Fitch Affirms Knox Community Hospital (Ohio) Bonds at 'BBB'; Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed the 'BBB' rating and underlying rating on about $25.7 million hospital revenue bonds, series 1998 and 2004 issued on behalf of Knox Community Hospital (Knox) by Knox County, Ohio. The series 2004 bonds are backed by an irrevocable direct pay letter of credit (LOC) from National City Bank, which Fitch does not rate. The Rating Outlook is Stable.

The rating affirmation reflects Knox's strong market position as the only hospital in the primary service area, solid operating profitability, sound liquidity, and management contract with Quorum Health Resources. Primary credit concerns include Knox's small revenue base, above average Medicaid exposure, and moderately high debt service burden.

As the only hospital within a 25-mile radius, Knox faces limited competition in its primary service area and had a leading 51.8% inpatient market share in 2008, which improved from 48.3% in 2005. Knox's operating performance is solid with an operating margin of 4.2% in fiscal year 2008 (FY08) and an operating margin of 3.6% for the eight month period ending Aug. 31, 2009. Furthermore, operating EBITDA margins averaged 11.2% over the last three fiscal years which is comfortably above Fitch's 'BBB' category median of 8%. Operating profitability is supported by good volume gains with admissions and outpatient visits growing 10.3% and 2.5%, respectively in FY08. Current year earnings are being pressured a bit by losses at Knox's newly acquired physician practices. Regardless, management expects physician clinic performance to improve as it recently hired a professional services company to assess operations, development turnaround plans, and manage the business. Lower volumes are also impacting the current fiscal year's operations due to the loss of an ENT physician and general market softness from economic pressures. Fitch view Knox's management agreement with Quorum Health Resources as a strength given its successful track record at many rural and community hospitals.

Knox's liquidity metrics are comparable to Fitch's 'BBB' category medians, with days cash on hand (DCOH) at 124 as of Dec. 31, 2008, compared to the median of 114 days. Unrestricted cash and investments increased to $30.7 million as of Aug. 31, 2009, representing 139 DCOH and a favorable 135% of long-term debt. Liquidity growth is supported by favorable receivable collections, with days in accounts receivable at 44.3 days as of Aug. 31, 2009.

Knox's revenue base of $93.4 million allows limited flexibility to absorb adverse events and is an inherent risk at smaller community hospitals. Furthermore, Knox's moderately high exposure to Medicaid (15% of gross revenues) leaves them susceptible to program changes or reimbursement cuts. Due to the rapid amortization of Knox's series 1998 bonds, the debt service burden is moderately high with maximum annual debt service (MADS) at 4.6% of revenues in FY08. As a result, MADS coverage is relatively light at 2.3 times (x) in 2008 and 2.1x for the eight month period ending Aug. 31, 2009. Last year, management indicated a plan to expand its surgical services for an approximate cost of $15 million. Given the state of the capital markets and uncertainties regarding the overall healthcare environment, a much smaller $2 million renovation is expected to occur over the next year. Additionally, management is in the process of developing a master facility plan that is expected to address long term capital requirements and potential funding sources.

The Stable Rating Outlook reflects Fitch's expectation that operating performance cash position remain consistent with historical levels.

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). 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.

Additional information is available at www.fitchratings.com.

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