[December 18, 2012]

Fitch Rates Mercy Regional Health Center (KS) Revs 'A-'; Outlook Stable

Fitch Ratings has assigned an 'A-' rating to the expected issuance of the following city of Manhattan, Kansas hospital bonds issued on behalf of Mercy Regional Health Center (MRHC):

--$28,000,000 refunding revenue bonds series 2013 (Mercy Regional Health Center, Inc.)

Proceeds from the series 2013 bonds will be used to refund MRHC's 2001 bonds and pay costs of issuance. The 2013 bonds are expected to price the week of January 7 via negotiation.

The Rating Outlook is Stable.

SECURITY

The bonds will be secured by a pledge of gross revenues of the obligated group, security of the main hospital campus through a lease arrangement with the city of Manhattan, and a funded debt service reserve.

KEY RATING DRIVERS

IMPROVED OPERATING PERFORMANCE: After a negative operating margin in fiscal 2008 (Sept. 30 year-end), Mercy Regional Health Center's (Mercy, or MHRC) operating performance has been consistent with the rating category for the past four fiscal years. Operating improvements were driven by a change in leadership at Mercy and additional oversight provided by Via Christi Health System (rev bonds rated 'A+', Stable Outlook by Fitch).

VIA (News - Alert) CHRISTI AFFILIATION A CREDIT STRENGTH: MRHC's affiliation with Via Christi, which owns 50% of Mercy and has a management contract with MRHC, provides Mercy with the resources of a much larger system in such areas as information technology, group purchasing, and risk management. Access to these resources serves to mitigate concerns about Mercy's smaller revenue base and bed size for the rating category.

LEADING MARKET SHARE: Mercy is the only full-service hospital in Manhattan, KS, and maintains a leading market share of 27% in a larger nine-county primary and secondary region.

MANAGEABLE CAPITAL NEEDS: Mercy completed a major campus expansion in 2004, so has manageable capital needs moving forward. The largest current project is the final consolidation of services from Mercy's other campus to Mercy, which includes the renovation of the North Tower at Mercy. This project will be largely funded by the sale of MRHC's other hospital campus, which is expected to be finalized within the next six months.

MODERATE DEBT LEVEL: With the refinancing of its 2001 debt, Mercy's maximum annual debt service (MADS) falls by approximately $1 million to $3.4 million. Coverage of the pro forma MADS was a very solid 4.9x in fiscal 2012 (unaudited). MADS occurs in 2014 and then will drop to approximately $2.7 million a year for the life of the bonds.

LIQUIDITY A STRENGTH: With 204.7 days cash on hand, a 14x pro forma cushion ratio, and 129.6% cash to debt as of Sept. 31, 2012, MRHC liquidity metrics compare well with category medians and liquidity has grown every year through the historical period.

CREDIT PROFILE

The 'A-' rating is supported by an overall financial profile including operating performance, liquidity, and debt service coverage that is consistent with the rating category. Further support for the 'A-' rating is provided by MRHC's affiliation with Via Christi. Through the affiliation, MRHC has access to the resources of a much larger system, as well as management oversight from Via Christi (the CEO of MRHC is a Via Christi employee). The affiliation mitigates much of the concern related to MRHC's smaller revenue and bed size for the rating category.

Over the last four audited years, MRHC operating EBITDA margin has averaged 13.5%, above Fitch's 'A' category median of 9.8%. Its operating margin has averaged 4.1% over that time as well, also above the category median. Financial results are based on consolidated reults. The largest entity outside the obligated group (OG) is a critical access hospital, Wamego Hospital Association (WHA), located in Wamego, Kansas, of which MRHC owns 51%. The OG represents approximately 88.7% of the consolidated operating revenues and approximately 90.3% of consolidated total assets for the period ending Sept. 30, 2012.

MRHC had a negative operating margin in fiscal 2008 but a new CEO, who started in June 2009, has turned operations around, along with oversight and guidance from Via Christi. Expenses fell from fiscal 2008 to 2009 and have remained fairly flat over the last four audited years. In addition, strategies are in place to increase revenue through expanding service lines and physician recruitment.

Strong financial performance is also supported by MRHC's positive competitive position. MRHC has a dominant market share in Manhattan, as it is the only acute care hospital in the city, and maintains a leading 27% market share in a larger nine-county service area. While there is competition, it is manageable and MRHC is positioned to compete. MRHC added seven physicians in the last year, will purchase and begin operating a da vinci robot, and is expanding its cardiology services, opening up a second cath lab on its main campus, which should further its competitive position regionally.

MRHC's liquidity has grown over the last four audited years, with unrestricted cash and investments increasing 47% over that time to $48.8 million as of Sept. 30, 2012. This equates to 204.7 days cash on hand, a 14x pro forma cushion ratio, and 129.6% cash to debt, all of which are favorable to Fitch's 'A' median category ratios. All of MRHC's debt is fixed, adding additional stability to its liquidity position.

Pro forma MADS of $3.4 million occurs in 2014 and then will drop to approximately $2.7 million a year for the life of the bonds. Coverage of the pro forma MADS was a very solid 4.9x in fiscal 2012 unaudited. Pro forma MADS as a percentage of revenue of 3.3% as of Sept. 30, 2012 was slightly elevated but Fitch expects MRHC to lower that figure over time.

Fitch's largest credit concerns are MRHC's small revenue base for the rating category (MRHC's revenue size of $105.5 million on a consolidated basis in fiscal 2012 makes it one of the smallest Fitch rated 'A' category hospitals) and execution on the closing down of MRHC's other campus and renovation of the North Tower on its main campus, where some of these services will be relocated. MRHC's relationship with Via Christi as well as its strong market position mitigates some of the concern over MRHC's small revenue base. The management contract with Via Christi is in the second year of a 10-year term.

The renovation of the North Tower is estimated to cost $17 million and will be funded by the sale of MRHC's second campus (which has been mostly outpatient services) and cash flow. MRHC is expected to close on the sale of the building within the next six months, but execution risk does exist until the sale is finalized. Services planned for the renovated North Tower include Cardiac Rehab, Outpatient Registration, IV Express unit, and Endoscopy. Additional space will be shelled in for potential further growth. The consolidation of the second campus into MRHC's main campus should be financially positive over the medium term, enabling MRHC to reduce expenses and grow services.

Overall MRHC's campus is in very good condition. A major campus reconfiguration project was completed in 2008, which included a new inpatient tower, intensive care unit and emergency department. Once the North Tower renovation is completed, MRHC should have minimal capital needs, which would be an additional credit strength.

The Stable Outlook is based on Fitch's expectation that MRHC's financial profile will remain unchanged over the next two years.

MRHC owns and operates a 150-licensed bed hospital and other health care facilities in Manhattan, KS. MRHC's main campus is operated under a lease from the city of Manhattan. The length of the lease is tied to the amortization of the bonds and the lease payment is composed mostly of the bond payments. Disclosure will be made within 120 days of fiscal year end and within 45 days of the end of the first three quarters and 60 days after the end of the fourth quarter to the Municipal Securities Rulemaking Board's EMMA system.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in the 'Revenue-Supported Rating Criteria', this action was informed by US Bank as underwriter.

Applicable Criteria and Related Research:

--Rating Criteria' (June 12, 2012);

--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=681015

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=683418

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