Fitch Affirms Parma Community Hospital, OH at 'A-'; Rating Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed the 'A-' rating on the $44 million outstanding City of Parma, OH hospital improvement and refunding bonds, series 1998 (The Parma Community General Hospital Association). The Rating Outlook is Stable.

Parma Community General Hospital's (Parma) rating affirmation reflects its leading and growing market position, consistent operating profitability, and favorable service area demographics. Parma has grown its market share in the primary service area to 45% in 2003 from 41% in 2000, while Southwest General Hospital's (Parma's primary competitor) market share has declined to 12.8% from 14% during the same periods. Parma's operating margin improved to 4.0% through the six months ending June 30, 2004 from 2.7% in fiscal 2003 and 1.8% in fiscal 2002. Coverage of MADS on outstanding debt was 3.7x times (x) in 2003 and 5.0x through the six months ended 2004. Adding back any lease payments associated with an ambulatory surgery center and medical office building (MOB), which was completed in 2003, to expenses and adjusting MADS to include interest expense from the lease transactions would result in coverage of 2.7x and 3.7x over the same periods, respectively. This improvement can be attributed in large part to strong volume growth. Patient discharges grew 7.6% to 15,540 in fiscal 2003 from 14,358 in fiscal 2002 and through the six months ended June 2004 discharges are up 10% over the same period in 2003. Also, the opening of Parma's ambulatory surgical center in 2003 has resulted in a 7.6% increase in volume through the six months ended 2004 over the prior year. Parma's service area characteristics remain favorable, with income and employment in the service area surpassing national averages (Parma, OH general obligation bonds are rated 'AA-' by Fitch).

Primary concerns include Parma's light and declining liquidity levels, limited debt capacity, and the nationwide labor shortage. Unrestricted cash declined 10.7% in 2003 to $28.4 million from $31.8 million at 2002, which primarily relates to management's decision to finance the expansion of its intensive care unit and emergency room with operating cash flow over the past two years at a cost of $13 million. Days cash on hand declined to 64 days at June 30, 2004 from 82 days at fiscal 2002. In addition, cash to debt is low at 67% through the six months of 2004. Parma's liquidity remains below Fitch's 'A' category medians of 171 days cash on hand and 98.4% cash to debt. Parma entered into synthetic lease transactions in 2001 to finance an ambulatory surgery center and a medical office building. While these projects have translated into increased revenues for Parma, they have also led to offsetting lease expenses. The ambulatory surgery center and MOB lost $414,000 and $250,000 in 2003, respectively; however, the ambulatory surgery center is expected to make $800,000 and the MOB is expected to lose $140,000 in 2004. Furthermore, these transactions could expose Parma to refinancing risk at the end of its lease term in 2011 resulting in a potential payment liability for these entities if the real estate values of the projects decline. In addition, the nationwide labor shortage is particularly acute in Cleveland, which continues to put expense pressure on Parma's labor costs. Nurse agency labor expense was around $1.9 million in 2003, compared with $2.5 million in 2002, and Parma's personnel cost as a percentage of total operating revenue is 52.6%, which is higher than Fitch's 'A' category median of 50.8%.

Fitch believes Parma's operating profitability will mirror historical levels as increasing volume trends resulting from service line growth will continue to be tempered by subsidiary losses (that are expected to decline in 2004) and rising labor expenses. Management does not expect to issue additional debt in the near term and has as a strategic target that days cash on hand will reach 125 days in five years. Further declines in liquidity ratios would pressure the current rating.

Parma is a 366 licensed bed hospital (204 operated) located in Parma, Ohio with total operating revenue of $172 million in fiscal 2003. Parma's disclosure practices remain inadequate as its fiscal 2003 audit was received 20 days late and current quarterly statements lack any management discussion and analysis and a cash flow statement. Furthermore, Parma's existing bond covenants require only annual disclosure to bondholders. However, management indicated to Fitch their intention to provide quarterly and annual disclosure through the nationally recognized municipal securities information repositories on a timely basis.