Fitch Affirms Sarasota County Public Hospital Board's (Florida) $332.9MM Bonds at 'A/F1'; Stable Outlook.

NEW YORK -- Fitch affirms the 'A' rating on Sarasota County Public Hospital Board's (SCPHB) $332.9 million bonds as listed below. Fitch also affirms the 'F1' short-term rating assigned to the SCPHB's $79.3 million series 2003A variable-rate demand bonds (VRDBs) and $62.4 million series 1996A VRDBs. The short-term rating is based on SPCHB's internal liquidity. The Rating Outlook is Stable.

The affirmation of the 'A' rating is supported by SCPHB's strong liquidity, leading market share, strong service area characteristics, and ability to levy taxes. Unaudited fiscal 2005 results show 394.1 days cash on hand ($433.5 million in unrestricted cash), a cushion ratio of 17.7 times (x) and a cash to debt of 114.5%, all above Fitch's 'A' medians of 177.2 days, 13.4x, and 109.8%, respectively. In fiscal 2004, SCPHB had a dominant market share of 60% within its primary service area of Sarasota County, well above the 18.5% of its nearest competitor (Venice Hospital). In addition, the board at SCPHB unanimously voted to raise its millage rate to 0.8 effective Oct. 1, 2005 to offset the increased expense of being the only safety-net hospital in its primary service area, which results in approximately $34.7 of revenues. SCPHB's tax limit is 2.0 mills, which if levied, would generate an additional $52 million per year based on current tax assessed value.

The 'F1' rating on the $141.7 million bonds (as listed below) reflects SCPHB's liquidity position and internal procedures that would provide timely access and transfer of funds in the unlikely event of a failed remarketing. Unrestricted cash at Sept. 30, 2005 was approximately $433.5 million. SCPHB's investment portfolio is required by Florida statute to be invested in highly liquid securities, which would be available in case of a remarketed put.

The hospital's new CEO, hired in May 2005, is taking aggressive steps to turn around several credit concerns, including low operating profitability, high debt burden, and declining admissions trends. SCPHB has posted a loss from operations of $5.7 million in fiscal 2005 (minus 1.2% operating margin), its third straight year of negative operating performance. SCPHB's debt burden is high, as evidenced by MADS as a percentage of revenue and debt to EBITDA of 5.2% and 7x, which is well above Fitch's 'A' medians of 3.4% and 3.5x, respectively. Debt service coverage is also low for the rating category at 2.2x through Sept. 30, 2005. Management reported that it has no additional debt plans for the immediate future. The decline in inpatient volume for fiscal 2005 (down 3.4%) and emergency department (ED) visits (down 5%) is also a concern, but inpatient admissions and adjusted occupied beds exceeded the prior year for the last five months of the fiscal year (0.2% and 4.8%, respectively). A new business unit approach, marketing campaign, and national designation as a primary stroke center all may have a positive impact on future volumes. Management attributed the decline to their ED often previously being on divert status, which resulted in fewer admissions, but the facility has not been on diversion since December 2004, thanks to a redesign of the patient flow process, the opening of 25 new ED rooms, and the hiring of additional board-certified ED physicians. As a result of these improvements, the ED recently introduced a 30-minute wait-time guarantee for all patients.

SCPHB has implemented a number of other initiatives and cost-saving measures to improve hospital operations, including reducing its workforce by 90 FTEs for a savings of $4.6 million in fiscal 2005 and has identified approximately $3 million of supply savings for fiscal 2006. Labor efficiency improved 5.5% over the last five months of the fiscal 2005 compared with that of fiscal 2004.

The Stable Rating Outlook is based on SCPHB's dominant market share and the expectation that SCPHB will be able to return to profitability in fiscal 2006. Management expects a positive operating margin of 1.0% in fiscal 2006, which Fitch believes is aggressive given SCPHB's past performance.

SCPHB has six derivative instruments in place with a total notional amount of approximately $473 million (the majority of which are insured) including floating- to fixed-rate swaps, fixed- to floating-rate swaps, and basis swaps. As of Sept. 30, 2005, the mark-to-market value is $8.06 million. All termination payments for the swaps are subordinate to outstanding debt. The counterparties for the swaps are Lehman Brothers Holdings Inc. (rated 'A+/F1+' by Fitch), Goldman Sachs Group Inc. (rated 'AA-/F1+' by Fitch), JP Morgan Chase Bank N.A. (rated 'AA-/F1+' by Fitch) and Citibank, N.A. (rated 'AA+/F1+' by Fitch). Given SCPHB's liquidity and improving profitability, Fitch believes the swaps pose minimal risk to the organization.

SCPHB owns and operates Sarasota Memorial Hospital, which is an 826-licensed bed facility (601 staffed beds) offering primary, secondary, and tertiary care services. The hospital is located on the southwest coast of Florida, approximately 65 miles south of Tampa. Total annual revenue for SCPHB equaled approximately $467 million for unaudited fiscal 2005. SCPHB covenants to disclose only audited annual information to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRS) and provides audited annual information through Digital Assurance Certification, LLC (DAC) as well as through their hospital web site, www.smh.com. SCPHB also voluntarily discloses quarterly information to the NRMSIRS through DAC, which Fitch views positively. SCPHB disclosure includes balance sheet, income statement, cash flows and utilization statistics, and management discussion and analysis.

Outstanding issues:

--$79,300,000 Sarasota County Public Hospital Board variable-rate revenue bonds (Sarasota Memorial Hospital Project), series 2003A (Ambac Assurance Corp. insured) (Sarasota Memorial Hospital Project)

--$118,000 Sarasota County Public Hospital Board, fixed-rate hospital revenue refunding bonds, series 1998B, (MBIA insured) (Sarasota Memorial Hospital Project)

--$15,365,000 Sarasota County Public Hospital Board, fixed-rate hospital revenue refunding bonds, series 1998A, (MBIA insured) (Sarasota Memorial Hospital Project)

--$57,815,000 Sarasota County Public Hospital Board, fixed-rate hospital revenue refunding bonds, series 1997B, (MBIA insured) (Sarasota Memorial Hospital Project)

--$62,400,000 Sarasota County Public Hospital Board variable-rate demand hospital revenue bonds, series 1996A (Sarasota Memorial Hospital Project)

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.