Fitch Rates Rehoboth McKinley Christian Hospital (NM) Revs 'B-'; Removed from Rating Watch Negative.

NEW YORK -- Fitch assigns a 'B-' rating to $7.53 million New Mexico Hospital Equipment Loan Council hospital refunding and facility improvement revenue bonds (Rehoboth McKinley Christian Hospital Project), series 2007A and series 2007A-T. In addition, Fitch affirms the 'B-' rating on the outstanding $2.705 million New Mexico Hospital Equipment Loan Council hospital facility improvement and refunding revenue bonds (Rehoboth McKinley Christian Hospital Project), series 1996 and simultaneously removes the bonds from Rating Watch Negative. The hospital also has $2.145 million of outstanding parity lien variable-rate demand bonds (VRDBs) issued in 2000 and $2.6 million of working capital notes secured solely from county property tax revenues, both of which Fitch does not rate. The Rating Outlook is Stable.

Proceeds from the series 2007 bonds will be used to refund the entire outstanding series 1996 bonds ($2.705 million) and 2000 bonds ($2.145 million), fund the hospital's capital needs for the year ($2.5 million), fund a debt service reserve ($695 thousand), and pay for costs of issuance. The bonds are scheduled to sell on March 1, via negotiation led by Wells Fargo. RBC Capital Markets is serving as financial advisor.

The 'B-' rating is supported by Rehoboth McKinley Christian Hospital's (Rehoboth) implementation of a financial turnaround plan over the last year, which has resulted in improved operating performance at the hospital, despite low liquidity levels. The turnaround plan has been implemented by a new management team with the current CEO and CFO, who started in December 2005 and January 2006, respectively. Financial controls and reporting at the hospital have strengthened as management has overhauled billing processes, improved charge capture, and focused on revenue cycle management.

The removal from Rating Watch Negative reflects the extension through March 2007 of Rehoboth's letter of credit agreement pertaining to its VRDBs, providing liquidity support until these bonds are refinanced with proceeds of the 2007 issue. Fitch has also received Rehoboth's delayed fiscal 2005 audited financial statements; the fiscal 2006 audit was filed on-time. For more information, see Fitch's press release dated March 15, 2006.

Current initiatives have resulted in an operating income improvement of over $13 million for fiscal 2006 over 2005. For 2006, Rehoboth posted an operating margin of 0.7% (gain of $447 thousand), comparing favorably to a budgeted 0.1%, and up from 2005's negative 20.4%. The positive operating trend has continued through the four months ended Dec. 31, 2006 with Rehoboth posting an operating margin of 2.5%. The improved profitability reflects the clean up of contractual and bad debt allowances that significantly affected profitability in fiscal 2005, an improved methodology for reserving doubtful accounts, greater expense controls and monitoring, and efforts to improve the filing of Medicare and Medicaid cost reports.

Other credit strengths include Rehoboth's geographic isolation as a sole community provider and low debt burden. Rehoboth faces limited competition in the primary service area (PSA) with a 67.8% market share, as the nearest non-Indian Health Services (IHS) hospital is located 55 miles away. Additionally, Rehoboth's debt burden is relatively light with pro forma maximum annual debt service (MADS) at 3.1% of revenues at Aug. 31, 2006. With the current financing, pro forma MADS coverage is adequate at 1.9 times (x) for fiscal 2006. MADS includes capital leases and a working capital loan, which fully mature in fiscal 2010.

Primary risks include weak liquidity and historical operating losses, lack of historical management stability, unfavorable service area characteristics, and a high Medicaid load. Liquidity indicators are at precariously low levels as unrestricted cash and investments totaled $1.7 million at Dec. 31, 2006, which translated into 10.2 days cash on hand and cash to debt of 25%. While profitability and business processes have improved, cash management and generation remains a key focus and challenge for the hospital.

Management stability at the hospital remains a concern given the ineffective management teams of the past as well as the numerous changes that have been made. The current CFO is a contracted consultant whose term is indefinite. Service area characteristics are unfavorable, reflecting low income levels and contributing to an elevated Medicaid load of 22% of gross revenues in fiscal 2006.

The Stable Outlook reflects Rehoboth's continued implementation of a turnaround plan as management has made significant strides in improving revenue cycle processes and expense controls. These initiatives in addition to the limited competition should enable the hospital to sustain profitability, with Rehoboth budgeting a 2% operating margin for fiscal 2007. With very weak liquidity, management is closely monitoring spending levels and expects moderately positive cash flows to translate into liquidity growth over the medium term.

Located in Gallup, NM, 137 miles west of Albuquerque, Rehoboth McKinley Christian Hospital is a sole community provider with 89 staffed beds. Rehoboth had total operating revenue of approximately $68.7 million in fiscal 2006. Rehoboth will covenant to provide and disseminate through the NRMSIRs annual financials and monthly disclosure to bondholders concurrently with the series 2007 financing.

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.