TEXT-Fitch cuts Halifax Regional Medical Center, N.C. revs at 'BB'

Sept 18 - Fitch Ratings has downgraded the rating on the following North
Carolina Medical Care Commission bonds issued on behalf of Halifax Regional
Medical Center (HRMC):

--$15.1 million hospital revenue bonds, series 1998 to 'BB' from 'BB+'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are secured by a pledge of gross receipts, a negative mortgage lien,
and a debt service reserve.

KEY RATING DRIVERS

VOLATILE FINANCIAL PERFORMANCE: The downgrade to 'BB' from 'BB+' reflects HRMC's
challenging fundamental credit characteristics including an unfavorable payor
mix and rural service area, which have led to inconsistent operating
performance. These pressures are not expected to wane over the near term.

LOW DEBT BURDEN: HRMC's light debt burden allows for adequate debt service
coverage at its rating level despite weak operating performance. No additional
debt is planned.

UNFAVORABLE PAYOR MIX: Much of HRMC's revenue growth in fiscal 2011 (Sept. 30
year end) and the 10 months ended July 31, 2012 (interim 2012) was the result of
supplemental Medicaid funds rather than organic growth, and it remains exposed
to a high level of government/self-pay revenues and bad debt expense.

MIXED SERVICE AREA CHARACTERISTICS: While HRMC's position as a sole community
hospital and market share leader is a credit strength, the service area's
overall socioeconomic profile is generally unfavorable.

STABLE BALANCE SHEET: HRMC's liquidity levels provide for some cushion against
its operating performance, and related metrics are favorable for the rating
category. Still, ongoing capital needs and pension funding requirements will
likely limit meaningful balance sheet growth over the near term.

CREDIT PROFILE

The downgrade to 'BB' reflects HRMC's challenging environment as a rural
provider that has suffered from soft clinical volumes on both an inpatient and
outpatient basis. Volume declines are due in part to difficulty recruiting,
retaining, and ramping up physicians, and have been further pressured by an
economically challenged service area. These challenges are not uncommon for
rural hospitals, and are more pronounced due to HRMC's relatively small revenue
base.

Through the 10-month interim period ended July 31, 2012, HRMC's total admissions
declined 10.8%, total surgeries declined 0.8%, and births declined 5.5% over the
same prior year period. HRMC had 47 active medical staff members, down from the
51 in fiscal 2011, and continues to experience challenges with physician
recruitment and retention.

HRMC's cash flow remains light, but due to its low debt burden, debt service
coverage is solid for the rating level. Through the 2012 interim period HRMC
produced an improved 0.6% operating margin ($614,000 operating income) and 4.4%
operating EBITDA margin, ahead of a negative 0.2% operating margin and 3.6%
operating EBITDA margin in 2011 (fiscal year end Sept. 30). This produced
maximum annual debt service (MADS) coverage of 3.5x by EBITDA in interim 2012,
ahead of prior fiscal year's 2.8x. However, HRMC has operating lease expense of
approximately $1 million and adjusted coverage including the operating leases
would reduce debt service coverage to 2.6x in the interim period.

Fitch notes that much of the operating improvement in fiscal 2012 is due to
funds received under a new Medicaid assessment program (GAP) enacted by the
North Carolina legislature in fiscal 2012 and payments retroactive to fiscal
2011 were recognized in fiscal 2012. Including Medicaid disproportionate share
funding, HRMC's recognition of net supplemental funding totaled $1.8 million in
fiscal 2010, $2.9 million in fiscal 2011, and $2.9 million in fiscal 2012. HRMC
is reliant on these supplemental funds for profitability, which is a credit
concern.

Fitch also notes that HRMC is challenged by the socioeconomic profile of its
service area, which generally has unfavorable of unemployment, income, and
poverty levels against state and national averages. This is borne out in a
government-payor-heavy revenue mix, with a high 72% of gross revenues from
Medicare/Medicaid and 17.3% bad debt as a percent of revenues in interim 2012.

Some flexibility is provided by HRMC's balance sheet, which is relatively robust
for its rating category. As of July 31, 2012, unrestricted cash equaled $23.9
million, equating to 97 days of cash on hand (DCOH), 14.5x cushion, and 107.4%
cash to debt, all ahead of Fitch's non-investment-grade medians.

HRMC's debt burden is low with debt to capitalization of 43.7% and MADS
comprising 1.4% of revenue through the 2012 interim period. Total debt of $22.3
million is 100% fixed rate with no derivatives, and includes a $6.5 million
direct bank placement (initial term to 2018). HRMC is now finishing its major
capital project of a $6.5 million ambulatory and surgery department
renovation/expansion, and its capital budget is $3.6 million in 2013 for routine
needs.

Fitch believes HRMC is stable at the 'BB' rating level and its balance sheet and
low debt burden provides adequate cushion to its variable operating performance.
HRMC is budgeting for a $511,000 operating income (0.5% operating margin) in
fiscal 2013.

HRMC is a 204 licensed-bed community medical center providing primary and
secondary care services. The medical center is located in Roanoke Rapids,
approximately 75 miles northeast of Raleigh. In fiscal 2011 HRMC had $107.6
million in total operating revenue.

Disclosure to Fitch has been adequate with quarterly disclosure, although only
audited annual disclosure is required in the bond documents. HRMC provides
disclosure upon request to other third parties. Fitch notes that quarterly
disclosure includes a balance sheet and income statements; however, a statement
of cash flows and management discussion and analysis is not provided.

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.

Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', June 12, 2012;
'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012.

Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria