Fitch Rates Forrest County General Hospital (Mississippi) 2007A Bonds 'A'; Outlook Stable.

NEW YORK -- Fitch assigns an underlying 'A' rating to the approximately $47.4 million Mississippi Hospital Equipment and Facilities Authority revenue refunding bonds (Forrest County General Hospital Refunding Project), series 2007A. Forrest County General Hospital's (FCGH) outstanding series 2000 bonds are affirmed at 'A'. The Rating Outlook is Stable.

Proceeds of the new issue will advance refund the series 2000 bonds and pay costs of issuance. The series 2007A bonds will be issued as index rate bonds and are scheduled to sell the week of June 4 or June 11, 2007 through negotiation led by Merrill Lynch & Co.

In connection with the issuance of the series 2007A bonds, FCGH will enter into an interest rate swap agreement with Merrill Lynch Capital Services, Inc. that provides for payment of a fixed rate of interest by FCGH and payment of a variable rate to FCGH to achieve synthetic fixed interest rate debt. The notional amount will be equal to the principal amount of the series 2007A bonds and will amortize at times and in amounts corresponding to principal payments on the bonds. The swap agreement is subject to optional termination by FCGH but by Merrill only upon credit-related events with respect to FCGH, including bankruptcy, downgrade below investment grade, and the violation of certain financial covenants. The swap agreement also provides for periodic valuation and posting of collateral by the affected party.

The 'A' rating and Stable Outlook are based on FCGH's solid operating performance, stable and dominant market share, manageable debt burden, and strong debt service coverage. FCGH recorded a solid operating margin of 5.7% in fiscal 2006, compared to 5.2% in fiscal 2005 and a median of 2.2% for Fitch's 'A' category. However, operating margin dropped to 1.0% ($2.3 million operating gain) for the six months ending Mar. 31, 2007, largely due to a temporary impairment of governmental reimbursement throughout the state for all hospitals. FCGH's market share in its primary service area is strong at approximately 53.2%, with its closest competitor, Wesley Medical Center, a 211-bed hospital owned by Triad Hospitals, Inc. (rated 'BB-' by Fitch), at 22.9%. Fitch considers FCGH's debt burden to be manageable relative to its liquidity and revenue base, and FCGH's pro forma maximum annual debt service (MADS) of approximately $9.8 million as a percent of revenues was 2.4% in fiscal 2006 and 2.3% through the six months ending Mar. 31, 2007.

Credit concerns include the temporary impairment of FCGH's revenues from Disproportionate Share Hospital (DSH) and Upper Payment Limit (UPL) programs, continued weakness in patient utilization, weak payor mix and service area characteristics, and future capital plans and associated construction risks.

FCGH has higher than average Medicaid and self-pay patients, with 15.2% and 19.1% in the six-month period ending Mar. 31, 2007, due to weak socioeconomic and demographic indicators in the southern Mississippi primary service area. These factors have had a negative impact on FCGH's bad debt as a percentage of revenue, which was a high 21.1% for the six-month period ending Mar. 31, 2007. Fitch's 'A' category median for this measure is 5.6%. The service areas' stagnant population base has also contributed to FCGH's historically uneven and negative utilization trends. Averaging approximately 8.1% of total operating revenues during fiscal 2006, FCGH is reliant upon DSH and UPL payments. The Centers for Medicare and Medicaid Services (CMS) changed its requirements for Mississippi DSH/UPL payments beginning in FCGH's fiscal 2007. CMS has also not resolved issues relating to disputes over prior UPL overpayments throughout Mississippi. As a result, FCGH has yet to receive $10.9 million of DSH/UPL payments expected during the six-month period ending Mar. 31, 2007. This compares with $28.1 million and $17.0 million of DSH/UPL payments reported in fiscal 2006 and fiscal 2005, respectively.

Though FCGH's market share is high, inpatient, outpatient and emergency room utilization trends increased in fiscal 2006, offsetting some previous year-over-year trends from the purchase of Highland Community Hospital. Inpatient admissions increased to 25,507 in fiscal 2006 from 23,589 in fiscal 2005. Normal newborn births increased to 2,730 in fiscal 2006 from 2,171 in fiscal 2005. Emergency room (ER) visits and outpatient surgeries increased to 91,520 and 4,956 in fiscal 2006 from 82,328 and 3,817 in fiscal 2005.

FCGH's heavy investment in its physical plant (capital expenditures averaged 220% of depreciation in the period fiscal 2004 through fiscal 2006) has contributed to limited liquidity growth. During fiscal 2006, FCGH acquired the 95-bed Crosby Memorial Hospital (renamed Highland Community Hospital) in nearby Pearl River County for approximately $5.5 million and a commitment to build a replacement facility for approximately $47 million within five years of achieving certain operational and financial metrics. FCGH's capital plan includes the replacement facility and renovation projects to its existing campus and behavioral health facility; however, the scope of these projects and the plan of finance are in the preliminary stages, and these projects and any associated debt were not considered in this rating action. The Highland facility will be a total replacement and therefore is not expected to seriously expose FCGH to potential disruptions in the provision of care, but the size and duration of the construction project could result in cost overruns and delays.

The Stable Outlook reflects Fitch's expectation that FCGH will continue to perform at recent levels of profitability and improve its liquidity levels without any significant deterioration to debt service coverage.

FCGH operates a 512-staffed bed, acute-care hospital, including an 88-bed chemical dependency and psychiatric facility and 24-bed rehabilitation unit, located in Hattiesburg, MS, which is roughly 90 miles southeast of Jackson, MS (the nearest tertiary-level care) and 130 miles northeast of New Orleans. FCGH is designated as one of the five Level II trauma centers in the state-wide trauma system, and no other Level II trauma centers are situated in FCGH's service area. FGCH maintains a large clinical program in cardiac services. FCGH leases 33 beds for long-term acute care to Regency Hospital, and also operates, but does not own, Walthall County Hospital in Tylertown, MS.

For the series 2000 bonds, FCGH covenants to disclose only annual financial information and utilization statistics to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs), which Fitch views negatively. For the series 2007A bonds, FCGH does not plan on covenanting to disclose any financial, audited annual or unaudited quarterly, or utilization statistics to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs), which Fitch views very negatively. However, FCGH has been proactive in providing thorough and timely disclosure, including quarterly disclosure of income statements, balance sheets, statements of cash flows and utilization statistics to bondholders directly. FCGH has no interest rate swaps outstanding at this time, but the series 2007A bonds will involve an interest rate swap to achieve synthetic fixed rate debt as described above.

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.