the following ratings:

–$52,175,000 The Hospital Authority of Hall County and City of Gainesville Revenue Anticipation Certificates (Northeast Georgia Health System, Inc. Project), series 2005A(1) at ‘A’;

–$65,975,000 The Hospital Authority of Hall County and City of Gainesville Revenue Anticipation Certificates (Northeast Georgia Health System, Inc. Project), series 2005B(2) at ‘A’;

–$94,645,000 The Hospital Authority of Hall County and City of Gainesville Revenue Anticipation Certificates (Northeast Georgia Health System, Inc. Project), series 2001 at ‘A’

–$28,250,000 The Hospital Authority of Hall County and City of Gainesville Revenue Anticipation Certificates (Northeast Georgia Health System, Inc. Project), series 1999(1) at ‘A’.

(1) This is an underlying rating. The bonds are insured by MBIA Insurance Corp., whose insurer financial strength is rated ‘AAA’ by Fitch Ratings.

(2) Standby bond purchase agreement provided by Citibank, N.A., whose short-term rating is ‘F1+’.

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.