Fitch Affirms Wilson N. Jones Regional Health System (TX) at 'B+'; Outlook to Negative.

NEW YORK -- Fitch Ratings has affirmed the 'B+' rating on the outstanding $45,900,000 Metro Health Facilities Development Corp., Texas (Wilson N. Jones Regional Health System) hospital revenue bonds, series 2001. Fitch does not rate the series 1993 bonds ($39,960,000 outstanding), which are insured by Ambac Assurance Corp. The Rating Outlook is revised to Negative from Stable.

The Negative Outlook reflects Wilson N. Jones Regional Health System's (WNJ) significant decline in patient utilization through the first half of 2006, which has resulted in declined profitability for the period. Patient volume has dropped sharply through the six months ended June 30, 2006 as compared to the prior year period with admissions, outpatient surgeries, newborn births, and emergency room visits declining 14.2%, 11.7%, 15.3%, and 7.0%, respectively. Volume has been affected by a high-volume general surgeon's temporary absence to serve in Iraq, the opening of a physician-owned standalone ambulatory surgery center, a local health clinic splitting obstetrical cases with Texoma Medical Center, and unseasonably mild weather in north Texas.

Operating profitability declined to a negative 1.5% (loss of $1 million) through the six months ended June 30, 2006 as compared to a positive 2.7% (gain of $2 million) for the prior year period. This represents a significant reversal from the 4.3% and 3.6% operating margins generated in 2004 and 2005, respectively. WNJ has budgeted a revised breakeven operating margin for 2006.

Management has outlined several strategic initiatives to help stabilize and improve patient volume and profitability. Initiatives include new additions to the medical staff with recent recruitment of a general surgeon and obstetrician, promoting the use of the hospital's ambulatory surgery center, strategic joint ventures, and cost controls related to staffing and labor. Having started in 2004, the management team has implemented several recommendations made by Cambio Health Solutions including the closure of the North Campus (operating losses at the North Campus have been reclassified as discontinued operations for 2004 and 2005), discontinuation of an unprofitable trauma program, revenue cycle management, and staff reductions.

Despite current initiatives, the hospital's inability to stabilize patient volume and a significant negative variance from the budget at year's end could pressure the current rating. Furthermore, additional declines in profitability could pressure coverage levels, which is required at 1.1 times (x) under the bond indenture. Actual maximum annual debt service (MADS) coverage for the six month interim period was 1.1x. Fitch expects to reevaluate WNJ's rating at year's end.

The current rating is supported by WNJ's improved liquidity levels and leading market position. WNJ had unrestricted cash and investments of $24.8 million as of June 30, 2006, which is significantly greater than the $14.6 million at Dec. 31, 2004. Liquidity relative to expenses is good for the current rating with 85.8 days cash on hand, which provides the hospital a moderate level of financial flexibility for the current rating. Liquidity growth has been fueled by deferred capital spending and improved cash flow generation in 2004 and 2005. Fitch notes that WNJ signed a $4.1 million settlement with Pension Guaranty Benefit Corp. in April 2006, which requires the hospital to make quarterly payments over the next three years. In the primary service area, WNJ continues to have a leading market share of 51.9% in 2004. However, its market share has declined from 55.8% in 2002 due to increased competition and the planned closure of its unprofitable trauma program and the North Campus.

Key credit risks include WNJ's high debt burden, the already mentioned declined volume and profitability, high age of plant, and unfavorable service area characteristics. WNJ's debt burden remains high with MADS at 7.7% of revenues at June 30, 2006. Its debt burden increased moderately with a $10 million capital lease that was entered into in June 2006 to fund the chiller/lighting retrofit, a new information system, and patient monitoring equipment. Further, WNJ's average age of plant of 16.5 years at June 30, 2006 indicates the need for future capital spending. Capital expenditures have been light for the last three years. Bad debt expense is also high at 17.1% of revenues through the six months ended June 30, 2006, which is reflective of an economically weak service area. Texoma Medical Center, located approximately 20 miles from WNJ and its only primary competitor, has recently announced plans to seek a financial partner to assume control of the facility in order to build a replacement hospital in Grayson County. While the partner has not been identified yet, the construction of a replacement in the county could significantly affect WNJ. Details of Texoma's plans are limited at this time and have not been factored into the rating; however, Fitch will continue to monitor the situation closely.

Located in Sherman, TX (65 miles north of Dallas in Grayson County), WNJ is a community hospital that is licensed for 241 beds and operates 178 beds. WNJ had $148 million in total operating revenue in 2005. WNJ covenants to provide annual and quarterly disclosure to bondholders. Quarterly disclosure is viewed favorably, which includes management discussion and analysis, a balance sheet, an income statement, a cash flow statement, and utilization statistics. Disclosure material is disseminated through the national repositories.

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