Fitch Rates Mother Frances Hospital (Texas) $90MM Series 2007 bonds 'BBB+'; Outlook Stable.

CHICAGO -- Fitch has assigned a 'BBB+' rating on the $90 million Tyler Health Facilities Development Corporation hospital refunding revenue bonds series 2007A & B (Mother Frances Hospital Regional Health Care Center Project). In addition, Fitch affirms the 'BBB+' outstanding rating on the $159 million revenue bonds issued through Tyler Health Facilities Development Corp. (see ratings list below). The Rating Outlook has been revised to Stable from Positive.

The series 2007 bonds are expected to be issued as traditional fixed-rate bonds. Bond proceeds will be used to refund all of the series 2001 bonds outstanding, a portion of the series 2003 bonds outstanding, fund $20 million of various capital projects, fund a debt service reserve fund and capitalized interest on the new money projects, and pay associated costs of issuance. The bonds are expected to price the week of April 23 through negotiation by Merrill Lynch, Inc.

In performing the analysis, Fitch has utilized the consolidated financial results of the Trinity Mother Frances Health System (TMFHS) which includes Mother Frances Hospital Regional Health Care Center (MFH), a 370 staffed bed tertiary referral center located in Tyler, TX. MFH is the sole entity obligated on the series 2007 and all outstanding debt. Neither the Trinity Clinic, Mother Frances Hospital - Jacksonville (a critical access hospital), the parent or the Health Plan are obligated on the outstanding debt. In fiscal 2006, MFH accounted for 93.3% of total assets of the system and 69.8% of total system revenues.

The 'BBB+' rating is supported by the benefits accruing to MFH from relationship with Trinity Clinic, TMFHS's solid pro-forma debt service coverage, consistent profitability and MFH's' leading market share in its primary service area. MFH benefits from the relationship with and the referral volume generated by physicians at the Trinity Clinic, a 200-physician multi-specialty clinic in 21 locations. In fiscal 2006, approximately 44% of total inpatient volume at MFH was generated from Trinity Clinic physicians. In addition, Fitch believes MFH benefits from the ability to negotiate managed care contracts on a 'single system' basis with the Trinity Clinic. Historical coverage of pro-forma maximum annual debt service (MADS) has been solid at 3.4 times (x) and 3.7x in fiscal 2005 and 2006, respectively, and compares favorably to Fitch's 2006 'BBB' median of 3.2x. Although increased depreciation and interest expense depressed the system's operating margin to 2.7% in fiscal 2006 from 3.4% in fiscal 2005, EBITDA margins (earnings before interest, taxes, depreciation and amortization) margins of 11.7% and 11.1%, in 2005 and 2006, respectively, exceed Fitch's 2006 'BBB' median of 10.7%.

MFH's share of inpatient admissions from its primary service area of Smith County increased to 56% in 2006 from 49.6% in 2004. Moreover, MFH maintains leading market share positions in nearly every clinical program over its main competitor, East Texas Medical Center-Tyler.

Fitch's primary credit concerns remain TMFHS's relatively low liquidity, a relatively high level of bad debt expense, and a flattening of utilization trends. Through the eight months ended Feb. 28, 2007 TMFHS reported $93.5 million of unrestricted cash and investments, which is unchanged from fiscal 2006 and about $7.5 million lower at fiscal year-end 2005. Management attributes the decline in unrestricted cash to heavy capital investment funded through operations. Due to growth in revenues and associated expenses, days cash on hand at fiscal 2006 was just 80.2, which reflects a decline from 104.7 and 99.2 at fiscal 2005 and 2004, respectively. Moreover, the ratio of unrestricted cash relative to long-term debt at fiscal 2006 of 53.9% is materially weaker than Fitch's 2006 'BBB' median of 76.1%.

TMFHS's level of bad debt expense at 9.2% of fiscal 2006 revenues is high compared to Fitch's 'BBB' median. The growth in high deductible insurance plans and the high number of self-pay patients has had an adverse effect on bad debt expense and the high number of self-pay patients. However, Fitch notes that the percentage of bad debt expense as a percentage of total revenues has remained relatively constant since fiscal 2004. Inpatient admissions have been flat over the last three years, reflecting the increasing trend toward outpatient procedures. A portion of the series 2007 bond proceeds will be used to fund an expansion in the neurosurgery clinical line.

The Rating Outlook revision to Stable from Positive reflects TMFHS's depressed liquidity indicators and operating results since Fitch's last rating action in 2005. Management projects growing cash and investments as required capital spending should moderate from recent levels. Fitch believes TMFHS's vertical integration provides the system significant competitive advantage relative to its competitors.

Located in Tyler, TX, approximately 100 miles east of Dallas, TMFHS consists of 370-licensed-bed Mother Frances Hospital, a 200-plus physician multi-specialty clinic, a critical access hospital and other health related entities. TMFHS had total system revenues of $505 million in fiscal 2006, of which $331 million was generated by MFH. TMFHS covenants to provide financial and utilization data within 180 days of each fiscal year-end and 45 days of each fiscal quarter end to each NRMSIR and through Digital Assurance Certification(DAC).

Fitch rates the following new issues 'BBB+':

--$90,000,000 Tyler Health Facilities Development Corp. hospital revenue refunding bonds (Mother Frances Hospital Regional Health Care Center Project), series 2007.

Outstanding issues currently rated 'BBB+' by Fitch:

--$52,600,000 Tyler Health Facilities Development Corp. hospital revenue bonds (Mother Frances Hospital Regional Health Care Center Project), series 2003;

--$40,000,000 Tyler Health Facilities Development Corp. hospital revenue bonds (Mother Frances Hospital Regional Health Care Center Project), series 2001;

--$40,000,000 Tyler Health Facilities Development Corp. variable-rate revenue bonds, series 1997B (Mother Frances Hospital Regional Health Care Center Project) ('BBB+' underlying rating only, short-term rating not assigned).

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.