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Fitch Upgrades Knox Community Hospital (Ohio) Bonds to 'BBB'; Outlook Stable

Posted on: Tuesday, 30 January 2007, 15:01 CST

Fitch has upgraded to 'BBB' from 'BBB-' the rating on approximately $34.5 million Knox County hospital revenue bonds. The outstanding bonds are listed at the end of the press release. For certain series, the rating action pertains to the underlying rating. The series 2004 bonds are backed by an irrevocable direct pay letter of credit (LOC) from National City Bank, which Fitch was not asked to rate and expires in 2009. The Rating Outlook is Stable.

The rating upgrade to 'BBB' reflects Knox Community Hospital's (Knox) strong market position as the sole community provider in the service area, four years of solid operating profitability, growing patient utilization, and management contract with Quorum Health Resources (expires in 2010). As the only hospital within a 25-mile radius, Knox faces limited competition in its service area and had a leading market share of 47.8% in 2005. Knox's operating performance has been very strong with an operating margin of 5.7% (unaudited operating income of $4.2 million) in 2006. However, operating margin is budgeted to decline to 2.0% (operating income of $1.5 million) in 2007. The decline in profitability reflects the ramp up of services and associated costs at the recently constructed outpatient facility, Knox Medical Pavilion (KMP), and management's decision to increase the number employed physicians at the hospital. In 2006, Knox added six additional employed physicians (currently totals eleven) to its medical staff, and the budget for 2007 reflects the full year impact of the physician practices coming on-line. In addition, Knox received a non-recurring grant of $1.5 million in 2006 to purchase a linear accelerator.

Patient utilization, particularly outpatient volume, has been robust with the opening of KMP in May 2006, which was the primary driver for the solid 7.4% and 9.0% increase in outpatient visits and outpatient surgeries, respectively, during the year. Future patient volume is supported by the incremental volume expected to be generated from the recently acquired physician practices and management's initiatives to add new services to the hospital. In 2007, Knox is planning to add a new progressive care unit and will participate in a C-port trial program, allowing the hospital to perform elective angioplasty procedures.

Primary credit concerns include Knox's small revenue base, high debt burden, above average Medicaid load (13.7% of gross revenues), and losses at the employed physician practices. Knox's revenue base of $73.2 million allows limited flexibility to absorb adverse events and is an inherent risk at smaller community hospitals. This risk highlighted by Knox's high dependence on its top ten admitting physicians and the lack of a state certificate of need. Partially mitigating Knox's smaller revenue base is the hospital's moderate liquidity levels with unrestricted cash and investments of $25.5 million at Dec. 31, 2006, which translated into 152 days cash on hand and 80.7% cash to debt. Due to the rapid amortization of Knox's series 1998 debt, Knox's debt burden is high with MADS at 5.9% of gross revenues in fiscal 2006. As a result, MADS coverage is relatively light at 2.5x in 2005 and 2.3x in 2006. Losses generated from Knox's employed physicians, totaling $2.3 million in 2006 and budgeted to remain the same in 2007, also pose a concern. These losses are partially offset by the expected ramp up of business volume at the practices during the year and management's goal to reduce losses in half by 2008.

The Rating Outlook is Stable. Fitch expects Knox to continue to generate operating results that are consistent with the rating category given the limited competition in the service area and the hospital's ability to maintain favorable managed care rates. While profitability is expected to decline to more moderate levels in 2007, Knox's investments at KMP and to its physician practices should help stem outmigration of essential services to Columbus, Ohio. This strategy, if implemented successfully, should enhance revenue and volume growth over the short term. Knox indicated preliminary plans to build a new surgical center over the next three to four years.

Located in Mount Vernon, Ohio (approximately 40 miles north east of Columbus), Knox is an acute care community hospital with 75 staffed beds (115 licensed beds). In fiscal 2006, total revenues were approximately $73 million. Knox covenants to provide bondholders with only audited annual financial statements. Knox does not covenant to provide quarterly disclosure to bondholders and is not disseminated through the National Municipal Securities Information Repositories, which is viewed negatively by Fitch.

Fitch has upgraded to 'BBB' from 'BBB-' the following bonds:

Knox County (OH) (Knox Community Hospital)

-- $16,375,000 variable-rate hospital revenue bonds, series 2004 (1);

-- $18,125,000 hospital facilities revenue refunding bonds, series 1998.

(1) This represents an underlying rating. The bonds are backed by an irrevocable direct pay letter of credit from National City Bank, which Fitch was not asked to rate.

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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