Fitch Rates Yavapai County IDA, Arizona (Regional Medical Ctr) $30MM Revs 'BBB+'; Outlook Stable.

SAN FRANCISCO -- Fitch Ratings has assigned a 'BBB+' rating to the approximately $30 million issue of Yavapai County Industrial Development Authority, hospital revenue bonds (Yavapai Regional Medical Center), series 2007. In addition, Fitch has affirmed its 'BBB+' rating on approximately $95.6 million in outstanding revenue bonds issued on behalf of Yavapai Regional Medical Center's (YRMC). The Rating Outlook is Stable.

Bond proceeds will fund construction of YRMC's women's health pavilion on its Prescott Valley medical facility (East Campus) and several renovation projects on its Prescott hospital (West Campus). The bonds will sell via negotiation with UBS Investment Bank during the week of Nov. 19, 2007.

The rating reflects YRMC's dominant market position in a growing service area, increased capacity to meet rising demand, and positive volume trends. YRMC remains the sole provider in a growing primary service area (PSA), with the closest competitor located 40 miles away. Population in the PSA has grown 5.5% annually since 2000, contributing to favorable utilization trends. Inpatient admissions increased 7.9% and outpatient surgeries were up 4.9% in 2006 from the prior year. In addition, YRMC's dominant market position provides it with significant pricing flexibility. All commercial contracts are percent of charges based with all discounts less than 10%. This pricing flexibility somewhat mitigates YRMC's heavy concentration of governmental payors and, combined with sound volume growth, has resulted in consistently strong operating and EBITDA margins. While operating margin fell in fiscal 2006 to 1.5% from 8.3% due to opening of the East Campus (as expected by Fitch in its last review of the credit), YRMC still achieved an EBITDA margin of 10.5%. Historical proforma maximum annual debt service coverage in fiscal 2006 is still sound at 2.2 times (x) and is projected to rise to 3.4x by 2011.

Fitch's primary credit concerns include YRMC's highly-leveraged balance sheet, reduced liquidity, and softening operating results. With this issuance, long term debt increases to $123.1 million from $95.6 million, resulting in a proforma cash-to-debt of 27.8%. Liquidity also declined with days-cash on-hand at fiscal year-end 2006 falling considerably to 83.5 days from the 130.5 days the prior year. However, YRMC's liquidity decline and softening operating margin are attributed mainly to cash spending on capital projects and increased operational expenses (including interest and depreciation) associated with the opening of YRMC's second facility in Prescott Valley (East Campus). While these results are appreciably below Fitch's media for the rating category (74.1% and 120.3 days), Fitch believes that YRMC's undertaking of this strategic capital initiative will better position YRMC for future growth in the area.

Other concerns remain YRMC's heavy concentration of revenues from governmental payors, and lack of Certificate of Need (CON) protection. YRMC is heavily reliant on governmental reimbursement, as approximately 70% of gross revenues are from Medicare and Medicaid. This concern is mitigated somewhat by YRMC's favorable commercial contracts and the absence of managed care in the service area. However, the potential for state and federal budget cuts concerning health care reimbursement presents an inherent credit risk. Additionally, Arizona is a non CON state, which Fitch believes is a credit risk given the rapid population growth and lack of other acute care facilities in the area.

The Stable Rating Outlook reflects Fitch's belief that YRMC will maintain its positive operating results and debt service coverage based on expected population and volume growth combined with the additional capacity provided by the new hospital.

YRMC is located in Prescott, AZ (approximately 90 miles northwest of Phoenix) with 185 licensed (169 staffed beds). Total operating revenue was $172.7 million in 2006. YRMC covenants to provide annual and quarterly disclosure to bondholders, which Fitch views favorably.

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