Fitch Affirms 'BBB-' Rating for Nanticoke Health Services, Delaware's Bonds; Outlook to Stable.

NEW DELHI & SYDNEY & SINGAPORE -- Fitch Ratings has affirmed Delaware Health Facilities Authority's (Nanticoke Health Services Project) outstanding bonds at 'BBB-'. Fitch has also taken the rating off Rating Watch Negative and revised the Outlook to Stable.

The affirmation of the 'BBB-' rating and the Stable Outlook reflect the strong operational turnaround that has occurred at Nanticoke over the last five fiscal quarters under the leadership of a new CEO and CFO. For the three-year period from fiscal 2006 to fiscal 2008 (June 30 year end), Nanticoke lost approximately $18 million on operations, averaging a -5.1% operating margin each of those years. In late fiscal 2007, FTI-Cambio was brought in to help turn around operations. The current CFO was part of that team and became the permanent CFO in fiscal 2008. A new CEO started in November 2008. After losing $8 million in fiscal 2008, fiscal 2009 audited results show Nanticoke at break even operations, with its operating EBITDA margin improving to 8.8%, above Fitch's 2008 'BBB' category median of 7.8% and up significantly from 3.5% in the prior year.

The year-over-year improvement in operations was mostly due to expense savings of approximately $10 million, including a workforce reduction, the freezing of Nanticoke's defined benefit plan, and the ending of the FTI-Cambio engagement. Over this time, Nanticoke added a number of new physicians including an interventional cardiologist, a gastroenterologist, a nephrologist, and a general surgeon. Nanticoke also regained certification as a level III trauma center by reestablishing fulltime orthopedic coverage. The revenue side initiatives should begin to help grow volumes and improve revenues in the current fiscal year.

Unaudited first quarter results for fiscal 2010 for the hospital only reflect this improvement with income from operations of $1.025 million and a 3.9% operation margin. This compares to a loss on operations of $1.988 million and -8.9% operating margin for the same period in fiscal 2009. Consolidated results are lower due to the drag on operations of a nursing home within the consolidated system. The nursing home experienced higher health care costs over the last year, but management expects expenses to moderate over the next year and is taking other steps to reduce costs at the nursing home. On a consolidated basis Nanticoke is above budget year to date, and it is expected that Nanticoke will have a positive year operationally on a consolidated basis in fiscal 2010.

The stabilizing of operations has led to a stabilizing of Nanticoke's liquidity position, which had weakened considerably due to the operating losses. As of Sept. 30, 2009, Nanticoke had days cash on hand of 102.9 days, cash to debt of 47.5%, and a cushion ratio of 7.9 times (x), all adequate for the 'BBB' category. Nanticoke's debt structure and investment allocation are conservative, as all of Nanticoke's debt is fixed rate, and its investment portfolio has no exposure to alternatives or private equity.

Additional credit strengths of Nanticoke are an inpatient market share at over 70% and a manageable debt load. Despite the negative operations, maximum annual debt service (MADS) coverage has remained above 2x over the last four audited fiscal years and stood at 6.7x in the interim period. MADS as a percentage of revenue was 3.2% in the interim period, lower than Fitch's 2008 'BBB' category median of 3.5%.

Key rating drivers for Nanticoke are sustaining the operational improvements and being able to grow revenue and volumes through ongoing physician recruitment. Revenues have remained flat over the past four audited years, due to decreases in volume and limited physician recruitment. A weakening in the current turnaround would return negative pressure to the rating. Stability within senior management is another key rating driver. Nanticoke has had four CEOs in the last five years. In light of the turnaround in operations under the current management team, any new executive turnover would be a credit concern.

Located in Seaford, DE, Nanticoke Health Services has 139 staffed acute care beds at Nanticoke Memorial Hospital and 110 skilled nursing beds at Nanticoke Alternative Care, Inc. The obligate group of NHS (which excludes a captive insurance company) posted $114.9 million in operating revenue in fiscal 2009. NHS covenants to disclose annual audited financial statements and quarterly disclosure to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Disclosure has been timely and includes a balance sheet, income statement, statement of cash flows and utilization data.

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