Fitch Affirms San Juan Regional Medical, NM Revs at 'A-'; Outlook to Positive.

NEW YORK -- Fitch Ratings affirms the 'A-' rating on approximately $44.5 million City of Farmington, New Mexico (San Juan Regional Medical Center, Inc. Project) hospital revenue bonds, which are listed at the end of the press release. For certain outstanding issues, the action pertains to the underlying rating since the bonds are insured by Ambac Insurance Corp. or backed by an irrevocable bank letter of credit provided by Bank of Nova Scotia. The Rating Outlook is revised to Positive from Stable.

The Positive Rating Outlook reflects Fitch's expectation that San Juan Regional Medical Center (SJRMC) will continue to exhibit solid operating results due to the hospital's dominant market position in the region. Fitch believes this will translate into strong debt service coverage and cash flow levels. An upward movement of the rating will depend upon sustained operating profitability and liquidity levels along with the completion of the hospital's current facility expansion and renovations that were financed with the series 2004 bonds. The new patient tower and renovations to the existing hospital are expected to be completed in August 2006 and June 2007, respectively. Fitch believes SJRMC's operating performance should be significantly enhanced when these projects are completed.

The current rating is based on SJRMC's dominant market share of around 85% in the primary service area, solid profitability and debt service coverage, and strong community support. SJRMC has continued to generate solid operating results with gains of $9.9 million (margin of 6.4%) in fiscal 2004 and $8.6 million (margin of 5.4%) in fiscal 2005. Additionally, cash flow generation has been strong, with cash flow margins ranging from 10.4%-12.6% over fiscal 2002-2005. SJRMC's low debt burden combined with solid operating results have led to excellent debt service coverage of 5.7 times (x) in fiscal 2004 and 5.6x in fiscal 2005. In addition, unrestricted cash and investments have improved to $58.8 million at fiscal 2005 from $31.5 million at fiscal 2002, which translated into moderate liquidity levels of 163 days cash on hand, 16.8x cushion ratio, and 134.5% cash to debt. Ongoing strengths include the extremely strong community support that SJRMC enjoys, which was exhibited by a voter approved gross receipts tax (GRT) revenue bond issued by San Juan County (GRT revenue bonds rated 'A+' by Fitch) in 2004 to fund approximately one-half of the hospital's expansion project.

Short-term concerns relate to construction risks associated with SJRMC's hospital expansion. Longer term concerns, which are ongoing, are SJRMC's unfavorable payor mix and challenges related physician recruitment and retention. The current construction of a new patient tower and renovations to the existing hospital facilities was originally budgeted to cost $58 million. However, increased outlays related to rising raw material costs, subcontracting expenses, insufficient contingency reserves, and changes to the scope of the project have resulted in higher than expected construction costs. The total project will now cost an additional $21.8 million from the original estimates. SJRMC has funded and will fund over the next several years the additional project costs primarily through operating cash flow. Management is confident the completion of the new patient tower will occur in August 2006 and renovations to the existing hospital in June 2007. In addition, management does not believe there will be any more significant changes to the cost of the project.

Ongoing risks include SJRMC's unfavorable payor mix. SJRMC's gross revenues are composed of a high proportion of Medicaid (15%) and self-pay (8%) payors, which is reflective of the low income levels of the service area. In addition, SJRMC received approximately $7.5 million of sole community and indigent care funds in fiscal 2005, which increased from $4.9 million in the prior year. While these funds have shown significant growth in past years, SJRMC is vulnerable to potential changes in future funding levels. Fitch also believes physician recruitment and retention will remain a challenge given the rural service area characteristics.

SRMC, located approximately 185 miles northwest of Albuquerque in Farmington, New Mexico, is a sole community provider acute care hospital with 168 staffed beds. Total revenue in fiscal 2005 was $161 million. SJRMC covenants to provide annual audited financials within 150 days of fiscal year-end and quarterly disclosure (including balance sheet, income and cash flow statements, and utilization data) within 60 days of quarter-end to the nationally recognized municipal securities information repositories (NRMSIRs). Fitch views favorably SJRMC's timely disclosure of financial statements on the NRMSIRs.

Fitch affirms the following ratings with a Positive Outlook:

-- $16,964,000 City of Farmington, New Mexico hospital revenue bonds (San Juan Regional Medical Center, Inc. Project), series 2004A 'A-';

-- $15,000,000 City of Farmington, New Mexico hospital revenue bonds (San Juan Regional Medical Center, Inc. Project), series 2004B 'A-' (underlying rating; backed by an irrevocable direct pay letter of credit from Bank of Nova Scotia, which is not rated by Fitch);

-- $12,560,000 City of Farmington, New Mexico hospital revenue bonds (San Juan Regional Medical Center, Inc. Project), series 1997 'A-' (underlying rating; insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch).

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.