Fitch Affirms Knox Community Hospital (Ohio) Bonds at 'BBB' Underlying; Outlook Stable

NEW YORK--(Business Wire)--
Fitch Ratings has affirmed the 'BBB' underlying rating on
approximately $31.7 million hospital revenue bonds, series 1998 and
2004 issued on behalf of Knox Community Hospital (Knox) by Knox
County, Ohio. The series 2004 bonds are backed by an irrevocable
direct pay letter of credit (LOC) from National City Bank, which Fitch
was not asked to rate. The Rating Outlook is Stable.

The rating affirmation at 'BBB' reflects Knox's strong market
position as the sole community provider in the service area, solid
operating profitability bolstered by growing patient utilization,
sound liquidity and management contract with Quorum Health Resources.
As the only hospital within a 25-mile radius, Knox faces limited
competition in its service area and had a leading market share of
48.7% in 2006. Knox's operating performance has been very strong with
an operating margin of 4.8% (operating income of $4.0 million) in
2007. Supporting the robust operations is utilization growth,
particularly in outpatient services, with outpatient surgeries growing
by 12.8% in fiscal 2007 to 3,097 cases from 2,746 in prior year.
Knox's liquidity metrics compare well to Fitch's 'BBB' category
medians with days cash on hand at 138.6 as of Dec. 31, 2007 compared
to the median of 120.3 days.

Primary credit concerns include Knox's small revenue base, high
debt burden and above average Medicaid load (13.2% of gross revenues).
Knox's revenue base of $83.3 million allows limited flexibility to
absorb adverse events and is an inherent risk at smaller community
hospitals. Due to the rapid amortization of Knox's series 1998 debt,
Knox's debt service burden is high with maximum annual debt service
(MADS) at 5.2% of revenues in fiscal 2007. As a result, MADS coverage
is relatively light at 2.2 times (x) in 2006 and 2.5x in 2007.
Management indicated a plan to renovate and potentially expand Knox's
surgical suite, which may entail additional borrowing (preliminary
estimate is $15 million) within 2-3 years. Fitch will consider the
rating implications of the new debt closer to the time of issuance but
does not anticipate negative rating action due to the potential
borrowing.

The Stable Rating Outlook reflects Fitch's opinion that Knox will
continue to generate sufficient cash flow from operations leading to a
strengthened balance sheet and an ability to fund necessary future
capital needs. Knox has averaged an operating EBITDA of approximately
$9.5 million annually over the last three years and has grown its net
patient revenues from $60.5 million to $83.3 million over the same
period. Knox budgets to finish fiscal 2008 with an operating margin at
approximately 5.5%, which Fitch believes is achievable.

Located in Mount Vernon, Ohio (approximately 40 miles north east
of Columbus), Knox is an acute care community hospital with 75 staffed
beds (115 licensed beds). Knox covenants to provide bondholders with
only audited annual financial statements. Knox does not covenant to
provide quarterly disclosure to bondholders and is not disseminated
through the National Municipal Securities Information Repositories,
which is viewed negatively 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.

Fitch Ratings
Alex Bumazhny, 212-908-0341 (New York)
James LeBuhn, 312-368-2059 (Chicago)
Sandro Scenga, 212-908-0278 (Media Relations, New York)

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