Fitch Affirms The William W. Backus Hospital (Connecticut) Revenue Bonds at 'A+'; Stable Outlook.

NEW YORK -- Fitch Ratings has affirmed the underlying 'A+' rating on Connecticut Health and Educational Facilities Authority's outstanding debt issued for the benefit of The William W. Backus Hospital (WBH, or the hospital). The Rating Outlook is Stable.

The 'A+' rating reflects WBH's leading market position supported by a successful physician alignment strategy, solid operating and liquidity ratios, and strong debt service coverage. The hospital has a 75% inpatient market share and is the sole provider in its primary service area, which consists of the New London communities immediately surrounding the city of Norwich. Backus is the state's only trauma center east of the Connecticut River, and is the only regional facility that has a hangar for LIFE STAR, Hartford Hospital's air medical transport helicopter. The hospital is also affiliated with Yale New Haven Health.

The top 10 admitters on the hospital's medical staff (five of whom are employed by WBH) account for almost 30% of hospital admissions, but almost all of the 250 physicians on staff admit exclusively to the hospital. For the nine-month interim period ending June 2009, WBH had $95.6 million in unrestricted cash and investments, which translated into 159.6 days cash on hand, a cushion ratio of 20.4 times (x), and a cash-to-debt ratio of 145.4%, not including $33.8 million of additional funds (as of Sept. 30, 2008) held by the Backus Foundation solely for the benefit of the hospital. All of these ratios compare favorably to Fitch's medians for the 'A' category. For the nine month period ending June 30, 2009, WBH earned $12.9 million from operations (6.1% operating margin) and $10.9 million in excess income (5.5% excess margin) which is approximately 20% higher than in the prior period. Coverage on maximum annual debt service is excellent at 7.7 times (x) and debt as a percentage of revenues is light at 1.8%, compared to Fitch's 'A' medians of 3.5x and 3.1%, respectively. Profitability and liquidity metrics have been stable for several years.

Effective July 2009, the former vice president of development and planning assumed the position of President and CEO of the hospital, while the former president has moved to the presidency of the hospital's parent company. The hospital has also begun initial planning for an off-campus outpatient center. Funding for the proposed $17 million expansion would likely come from private sources.

Credit concerns include a reliance on two large managed-care payors, increasing WBH's vulnerability to changes in reimbursement methodology, and a relatively high Medicaid exposure of 14.9% for fiscal year 2009. Anthem BCBS and United account for 20% and 9%, respectively, of the gross revenues of the hospital. Between 2007 and 2009, Medicaid as a percentage of revenues increased slightly from 12.9% to 14.9% and bad debts as a percentage of revenues increased marginally from 5.8% to 5.9% of revenues. Concern is mitigated by the overall stable and diversified local economy (the city of Norwich is rated 'AA-' by Fitch) and the hospital's market position.

The Stable Outlook reflects Fitch's belief that WBH will continue to maintain its historical profitability trends and solid balance sheet ratios. Hospital management has no plans to issue any long-term debt in the near to medium term. In June 2008, the hospital converted its only variable-rate series to fixed rate and terminated the associated swap.

WBH is a 213 licensed-bed (184 staffed) acute care hospital located in Norwich, CT, which is approximately 40 miles southeast of Hartford. Total revenue in fiscal 2008 was $246.9 million. WBH covenants to provide to bondholders annual audited financials within 150 days of fiscal year-end and quarterly disclosure (including a balance sheet, income and cash flow statements, utilization data and brief management commentary) within 45 days of quarter-end. To date, disclosure to Fitch has been favorable in terms of content and timeliness.

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