Fitch Affirms Marshall Medical Center Revs at 'BBB-' Outlook Stable

As part of its ongoing surveillance efforts, Fitch Ratings has affirmed its 'BBB-' rating on the following revenue bonds issued on behalf of Marshall Medical Center (MMC), California, as follows:

--$29,650,000 California Health Facilities Financing Authority insured hospital revenue bonds (Marshall Medical) 2004 series A, (insured by Cal Mortgage, whose Insurer Financial Strength [IFS] is rated 'A-' by Fitch);

--$20,000,000 California Health Facilities Financing Authority insured hospital revenue bonds (Marshall Medical) 2004 series B (insured by Ambac, which is not rated by Fitch);

--$17,705,000 California Health Facilities Financing Authority insured hospital revenue refunding bonds, 1998 series A (insured by Cal Mortgage, whose IFS is rated 'A-' by Fitch);

-- $5,010,000 California Health Facilities Financing Authority insured hospital revenue refunding bonds, 1993 series A (insured by Cal Mortgage, whose IFS is rated 'A-' by Fitch).

The Rating Outlook is Stable.

SECURITY: Gross revenue pledge of the obligated group.

KEY RATING DRIVERS:

PRESSURED OPERATING ENVIRONMENT: Absent one-time receipt of $7.4 million in net California provider fee funds, fiscal year (FY) 2011 operations were hampered by flagging patient volume and rising operating expenses. Fitch expects MMC to undertake strong cost saving measures should patient volumes fail to rebound.

GOOD PROFITABILITY: MMC reported a strong 4.6% operating margin in FY 2011 (unaudited), compared to Fitch's 'BBB' median of 1.7%. However, Fitch notes that profitability was markedly enhanced by the receipt of $7.4 million in net provider fee funds. Absent this net benefit, MMC would have posted a 1.1% operating margin.

LOW LIQUIDITY: MMC's balance sheet demonstrates low liquidity for the rating category and a further decline is expected in FY 2012. MMC plans to spend down approximately $7 million in board designated funds to complete phase I of its ongoing construction project.

FUTURE CAPITAL PLANS: MMC's future capital needs for the second and third phases of its master facility plan are sizable and total $33 million. MMC plans to proceed slowly on these plans and utilize approximately $18 million in future net provider fee funds to help fund the capital needs. No additional debt is expected.

WHAT COULD TRIGGER A RATING ACTION

Larger than anticipated decline in liquidity or failure to meet fiscal 2012 budgeted profitability (absent net provider fee funds) could result in negative rating pressure.

CREDIT PROFILE

Marshall Medical Center is located in Placerville, California, and operates a 105 licensed-bed general acute-care community hospital and several clinics. In fiscal 2011 (Oct. 31 year end), MMC reported $209.4 million in total operating revenue (unaudited).

Pressured Operating Environment

Unlike the prior year, fiscal 2011 operations saw flagging patient volumes as inpatient activity decreased markedly due to rising observation cases and a general decline in utilization. Additionally, outpatient volume growth was blunted by MMC's implementation of its electronic medical record platform in its physician clinics. As a result, net patient revenue growth was flat, while expense growth continued near historical rates. Additional operating pressures include MMC's rising defined benefit pension expense, which necessitates a significant increase in 2012 required contributions.

Counteracting these pressures and markedly bolstering profitability, MMC was a beneficiary of $7.5 million in one-time net California provider fee funds in FY 2011. Overall, MMC reported a 4.6% operating margin (unaudited) compared to 4.3% in the prior year. However, excluding the one-time net benefit, MMC would have posted a 1.1% operating margin.

Low Liquidity

Marshall Medical Center's liquidity has been historically low for the rating category. As of Oct. 31, 2011, MMC had $44.5 million in unrestricted cash and investments, equating to 90.3 days-cash-on-hand and a 63% cash-to-debt position, which are below Fitch's 'BBB' medians of 128.6 and 79.8%, respectively. In addition, Fitch expects liquidity to decline further over the next year as MMC is planning to use its board designated funds to complete phase I of its master facility plan.

Ongoing Construction

Construction and occupancy of MMC's three-story expansion project is now a year behind schedule. While MMC received seismic approval for the facility in November 2011, it now expects to receive occupancy licensing in December 2012. However, the project has remained on budget ($52.5 million). Fitch is concerned that prolonged delays may stress operations and profitability.

The expansion is slated to house MMC's obstetrics center and new emergency department (phase I). Remaining funding needs of $11 million will be spent from operating cash flow and board designated funds.

Future Capital Plans

Marshall Medical Center's two-year capital plan (FY 2012-13) totals $36.5 million. Along with completion of phase I, the capital plan addresses phases II & III of MMC's master facility plan, including the expansion of the intensive care unit and medical/surgical unit. Funding for these projects relies heavily on MMC's expected receipt of approximately $18 million in net provider fee funds in FY 2012, which is still awaiting the Centers for Medicare and Medicaid Services' approval.

The timing and funding of MMC's phase II and III projects remains in flux and Fitch will continue to monitor any developments. Fitch believes that MMC's capital plan cannot be supported by its current core operating performance with an operating EBITDA margin of 4.5% without the provider fee in fiscal 2011.

As of Oct. 31, 2011, Marshall had $72.5 million in long-term revenue bonds outstanding. The bonds are in fixed-rate mode, except for the series 2004B, which are in auction-rate mode. Maximum annual debt service (MADS) ($5.1 million) accounts for a moderate 2.4% of total revenue, and coverage by FY 2011 EBITDA is very good at 3.3 times (x), compared to Fitch's respective medians of 3.3% and 2.6x. However, excluding the net provider fee benefit, MADS coverage would have been weak at 1.9x.

Stable Outlook

The Stable Rating Outlook reflects Fitch's expectation that MMC will meet its budget target of 1.2% operating margin, and will prudently execute its master facility plan. However, large declines in liquidity or failure to meet budget targets could result in negative rating pressure.

Disclosure

Marshall Medical Center covenants to provide annual and quarterly disclosure through the Municipal Rule Making Board's EMMA system.

Additional information is available at ' www.fitchratings.com '. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 20, 2011;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.

For information on Build America Bonds, visit Fitch's website at ' www.fitchratings.com '.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=6...

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=6...

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' 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: Fitch Ratings