Fitch Rates Norman Regional Hospital Authority, Oklahoma Series 2005 Hosp Revs 'BBB'; Outlook Stable.

CHICAGO -- Fitch Ratings assigns a 'BBB' rating to the $75 million of Norman Regional Hospital Authority (Norman Regional) hospital revenue bonds series 2005. In addition, Fitch assigns a 'BBB' to Norman Regional's $99.6 million outstanding bonds listed at the end of the press release. The Rating Outlook is Stable.

The series 2005 bonds are expected to sell the week of Nov. 28 through negotiation led by Banc of America Securities. Bond proceeds will be used to fund a portion of the costs related to construction of a new 110-bed hospital facility at the authority's Westside campus, a debt service reserve fund, and pay associated costs of issuance. Upon closing, Norman Regional Hospital Authority will have approximately $176.7 million in total debt outstanding.

The 'BBB' rating reflects Norman Regional's solid historical operating profitability, its leading market share position in its primary service area (PSA), improved liquidity position, and the integration of the board, management, and medical staff. Norman Regional has generated consistently strong operating margins above 3.5% since 2002. As a result, EBITDA margins have averaged 13.0% over the same period, which easily exceeds Fitch's 2005 'BBB' median. Norman Regional's profitability has been built on increased utilization and market share growth in its defined PSA. Approximately 49% of the hospital's fiscal 2004 inpatient volume originated from zip codes located in the cities of Norman and Noble and represents a 72% market share. The secondary service areas to the north and south accounted for approximately 15% and 18% of fiscal 2004 inpatient admissions, respectively. The new beds being constructed at the Westside campus should position Norman Regional to increase volumes and market share that originate from the secondary service area to the north, which experienced solid residential development. Norman Regional's cash and investments increased almost 75% in fiscal 2005 at $62.8 million from $35.9 million in fiscal 2004. As a result, Norman's days cash on hand ratio increased to 141.4 at the end of fiscal 2005 from 84.4 in the year earlier period. Finally, the management practices established at the hospital has created very strong integration between the management, the board of directors, and the medical staff. Fitch believes that the involvement of the board and the medical staff has been beneficial in Norman Regional's operating strategy and results.

The primary credit concerns include the increased pro forma leverage associated with the Westside project, the hospital's sizable bad debt expense, and the risks associated with the development of a new hospital facility. With the issuance of the series 2005 bonds, Norman Regional's long-term debt will increase approximately 75% causing several leverage related ratios to weaken below Fitch's 'BBB' medians. At fiscal year-end 2005, pro forma cash-to-debt drops to 36% from 63% while pro forma debt to capitalization increases to 56.7% from 42.8%. Bad debt expense in fiscal 2005 increased approximately $7.5 million, representing approximately 13.4% of net patient revenues, which is higher than Fitch's 'BBB' median of 5.2%. According to management, the level of bad debt expense reserved is conservative and the actual amount written-off could be materially less. Finally, there are the attendant risks associated with construction, staffing, and utilization of the new beds being constructed at the Westside facility. Of particular concern are the recent cost increases in construction materials and subcontracting labor due to hurricanes Katrina and Rita and the lack of a signed guaranteed maximum price contract on the proposed project.

The Stable Rating Outlook reflects the expectation that Norman Regional will continue to benefit from its leading market share position in the Norman and Noble service areas. Moreover, Fitch believes the expansion at the Westside campus to be sound strategically given its location in a high growth residential area. Assuming successful development of the new hospital, continuation of historical profitability, and a reduction in pro forma leverage indicators, an upward rating action may be warranted in the medium term.

NRHA has not entered into any swap agreements.

Norman Regional Hospital Authority is an acute-care hospital with 324 licensed and staffed beds located in Norman, OK, approximately 20 miles south of Oklahoma City. Norman Regional had total operating revenues of $184 million (net of bad expense in accordance with Governmental Accounting Standards Board Statement 34) in fiscal 2005. Norman Regional covenants to provide audited financial disclosure to the trustee and each NRMSIR within 180 days of each fiscal year-end and quarterly unaudited financial results within 45 days of each fiscal quarter-end. Financial disclosure means a balance sheet, income and cash flow statements, and utilization statistics. In addition, financial information is posted on DAC, which is viewed positively by Fitch.

Outstanding debt:

--$75,000,000 Norman Regional Hospital Authority hospital revenue bonds, series 2005 'BBB';

--$53,265,000 Norman Regional Hospital Authority hospital revenue bonds, series 2002 (1) (2) 'BBB';

--$28,380,000 Norman Regional Hospital Authority hospital revenue bonds, series 1996A 'BBB';

--$22,700,000 Norman Regional Hospital Authority hospital revenue bonds select auction variable-rate securities, series 1996B (2) 'BBB'.

(1) Underlying rating.

(2) Insured by Radian Asset Assurance, whose insurer financial strength is rated 'AA' by Fitch.

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.