[March 05, 2014]

Fitch Affirms Carroll Hospital Center (Maryland) Revs at 'BBB+'; Outlook Stable

Fitch Ratings affirms the 'BBB+' rating on the following Maryland Health & Higher Educational Facilities Authority bonds (Carroll Hospital Center Issue) issued on behalf of Carroll Hospital Center (CHC).

-- $59,780,000 revenue bonds, series 2012A;

-- $35,000,000 revenue bonds, series 2006.

The Rating Outlook is Stable.

SECURITY

Security pledged for the bonds consists of a lien on all obligated group (OG) cash receipts and a mortgage granted on most OG facilities.

KEY RATING DRIVERS

STRONG OPERATING PERFORMANCE: The affirmation of the 'BBB+' rating is supported by CHC's strong operating performance. CHC had a 3.7% operating margin and 12.2% operating EBITDA in fiscal 2013 (June 30 year-end), above Fitch's 'BBB' respective category medians of 1.8% and 9.0%, and an improvement over the prior year. Six-month fiscal 2014 interim results show operations remaining stable.

TPR EXTENDED: CHC signed a three-year contract with Maryland's rate-setting commission to stay in the Total Patient Revenue (TPR) program, which Fitch views favorably. At this time last year, there was uncertainty surrounding CHC remaining under TPR. Under the new agreement, CHC maintained both its base rate and the extension of additional revenue for added volume expected with a new cancer center opening fall 2014. However, CHC received less of a revenue increase relative to the expected volume increase from the area's growing senior population.

BALANCE SHEET STRENGTH: While CHC management expects unrestricted cash and investments to decline by approximately $21.3 million through June 2015 due to a combination of capital spending and stress from the ICD-10 conversion, Fitch believes CHC's balance sheet has enough flexibility to absorb the decline at the current rating level in the short- to medium-term. CHC's long-term capital plans are significant, however, and could pressure their future liquidity.

GOOD MARKET POSITION: CHC maintains a leading 56.5% (FY2013 figures) inpatient/observation market share, in a solid service area (Carroll County GOs rated 'AAA' by Fitch), with its nearest competitor, Frederick Memorial Hospital (rated 'BBB+'), located outside the county, approximately 25 miles away, with a market share below 7%.

RATING SENSITIVITIES

MAINTAINING TPR PERFORMANCE: While CHC has posted a very solid operating performance under TPR (operations were essentially break-even the year prior to CHC joining TPR), some of that operational gain has been due to one-time incentives provided by the rate-setting commission, in part, to smooth the transition into the program. The next few years should provide a better indication of CHC's underlying operational performance under TPR. Should CHC be able to continue to outperform Fitch's 'BBB' medians over the next few years, there is potential for positive rating movement.

CREDIT PROFILE

CHC is a 151-bed acute-care hospital located in Westminster, MD, approximately 40 miles northwest of Baltimore. Total consolidated operating revenues, including the hospital and various othr smaller subsidiaries, totaled $285.5 million in fiscal 2013.

STRONG OPERATING PERFORMANCE

FY 2013 concluded with a solid 3.7% operating margin and a 12.2% operating EBITDA margin, both of which are better than the 1.8% and 9.0% respective 'BBB' category medians. A decline in volumes has allowed CHC to manage its operating expenses better, which increased its profit margin under the TPR reimbursement agreement.

Another year of strong operations in FY 2013 supports ample coverage of CHC's maximum annual debt service (MADS) of $9.995 million. With 4.0x and 3.5x coverage by EBITDA and operating EBITDA, respectively, CHC exceeds Fitch's corresponding 'BBB' medians of 3.1x and 2.7x.

TPR EXTENDED

Under the TPR payment model, participating hospitals receive a total revenue figure for the year for services covered by Maryland's rate-setting commission, and that figure is fixed regardless of fluctuations in volume levels or acuity indicators. Fitch views the terms of CHC's new contract as credit neutral. Overall, CHC has performed well under the program and expects to remain favorable to the 'BBB' profitability medians under the new agreement.

The previous three years operating under TPR have provided CHC with experience necessary to navigate this fixed revenue budget reimbursement structure. CHC has experienced reductions in inpatient volumes and an increase in utilization of services not subject to the TPR agreement (home health, hospice and imaging procedures). CHC's continued strong operating performance is attributable to the alignment between TPR program goals and CHC goals.

BALANCE SHEET STRENGTH

As of Dec. 31, 2013, CHC had $126 million in unrestricted cash and investments, which equated to 174.7 days cash on hand, a 12.6x cushion ratio, and 90.8% cash to debt; all stronger than the same period in the prior year and in line with the respective 'BBB' Fitch medians. Despite the likely decline in CHC's unrestricted cash and investments, Fitch expects that liquidity metrics will not drop below 'BBB' medians in the short- to medium-term.

Furthermore, CHC's liquidity relative to its variable rate debt (30% of debt mix) is expected to remain strong with twice as much unrestricted liquidity relative to variable rate debt, bolstering its ability to manage additional cash demands should any of the outstanding variable rate debt be put back to the issuer.

GOOD MARKET POSITION

CHC's caseload in its primary service area has declined 10% between 2010 and 2013 in comparison to a 3% decline for competing hospitals' caseload over the same period. CHC, notably, operates under a different set of incentives under the TPR rate methodology that encourages reducing utilization, where appropriate. CHC has maintained its position as market leader in addition to successfully reducing utilization to the extent that it supports more efficient cost management.

Fitch considers CHC's disclosure practices to be very good, with quarterly data and annual data (150 days after fiscal year end) posted on EMMA.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822678

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